-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QUkyuRwpOkFxo2dNOOffoajZet+pATE3k+ZFxvpzpujk1/EegM+6+giNARUFfVvH nzHwwylFGflrlUf/+HIVJg== 0000950130-99-002378.txt : 19990427 0000950130-99-002378.hdr.sgml : 19990427 ACCESSION NUMBER: 0000950130-99-002378 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 30 FILED AS OF DATE: 19990426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUDIBLE INC CENTRAL INDEX KEY: 0001077926 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-76985 FILM NUMBER: 99600388 BUSINESS ADDRESS: STREET 1: 65 EILLOWBROOK BOULEVARD CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 9738904070 MAIL ADDRESS: STREET 1: 65 WILLOWBROOK BLVD CITY: WAYNE STATE: NJ ZIP: 07470 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on April 23, 1999 Registration 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
Proposed Maximum Title of Each Class of Securities To Aggregate Amount of Be Registered Offering Price(1) Registration Fee - -------------------------------------------------------------------------- Shares of Common Stock, par value $.01 $46,000,000 $12,788 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act. ---------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 APRIL 23, 1999 Shares [Audible, Inc. logo] 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 $ and $ per share. We have granted the underwriters a 30-day option to purchase a maximum of additional shares to cover over allotments of shares. We will apply 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 6.
Underwriting Price to Discounts and Proceeds Public Commissions to Audible -------- ------------- ---------- Per Share..................................... $ $ $ Total......................................... $ $ $
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 [Graphics] We use market data and industry forecasts throughout this prospectus, which we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, we believe that the surveys and market research we or others have performed is reliable, but we have not independently verified this information. Neither we nor any of the underwriters represents that any such information is accurate. ------------ TABLE OF CONTENTS
Page ---- Management........................................ 39 Related Transactions and Relationships............ 46 Principal Stockholders............................ 49 Description of Capital Stock...................... 52 Shares Eligible for Future Sale................... 56 Underwriting...................................... 58 Notice to Canadian Residents...................... 60 Validity of the Shares............................ 62 Experts........................................... 62 Additional Information............................ 62 Index to Financial Statements..................... F-1
Page ---- Prospectus Summary................... 3 Risk Factors......................... 6 Use of Proceeds...................... 14 Dividend Policy...................... 14 Capitalization....................... 15 Dilution............................. 16 Selected Historical Financial Data... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 18 Business............................. 27
------------ 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, AudiblePlayer, MobileServer, Click.Hear, Internet Theater and Audible MobilePlayer. Other trademarks and service marks appearing in this prospectus are the property of their respective holders. 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. 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 8,934,000 shares of common stock upon the closing of this offering, (2) our common stock will be sold at $ per share, which is the mid-point of the range shown on the cover page 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. Audible, Inc. We are the leading provider of Internet-delivered premium spoken audio content for playback on personal computers and mobile devices. We have the largest and most diverse collection of premium digital spoken audio content available for download on the Internet for playback on personal computers and mobile devices, most of which is currently available only through our Web site, audible.com. Visitors can browse, sample, purchase, subscribe, schedule and download more than 15,000 hours of audio content available on our Web site, including over 2,800 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. Download and playback of this content is available on personal computers and AudibleReady mobile devices. Compaq, Creative Labs, Diamond Multimedia, Everex and Philips have agreed to support the AudibleReady format on their mobile audio-enabled devices. Our solution leverages the increasing usage of the Internet and the introduction of audio-enabled mobile devices to enable consumers to more efficiently manage and control the increasing amount of content available to them. 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 digital format that can be quickly delivered over the Internet directly to our customers. 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. We help content creators, device manufacturers and our other technology and distribution partners create incremental sources of revenue by aggregating premium audio content and providing a system for secure distribution of digital spoken audio. As a result, 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 manufacturers of mobile audio-enabled devices with a new application and enables our technology and distribution partners to provide our wide selection of content to their customers. We were incorporated in 1995 and commenced 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. 3 The Offering
Common stock offered......................... shares. Common stock to be outstanding after this shares. offering.................................... Use of proceeds.............................. For general corporate purposes, including increased marketing, acquisition and production of new audio content, obtaining and extending content and technology licensing arrangements, increasing personnel and increasing production and server system capacities. Proposed Nasdaq National Market symbol....... ADBL
- -------------------- This table is based on shares outstanding as of March 31, 1999. This table excludes: . 6,000,000 shares of common stock we have reserved for issuance under our 1999 Stock Incentive Plan; and . 613,270 shares of common stock issuable upon exercise of outstanding warrants. 4 Summary Financial Data (In thousands, except per share data)
Three Months November 3, 1995 Ended (inception) to Year Ended December 31, March 31, December 31, ------------------------- ---------------- 1995 1996 1997 1998 1998 1999 ---------------- ------- ------- ------- ------- ------- (unaudited) 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 1,838 481 417 ------ ------- ------- ------- ------- ------- Total operating expenses............. 49 3,536 8,133 8,453 1,958 1,844 ------ ------- ------- ------- ------- ------- Loss from operations. (49) (3,536) (8,073) (8,076) (1,838) (1,529) ------ ------- ------- ------- ------- ------- Other (income) expense, net........ -- (27) (44) 62 6 (67) ------ ------- ------- ------- ------- ------- Net loss................ $ (49) $(3,509) $(8,029) $(8,138) $(1,844) $(1,461) ====== ======= ======= ======= ======= ======= Basic and diluted net loss per common share.. $(0.03) $ (1.66) $ (2.24) $ (1.72) $ (0.42) $ (0.29) Weighted average shares outstanding............ 1,500 2,118 3,586 4,731 4,372 4,968 Proforma basic and diluted net loss per common share........... (0.02) (0.96) (1.00) (0.75) (0.19) (0.11) Proforma weighted average shares outstanding............ 2,034 3,660 8,045 10,861 9,806 13,819
March 31, 1999 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (unaudited) Balance sheet data: Cash and cash equivalents........................ $ 9,652 $9,652 Total assets..................................... 10,991 10,991 Noncurrent liabilities........................... 377 377 Redeemable preferred stock....................... 28,719 -- Total stockholders' (deficit) equity ............ (20,949) 7,770
5 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. We are a development stage company, we earned our first revenue in October 1997 and our business model is unproven. We have generated limited revenue from a small number of customers who purchased Audible MobilePlayers and our digital spoken audio content. As a result, we have only a limited operating history with which you can evaluate our business and prospects. Our limited operating history and small number of customers 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. We have limited revenue, we have a history of losses and we may not be profitable in the future. 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. The majority of this revenue during 1998 was derived from sales of hardware, which we expect to decline as we discontinue sales of the Audible MobilePlayer. 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. 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. We cannot be certain when we may 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. Disappointing quarterly revenue or operating results could cause our stock price to fall. Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our quarterly revenue or operating results fall below investor or securities analyst expectations, our stock price could fall substantially. Our quarterly revenue may fluctuate as a result of a variety of factors, many of which are outside our control, including the following: . demand for the Audible service; . availability of spoken audio content; . sales and consumer usage of AudibleReady devices; . introduction of products competitive with AudibleReady devices and services competitive with audible.com; and . inability of our system to satisfy customer demand. 6 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. The market for our service is uncertain and consumers may not be willing to use the Internet to purchase spoken audio content. 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. Downloading of audio content is a relatively new method of distribution and its growth and market acceptance is highly uncertain. 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. We may not be able to license or produce sufficiently compelling audio content to attract and retain customers and grow our revenue. 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 certain periodicals and other branded print materials to produce 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. If we are unable to obtain licenses from content providers 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 materially adversely affect our financial performance. 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 mobile devices may not sell a sufficient number of products suitable for our service, which would limit our revenue growth. Although content we sell can be played on personal computers, we believe that a key to our future success is the ability to play back this content on mobile devices. Because we do not intend to continue to manufacture our own mobile devices, we depend on manufacturers, such as Philips, Compaq and Diamond Multimedia, to develop and sell their own products. The first of these products only became commercially available in April 1999. If these manufacturers do not sell a sufficient number of AudibleReady devices, 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. We may not create sufficient brand awareness to acquire customers and generate revenue. 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 partners. If we fail to promote and maintain our brand names, our business, operating results and financial condition could be materially adversely affected. To promote our brands, we will need to substantially increase our marketing expenditures. Although we have applied for trademark and service mark registrations of our brand names in the United States, there can be no assurance that these applications will be approved. We have licensed to others in the past, and expect to license in the future, certain of our proprietary rights, such as portions of our technology and certain trademarks or 7 copyrighted material. While we attempt to ensure that these licensees maintain the quality of our brand, they could take actions that materially harm the value of our reputation. Increasing availability of digital audio technologies may increase competition and reduce our gross margins, market share and profitability. 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, download, security, management and playback technologies reduce the cost of starting a digital audio delivery system or audio content aggregation service. To remain competitive, we must continue to enhance the features of the Audible services, our audio content management software and our audio compression, download, security and playback technologies, either through technology licenses or through our own development. 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 competitors for customers, and, in some cases, for access to audio content, include both online and offline entities. Many of these companies have significantly greater brand recognition and financial, technical, marketing and other resources than do we. We cannot assure you that we will be able to compete successfully against current or future competitors which may deliver digital spoken audio content. 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, including competition for consumers of audio materials, both over the Internet and in cassette tape or compact disc form, for content with other content distributors and for mobile devices enabled with audio playback capabilities other than those that are AudibleReady. 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, (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. In addition, a small number of these companies control primary or secondary access to a significant percentage of Internet users and therefore have a competitive advantage in marketing to those users. Many of these companies have financial, technological, promotional and other resources that are much greater than those available to us. Many of these providers could use or adapt their current technology, or could purchase technology, to provide a service directly competitive with the Audible service. We cannot assure you that we will be able to compete effectively in this industry. Capacity constraints and failures, delays or overloads could interrupt our service and reduce the attractiveness of our service to existing or potential customers. Our success depends on our ability to electronically distribute spoken audio content to a large number of customers through our Web site 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. Any 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. We have experienced periodic systems interruptions, which we believe may continue to occur. 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. 8 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. 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 Windows CE-based devices manufactured by a number of computer and consumer electronics companies. On April 17, 1999, Version 2.0 became available in a pre-release version, and we do not plan to release it commercially prior to May 1999. Version 2.0 contains errors and bugs of which we are aware and may also contain additional errors and bugs. 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. 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. If the Internet fails to develop or develops more slowly than we expect as a commercial medium, our business may also grow more slowly, if at all. 9 The loss of key employees, failure to manage growth and inability to hire employees could jeopardize our growth prospects. 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. The loss of the services of any of our executive officers or other key employees could materially adversely affect our business. We do not have employment agreements with any of our executive officers or other key employees. We do not have a chief financial officer. Our future success also 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. Our failure to properly manage rapid growth could strain our resources and adversely affect our business. We have been experiencing a period of rapid growth that has been placing a significant strain on our resources. Our revenue increased 162% in the quarter ended March 31, 1999 from the same period the year earlier. The rapid rate of our recent growth has made management of that growth more difficult. In addition, we anticipate that we will significantly expand our operations over the next twelve months. We plan to use the proceeds of this offering in part to expand sales and marketing activities, to acquire new audio content, to obtain and extend content and technology licensing arrangements and to expand production and server system capabilities. This additional growth will further strain our management, financial and other resources. To manage future growth effectively we must significantly upgrade our financial and accounting systems and controls, integrate new personnel and manage expanded operations. Any failure to do so could have a material adverse effect on the quality of the Audible service, our ability to retain key personnel and our business, operating results and financial condition. 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 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. 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 certain 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. Significant uncertainty exists concerning the potential costs and effects associated with Year 2000 compliance. We may not be able to protect our intellectual property. 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 applied for trademarks and service marks on terms and symbols that we believe are important for our business. 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 10 others. This litigation could result in substantial costs and the diversion of our management and technical resources which would harm our business. 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. 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 adversely affect our business. We may become subject to sales and other taxes for direct sales over the Internet. 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 exercise significant influence over our company. After this offering, our executive officers and directors will continue to exercise significant influence over stockholder voting matters. Our executive officers, directors and their affiliates will together control approximately % of our common stock after this offering. As a result, these stockholders, if they act together, will be able to determine the composition of our board of directors, will retain the voting power to approve all matters requiring stockholder approval, including any acquisition of our company, and will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying 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. 11 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, and 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. Please see "Description of our Capital Stock--Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law; Right of First Negotiation." 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 will apply 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 shares of our common stock will be outstanding. Of these shares, other than the shares included in the offering, shares will be available for resale in the public market without restriction immediately following this offering, all of which are subject to lock-up agreements restricting the sale of common stock for 180 days after the date of this prospectus. In addition, shares will be available for resale in the public market without restriction 90 days after the date of this prospectus, of which shares are subject to the lock-up agreements. The remaining shares held by existing stockholders become eligible for resale in the public market at various dates thereafter, all of which shares are subject to the lock-up agreements. After this offering, the holders of 8,934,000 shares of common stock and holders of warrants to purchase an aggregate of 550,000 shares of our common stock and warrants to purchase 63,270 shares of our preferred stock, which preferred stock warrants will be exercisable for 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 12 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 6 million shares of common stock reserved for issuance under our stock plan, subject to limitations and the lock-up agreements. Investors will experience immediate and substantial dilution in the book value of their investment. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution 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 the proceeds from this offering, and we will have broad discretion in how we use them. 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. This prospectus contains forward-looking statements which may not prove to be accurate. 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. 13 USE OF PROCEEDS The net proceeds to us from the issuance and sale of the shares of our common stock offered hereby are estimated to be approximately $ million (approximately $ million if the underwriters' exercise their over-allotment in full), at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. We intend to use the proceeds for general corporate purposes, including increased marketing, acquisition and production of new audio content, obtaining and extending content and technology licensing arrangements, increasing personnel and increasing production and server system capacities. 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. 14 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 shares of common stock offered hereby at an assumed initial public offering price of $ 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.
March 31, 1999 --------------------------------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------------- ----------------- ------------------ (in thousands, except share and per share data) Lease obligations, long-term portion.................... $ 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: 16,000,000 shares authorized, 5,068,180 shares issued and outstanding actual; 50,000,000 shares authorized pro forma and pro forma as adjusted, 14,002,180 shares issued and outstanding pro forma and pro forma as adjusted. 51 140 Additional paid-in capital. 1,249 29,879 Notes due from stockholders for common stock.......... (1,063) (1,063) Deficit accumulated during the development stage..... (21,186) (21,186) ----------------- ----------------- ------------- Total stockholders' equity (deficit)....... (20,949) 7,770 ----------------- ----------------- ------------- Total capitalization.... $ 7,958 $ 7,958 $ ================= ================= =============
15 DILUTION Our net tangible book value at March 31, 1999 was $7,769,185 or $0.56 per common share. Net tangible book value is the amount of total tangible assets less total liabilities. Net tangible book value per common share is net tangible book value divided by the number of shares of common stock outstanding. Net pro forma tangible book value per common share is determined by dividing our net tangible book value 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 $ per share, the mid-point of the range on the cover page of this prospectus, and the application of the net offering proceeds as described under "Use of Proceeds," our pro forma net tangible book value at March 31, 1999 would have been $ , or $ per common share. This represents an immediate increase in pro forma net tangible book value of $ per common share to existing stockholders, and an immediate dilution in pro forma net tangible book value of $ per common share to new investors purchasing our common stock in this offering. The following table illustrates this per share dilution.
Assumed initial public offering price per common share........... $ Net tangible book value per common share at March 31, 1999...... $0.56 Increase per share attributable to new investors................ ----- Net tangible book value per common share after this offering..... ------ Dilution per common share to new investors....................... $ ======
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, valuing these shares at the initial public offering price; . 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.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Per Number Percent Amount Percent Common Share ---------- ------- ----------- ------- ------------ Existing stockholders... 14,002,180 100.0% $30,018,469 100.0% $2.14 New Investors........... ---------- ----- ----------- ----- Total.................. 100.0% $ 100.0% ========== ===== =========== =====
16 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, the Company's 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 the Company's 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.
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) 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 1,838 481 417 ------ ------- ------- ------- ------- ------- Total operating expenses............. 49 3,536 8,133 8,453 1,958 1,844 ------ ------- ------- ------- ------- ------- Loss from operations. (49) (3,536) (8,073) (8,076) (1,838) (1,529) ------ ------- ------- ------- ------- ------- Other (income) expense, net........ -- (27) (44) 62 6 (67) ------ ------- ------- ------- ------- ------- Net loss................ $ (49) $(3,509) $(8,029) $(8,138) $(1,844) $(1,461) ====== ======= ======= ======= ======= ======= Basic and diluted net loss per common share.. $(0.03) $ (1.66) $ (2.24) $ (1.72) $ (0.42) $ (0.29) Weighted average shares outstanding............ 1,500 2,118 3,586 4,731 4,372 4,968 Proforma basic and diluted net loss per common share........... (0.02) (0.96) (1.00) (0.75) (0.19) (0.11) Proforma weighted average shares outstanding............ 2,034 3,660 8,045 10,861 9,806 13,819
December 31, March 31, 1999 ------------------------------ ------------------ 1995 1996 1997 1998 Actual Pro Forma ---- ------ ------- ------- ------- --------- (unaudited) (In thousands) 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) 7,770
17 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 certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. Overview We are the leading provider of Internet-delivered premium spoken audio content for playback on personal computers and mobile devices. We have the largest and most diverse collection of premium digital spoken audio content available for download on the Internet for playback on personal computers and mobile devices, most of which is currently available only through us. We were incorporated in 1995, commenced commercial operations in October 1997 and are currently in the development stage. 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. We expect this revenue to decrease and eventually phase out as we discontinue the production of the player and sell our remaining inventory. 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 AudibleReady. The first of these devices became commercially available in April 1999. Revenue from the sale of audio content through our Web site has increased in each of the last four quarters. We expect that within the next several quarters the sales of Audible content and our other services will increase and 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 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 as the services are performed. In November 1998, we entered into an agreement with Microsoft, one of our stockholders, to develop certain integration of products, grant various rights and licenses and provide for Microsoft to be paid future 18 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 certain products and acquire various rights and licenses. $200,000 of these payments were recognized as other revenue in the quarter ended March 31, 1999. $1.5 million of these payments were advanced in the three months ended December 31, 1998, but have not yet been recognized, and therefore appear on our balance sheet as deferred revenue until we satisfy the associated conditions. In addition, Microsoft will be paid a share of our future revenue for content distributed as a result of the customized software developed under the agreement. 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 Compaq, Creative Labs, 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. 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. 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. 19 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.
Three Months Year Ended Ended December 31, March 31, ---------------- ---------------- 1997 1998 1998 1999 ------- ------ ------- ------ (unaudited) 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........... 3,187 489 399 132 ------- ------ ------- ----- Total operating expenses............... 13,494 2,248 1,626 585 ------- ------ ------- ----- Loss from operations........ (13,394) (2,148) (1,526) (485) ------- ------ ------- ----- 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)% (464)% ======= ====== ======= =====
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 our manufacturing partners. 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 pursuant to our agreement with Microsoft. Operating expenses. Cost of content and services revenue. Cost of content and services revenue consists primarily of amortized minimum guarantees and royalties earned by content providers. Minimum guarantees are amortized 20 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 $417,000 for the three months ended March 31, 1999, as compared to $481,000 for the three months ended March 31, 1998, a decrease of $64,000, or 13%. 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. 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. 21 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 certain 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. 22 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 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 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. 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 23 changes in the competitive environment, we may from time to time make certain 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. 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 deferred revenue, 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 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 24 upgrade our systems capacity. 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, . 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. 25 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 certain 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. 26 BUSINESS We are the leading provider of Internet-delivered premium spoken audio content for playback on personal computers and mobile devices. Visitors can browse, sample, purchase, subscribe, schedule and download more than 15,000 hours of audio content available on our Web site, including audio versions of books, periodicals and radio programs. Several manufacturers have agreed to support the AudibleReady format on their mobile audio-enabled devices. Our solution leverages the increasing usage of the Internet and the introduction of audio-enabled mobile devices to enable consumers to more efficiently manage and control how they select, organize and listen to audio content. 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. Furthermore, 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. By aggregating premium audio content and providing a system for secure distribution of digital spoken audio, we create incremental sources of revenue for a variety of partners. For example, 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 manufacturers of mobile audio-enabled devices with a new application and enables our technology and distribution partners to provide our wide selection of content 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 feel overwhelmed by the vast amount of available media and 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 $2.0 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. 27 IDC estimates that shipments of hand-held companion devices exceeded 4.5 million units in 1998 and will increase to over 14 million 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, the first solution for secure delivery of premium digital spoken audio content over the Internet for playback on personal computers and mobile 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 mobile 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 2,800 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, mobile device manufacturing partners and technology and distribution partners. 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. Our collection includes over 2,800 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 4,200 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 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. 28 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 April 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 $20.97 plus shipping through Amazon.com. By comparison, the manufacturer's suggested retail price for the same title was $29.95 for cassette tape and $44.95 for compact disc. Benefits to our partners: We help content creators, device manufacturers and our other technology and distribution partners create incremental sources of revenue by aggregating premium content and providing a widely-accepted system for digital spoken audio distribution. We are the first to offer a solution that addresses the needs of our partners which has allowed us to establish a leadership position in our market. 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 mobile devices. Device manufacturers. Major manufacturers of mobile audio-enabled devices, such as Compaq, Creative Labs, Diamond Multimedia, Everex and Philips, have agreed to support the Audible format. 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 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. Other technology and distribution partners. We have entered into agreements with Microsoft, MP3.com, RealNetworks and Softbank to allow their customers to access Audible content and our technology, either directly or indirectly. In return, we have access to additional distribution outlets. We have agreed with these partners to share a portion of revenue from sales of our content to their customers. Our Strategy Our objective is to enhance our position as the 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 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, 29 radio advertisements and billboards. Our co-marketing agreements with AudibleReady device manufacturers 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 partners to provide a selection of free and discounted content samples. In addition, we seek to partner 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 partners, 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 mobile devices and systems to be AudibleReady. We intend to continue to work with the manufacturers of mobile devices to enable these devices to play Audible content. In addition to our agreements with Compaq, Everex and Philips, we also seek to make future generations of MP3 audio players AudibleReady. For instance, we have an agreement with Diamond Multimedia to integrate the Audible format and security into future versions of the Rio Internet music player. 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) AudibleManager, our Web-based client software for downloading, managing and scheduling audio selections for playback; and (4) a variety of AudibleReady devices. [graphic displaying four components of the Audible service in circles and pictures] 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. 30 Digital audio content We currently offer more than 2,800 digital audiobooks and more than 4,200 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. 31 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--$6.95 (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-- $6.95 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 Wall Street Journal Special Report (Dow Jones & Company, Inc.)--$6.95 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 (Dewey, Cheetham and Howe d/b/a Tapet Brothers Associates)--$1.95 per weekly broadcast; $15.95 for a 1-year subscription 32 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, Pizza and the Internet--$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 Life Audio: Lost Civilizations: Egypt--$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. 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 The Economist Publishing, a division of Gartner Group Random House, Inc. Harvard Business School Blackstone Audiobooks Industry Standard Books on Tape Marketplace Productions Dove Audio The New York Times Harper Audio/Caedmon Harper Audio The Wall Street Journal New World Library The Teaching Company Random House AudioBooks, Sounds True a division of Random House, Inc. Stanford Audio Simon & Schuster Audio Penguin Audiobooks Time Warner AudioBooks AudibleManager The second generation of our AudibleManager software, which is generally available in pre-release form on our Web site, is scheduled for commercial release in May 1999. 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 33 customer's mobile 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 listened to with new content. AudibleReady Program We have formed several relationships with consumer electronics and computer companies to make their mobile devices AudibleReady. To be included in the AudibleReady program, these devices must include bundled software support for playing our file format and for the transfer of content from a personal computer to the devices. Unlike cassette tape or compact disc players, AudibleReady devices offer fast navigation of the content through section markers and bookmarks that can be set by the user. Users of AudibleReady devices can skip between selections, individual articles or chapters, effectively allowing them to control the listening experience. 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 Audible and AudibleReady brochures inside the device package and (4) referring to Audible and AudibleReady in their brochures and manuals. In most cases, our partners receive a portion of the revenue generated over a specific period of time by each new Audible customer referred by the partner as a result of the purchase of a new device. We have agreements with Compaq, Everex and Philips to bundle AudibleManager with their Windows CE palm-size devices. 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 anticipate entering into agreements with other palm-size device manufacturers, including Casio, with which we have a letter of intent. 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 limited numbers of the MobilePlayer, which stores up to two hours of spoken audio content, and the MobilePlayer PLUS, which stores up to seven hours of spoken audio content. Content can be played back directly from these devices or through a car stereo system using either an unused FM radio frequency or a cassette tape adapter. 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 mobile devices in order to reduce the risk of audio files being copied without authorization. Audio files are compressed for relatively fast downloads, scrambled and targeted to a customer's personal computer or mobile device. 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. 34 As of March 31, 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 March 31, 1999, we had 14 employees and several contractors involved in audio production who regularly produce new audio for the site. Strategic Relationships In addition to our arrangements with Casio, Compaq, Everex, MP3.com, Philips and Softbank, we have entered into strategic development and marketing arrangements with Microsoft, RealNetworks and Diamond Multimedia. Microsoft. Our agreement with Microsoft involves several development projects including Windows CE, Windows Media Player, Digital Rights Management, Microsoft's electronic books initiative and Microsoft's Auto PC platform. Microsoft has made a minority investment in our company and has committed to pay certain fees over the next five years for technology development, technology licensing and content licensing. 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. RealNetworks. Our agreement with RealNetworks has a variety of components. We plan to develop software that will allow users of RealNetworks' personal computer audio playback software 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 generation 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. 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 by our manufacturing partners of 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 35 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. 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 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. 36 Our content partners 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 employees, customers, partners 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 U.S. registration of several of our trademarks and service marks, including Audible, audible.com and AudibleReady. We do not know if these marks will be approved. In addition, effective trademark, service mark, copyright and trade secret protection are 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 certain 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. 37 Employees As of April 15, 1999, Audible had a total of 39 full-time employees -- ten in research and development, 11 in sales and marketing, 14 in production and four 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. 38 MANAGEMENT Our Directors and Executive Officers The following table shows information about our directors and executive officers:
Name Age Position ---- --- -------- Andrew J. Huffman....... 39 President, Chief Executive Officer and Director Donald R. Katz.......... 47 Chairman of the Board of Directors Brian M. Fielding....... 44 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 Anthony T. Nash......... 41 Director of Finance and Administration 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
- -------- (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. 39 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 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. Anthony T. Nash has been our Director of Finance and Administration since July 1998 and he was our Controller from February 1997 to July 1998. From May 1993 to February 1997, Mr. Nash was the Chief Financial Officer of Charles Green's Nursery, a wholesale foliage company. 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. 40 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. 41 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
Long-Term Compensation ------------ Annual Compensation Restricted ------------------------- Stock Name and Principal Position Salary Bonus(1) Other Sales(2) - --------------------------- -------- -------- ------- ------------ 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
- -------- (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 1,000,000 shares of our restricted common stock for $400,000. As of December 31, 1998, 200,000 shares had vested. The remaining shares vest at a rate of 20,000 shares per month and will be fully vested in April 2002. (5) In May 1998, Mr. Millman purchased 50,000 shares of our restricted common stock for $20,000. As of December 31, 1998, 8,000 shares had vested. The remaining shares vest at a rate of 1,000 per month and will be fully vested in June 2002. (6) In May 1998, Mr. Fielding purchased 25,000 shares of our restricted common stock for $10,000. As of December 31, 1998, 4,000 shares had vested. The remaining shares vest at a rate of 500 per month and will be fully vested in June 2002. 42 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 $ 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."
Aggregate Value Aggregate Value Of Vested Of Unvested Name Vested Shares Unvested Shares Shares Shares ---- ------------- --------------- --------------- --------------- Andrew J. Huffman....... 200,000 800,000 $ $ Donald R. Katz.......... 906,250 93,750 Travis Millman.......... 59,000 141,000 Brian Fielding.......... 35,500 64,500 Guy Story, Jr........... 142,000 108,000
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 and have never granted options to our Named Executive Officers. Named Executive Officers have purchased shares of our common stock through our restricted stock program as described below. 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 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.
Maximum Annual Annual Bonus Name Base Salary for 1999 ---- ----------- ------------ 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 22,000
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. 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. 43 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:
Name Bonus Date ---- ------- ------------------ Donald R. Katz.................................... $70,000 June 30, 1999 Travis Millman.................................... 80,000 September 30, 2001 Brian Fielding.................................... 40,000 May 31, 2001 Guy Story, Jr..................................... 22,667 July 31, 2000
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 April 15, 1999, we have issued none of the 6,000,000 shares of our common stock 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. 44 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 certain 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. 45 RELATED TRANSACTIONS AND RELATIONSHIPS 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 Capital L.L.C., 833,333 shares to funds managed by Patricof & Co. Ventures, Inc., (the "Patricof group") of which Mr. Hirschfeld, one of our directors, is a managing director, and 833,333 shares to Kleiner Perkins Caufield & Byers and its affiliates (the "Kleiner Perkins group"). 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 (the "AT&T group"), 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. Pursuant to these sales of preferred stock, we granted registration rights to certain stockholders. 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. 46
Date Number of Price Aggregate Name of Issuance Shares Per Share Price(1) - ---- ----------- --------- --------- --------- W. Bingham Gordon..................... 07/17/96 5,000 $.17 $ 850 W. Bingham Gordon..................... 02/20/97 25,000 .15 3,750 Timothy Mott (2)...................... 12/11/95 250,000 .07 17,500 Timothy Mott (2)...................... 07/23/96 250,000 .15 37,500 Winthrop Knowlton..................... 01/20/97 25,000 .15 3,750 Brian Fielding........................ 06/17/97 75,000 .40 30,000 Brian Fielding........................ 05/06/98 25,000 .40 10,000 Brian Fielding........................ 03/02/99 75,000 .40 30,000 Matthew Fine.......................... 06/17/97 75,000 .40 30,000 Matthew Fine.......................... 05/06/98 25,000 .40 10,000 Matthew Fine.......................... 03/02/99 50,000 .40 20,000 Andrew Huffman........................ 02/28/98 1,000,000 .40 400,000 Donald Katz (3)....................... 12/11/95 1,000,000 .07 70,000 J. Travis Millman..................... 11/03/97 150,000 .40 60,000 J. Travis Millman..................... 05/06/98 50,000 .40 20,000 Anthony Nash.......................... 05/08/97 15,000 .15 2,250 Anthony Nash.......................... 11/03/97 15,000 .40 6,000 Anthony Nash.......................... 09/15/98 20,000 .40 8,000 Foy Sperring.......................... 06/15/98 250,000 .40 100,000 Guy Story, Jr. ....................... 07/17/96 200,000 .085 17,000 Guy Story, Jr. ....................... 07/29/97 50,000 .40 20,000
- -------- (1) 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. (2) Ironwood Capital transferred these shares to Mr. Mott in April 1999. (3) 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 Warrants In March 1997, in connection with the sale of the Series C preferred stock, we issued warrants to purchase an aggregate of 450,000 shares of common stock at an exercise price of $6.00 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. 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 25,000 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. 47 In November 1998, we entered into a license agreement with Microsoft. This agreement also contains a right of first negotiation if we receive a proposal from another company that could result in our acquisition. Please see "Business--Strategic Relationships" and "Description of our Capital Stock-- Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware General Corporation Law; Right of First Negotiation" for a description of the agreement. 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. We plan to terminate this agreement in 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. 48 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of March 31, 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, 14,002,180 shares of common stock are deemed outstanding before the offering. 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) 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 May 31, 1999, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
Percent of Common Number of Stock Outstanding Shares ----------------- Beneficially Before After Name of Beneficial Owner Owned Offering Offering - ------------------------ ------------ -------- -------- Patricof group (1)............................... 1,401,794 10.0% c/o Patricof & Co. Ventures, Inc. 445 Park Avenue, 11th Floor New York, NY 10022 Kleiner Perkins group (2)........................ 1,356,008 9.6 2750 Sand Hill Road Menlo Park, CA 94025 Microsoft Corporation (3)........................ 1,350,000 9.6 One Microsoft Way Redmond, WA 98052-6399 Ironwood Capital L.L.C. (4)...................... 1,080,063 7.7 2241 Lundy Avenue San Jose, CA 95131 AT&T group (5)................................... 1,031,261 7.3 c/o AT&T Ventures 295 North Maple Avenue Basking Ridge, NJ 07920 CPQ Holdings, Inc. (6)........................... 750,000 5.4 20555 SH 249 Houston, TX 77070
49
Percent of Common Number of Stock Outstanding Shares ----------------- Beneficially Before After Name of Beneficial Owner Owned Offering Offering - ------------------------ ------------ -------- -------- Richard Brass................................... -- -- R. Bradford Burnham (7)......................... 1,031,261 7.3 W. Bingham Gordon (8)........................... 62,500 * Thomas Hirschfeld (9)........................... 1,401,794 10.0 Winthrop Knowlton (10).......................... 57,500 * Timothy Mott (11)............................... 1,580,063 11.3 Andrew J. Huffman (12).......................... 1,000,000 7.1 Donald R. Katz (13)............................. 1,000,000 7.1 Brian Fielding (14)............................. 175,000 1.3 J. Travis Millman (15).......................... 200,000 1.4 Guy Story, Jr. (16)............................. 250,000 1.8 All officers and directors as a group (14 people) (17)................................... 7,208,118 50.6
- -------- * Less than 1%. (1) Represents (i) 1,172,462 shares beneficially owned by APA Excelsior IV, L.P., including 51,404 shares issuable upon exercise of warrants, (ii) 206,904 shares beneficially owned by APA Excelsior IV/Offshore L.P., including 9,071 shares issuable upon exercise of warrants, and (iii) 22,428 shares beneficially owned by Patricof Private Investment Club, L.P., including 983 shares issuable upon exercise of warrants. (2) Represents (i) 1,313,889 shares beneficially owned by Kleiner Perkins Caufield & Byers VIII, including 59,922 shares issuable upon exercise of warrants, (ii) 33,899 shares beneficially owned by KPCB Information Sciences Zaibatsu, including 1,536 shares issuable upon exercise of warrants, and (iii) 8,200 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 24,584 shares issuable upon exercise of warrants. (5) Represents (i) 103,126 shares beneficially owned by Venture Fund I, L.P., including 15,000 shares issuable upon exercise of warrants, and (ii) 928,135 shares beneficially owned by AT&T Venture Fund II, L.P., including 135,000 shares issuable upon exercise of warrants. (6) An affiliate of Compaq Computer Corporation. (7) Represents (i) 103,126 shares beneficially owned by Venture Fund I, L.P., including 15,000 shares issuable upon exercise of warrants, and (ii) 928,135 shares owned by AT&T Venture Fund II, L.P., including 135,000 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 1,250 shares issuable upon exercise of warrants and 9,000 shares that are subject to our repurchase option. (9) Represents 1,401,794 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 1,250 shares issuable upon exercise of warrants and 9,500 shares that are subject to our repurchase option. (11) Includes 83,333 shares that are subject to our repurchase option. Includes 1,080,063 shares (including 24,584 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 1,080,063 shares, except to the extent of his pecuniary interest. 50 (12) Includes 740,000 shares that are subject to our repurchase option. (13) Includes 46,875 shares that are subject to our repurchase option, 65,000 shares that are pledged to secure private loans and 25,000 shares that are pledged to secure a $100,000 loan from the Company. See "Related Transactions and Relationships." (14) Includes 133,500 shares that are subject to our repurchase option. (15) Includes 129,000 shares that are subject to our repurchase option. (16) Includes 93,000 shares that are subject to our repurchase option. (17) Includes an aggregate of 1,585,508 shares that are subject to our repurchase option and 237,292 shares issuable upon exercise of warrants. 51 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 March 31, 1999, there were 5,068,180 shares of our common stock outstanding, held of record by 81 stockholders. As of March 31, 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 8,934,000 shares of common stock upon the closing of this offering. In addition, we currently have outstanding warrants to purchase up to an aggregate of 550,000 shares of our common stock and 63,270 shares of preferred stock, which warrants will be exercisable for common stock following this offering as described below. After this offering, we will have outstanding, shares of common stock if the underwriters do not exercise their overallotment option, or 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 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. 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 33,582 shares at an exercise price of $2.68 per share, expiring November 19, 2006, (2) warrant, to purchase 12,500 shares at an exercise price of $4.00 per share, expiring November 20, 2001, (3) warrant, to purchase 12,188 shares at an exercise price of $4.00 per share, expiring July 24, 2007, (4) warrant, to purchase 5,000 shares at an exercise price of $4.00 per share, expiring April 5, 2003, (5) warrants, to purchase 450,000 shares at an exercise price of $6.00 per share, expiring March 31, 2002, and (6) warrants, to purchase 100,000 shares at an exercise price per share equal to the price to the public of this offering. 52 Registration Rights After this offering, holders of (i) an aggregate of 534,000 shares of common stock issued upon the conversion of the Series A preferred stock (the "Series A Registrable Shares"); (ii) 2,096,082 shares of common stock issued upon the conversion of the Series B preferred stock including 46,082 shares issuable upon exercise of warrants to purchase Series B preferred stock (the "Series B Registrable Shares"); (iii) 2,262,188 shares of common stock issued upon the conversion of the Series C preferred stock including 12,188 shares issuable upon exercise of warrants to purchase Series C preferred stock and 450,000 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) 4,100,000 shares of the common stock issued upon conversion of the Series D preferred stock and 100,000 shares of common stock issuable upon exercise of an outstanding warrant held by a holder of Series D preferred stock (the "Series D Registrable Shares") will be entitled to certain provisions with respect to the registration of such shares under the Securities Act. We have an agreement with these stockholders that gives them certain registration rights. Subject to certain limitations, including those in lock-up agreements that the 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 certain conditions and limitations, 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. Holders of warrants to purchase our stock do not have there demand registration rights. 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. 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. 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. 53 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. 54 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, 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. 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 the initial notice. If we are unable to negotiate a disposition 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. Microsoft has this right for up to 4 1/2 years. Microsoft's right of first negotiation could have the effect of delaying, deterring or preventing a change of control. Stock Transfer Agent The transfer agent and registrar for our common stock is . 55 SHARES ELIGIBLE FOR FUTURE SALE After this offering, we will have shares of common stock outstanding. If the underwriters exercise their over-allotment option in full, we will have shares of common stock outstanding. All 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 described below. The remaining 14,002,180 shares of common stock outstanding after this offering will be restricted shares under the terms of the Securities Act. Of the restricted shares to be outstanding after this offering, transfer of substantially all of these shares will be limited by lock-up agreements as described below. 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 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. 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. As a result of contractual restrictions and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: . no restricted securities will be eligible for immediate sale on the date of this prospectus; . approximately restricted securities will be eligible for sale beginning 90 days after the date of this prospectus, subject in some cases to compliance with Rule 144; . approximately additional restricted securities will be eligible for sale beginning 180 days after the effective date of this offering upon expiration of lock-up agreements, subject in some cases to compliance with Rule 144; and . the remainder of the restricted securities will be eligible for sale from time to time thereafter, subject in some cases to compliance with Rule 144. 56 Registration Rights We have entered into an investor rights agreement with some of our stockholders, who own an aggregate of 8,934,000 shares of our common stock and holders of warrants to purchase an aggregate of 550,000 shares of our common stock and warrants to purchase 63,270 shares of our preferred stock, which preferred stock warrants will be exercisable for common stock following this offering. These stockholders have certain registration rights. 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 6,000,000 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 agreement with the underwriters. Lock-up Agreements Our officers and directors and substantially all of our other stockholders, who will hold an aggregate of shares of common stock after this offering, 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 after the date of the underwriting agreement. 57 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. and Volpe Brown Whelan & Company, LLC are acting as representatives, have severally but not jointly agreed to purchase from us the following respective numbers of shares of common stock:
Number of Underwriters Shares ------------ --------- Credit Suisse First Boston Corporation............................. J.P. Morgan Securities Inc......................................... Volpe Brown Whelan & Company, LLC.................................. Wit Capital Corporation............................................ --- Total............................................................ ===
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.
Total ------------------- Without With Per Over- Over- Share allotment allotment ----- --------- --------- Underwriting discounts and commissions paid by us.............................................. $ $ $ Expenses payable by us........................... $ $ $
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 58 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 shares of common stock for employees and certain other persons associated with Audible who have expressed an interest in purchasing common stock in this offering. 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 asked the underwriters to reserve for sale at the initial public offering price shares of common stock for our customers who express an interest in purchasing these shares. The sales of these shares will be made by . Purchases of reserved shares are to be made through an account at in accordance with procedures for opening an account and transacting in securities. Any reserved shares not purchased by subscribers will be offered by the underwriters on the same basis as the other shares. We have agreed to indemnify the underwriters against certain 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. 59 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. 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. 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. 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. 60 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. 61 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. 62 AUDIBLE, INC. INDEX TO FINANCIAL STATEMENTS 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-7
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 F-2 AUDIBLE, INC. (A Development Stage Company) Balance Sheets
December 31, ------------------------ March 31, 1997 1998 1999 Assets ----------- ----------- ----------- (Unaudited) Current assets: Cash and cash equivalents............. $ 646,186 $10,526,299 $ 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 Advance royalty payments.............. 259,209 228,402 213,464 Advance to manufacturer............... 350,000 -- -- Prepaid expenses...................... 119,481 102,916 94,279 Inventory............................. 240,453 129,535 189,667 ----------- ----------- ----------- Total current assets................. 1,617,103 10,995,668 10,384,766 Property and equipment, net............ 1,167,612 397,837 404,536 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 Other assets........................... 113,298 106,153 101,468 ----------- ----------- ----------- Total assets......................... $ 3,013,378 $11,599,658 $10,990,770 =========== =========== =========== Liabilities and Stockholders' Deficit Current liabilities: Accounts payable...................... $ 372,786 $ 482,971 $ 429,327 Accrued expenses...................... 204,439 208,518 176,263 Accrued compensation.................. 211,607 263,235 248,031 Current maturities of obligations under capital leases................. 432,497 471,224 471,224 Deferred revenue...................... -- 1,500,000 1,520,000 ----------- ----------- ----------- Total current liabilities............ 1,221,329 2,925,948 2,844,845 Deferred compensation.................. 129,508 167,318 189,032 Obligations under capital leases, net of current maturities................. 712,348 310,507 187,708 Redeemable convertible preferred stock (non-cumulative): Series A, par value $.01. Authorized 1,068,000 shares; issued and outstanding 534,000 shares at December 31, 1997, 1998 and March 31, 1999 (liquidation value $504,514; redemption value $400,500)........... 389,189 389,189 389,189 Series B, par value $.01. Authorized 2,100,000 shares; issued and outstanding 2,050,000 shares at December 31, 1997, 1998 and March 31, 1999 (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; issued and outstanding 2,250,000 shares at December 31, 1997, 1998 and March 31, 1999 (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; issued and outstanding 3,850,000 shares at December 31, 1998 and 4,100,000 shares at March 31, 1999 (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 and 16,000,000 shares; issued and outstanding 4,066,136, 4,929,570 and 5,068,180 shares at December 31, 1997, 1998 and March 31, 1999, respectively.................... 40,661 49,295 50,681 Additional paid-in capital............. 715,163 1,187,069 1,248,662 Notes due from stockholders for common stock................................. (596,375) (1,040,158) (1,063,125) Deficit accumulated during the development stage..................... (11,586,901) (19,724,975) (21,186,159) ----------- ----------- ----------- Total stockholders' deficit............ (11,427,452) (19,528,769) (20,949,941) ----------- ----------- ----------- Commitments (note 10) Total liabilities and stockholders' deficit............................... $ 3,013,378 $11,599,658 $10,990,770 =========== =========== ===========
See accompanying notes to financial statements. F-3 AUDIBLE, INC. (A Development Stage Company) Statements of Operations
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) 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 4,546,077 480,553 417,319 4,963,396 ----------- ----------- ----------- ------------ ------------ ----------- ------------ Total operating expenses....... 3,536,230 8,133,247 8,452,517 20,170,878 1,958,332 1,843,684 22,014,562 ----------- ----------- ----------- ------------ ------------ ----------- ------------ Loss from operations...... (3,536,230) (8,072,973) (8,076,427) (19,734,514) (1,837,866) (1,528,629) (21,263,143) 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) $(1,461,184) $(21,186,159) =========== =========== =========== ============ ============ =========== ============ Basic and diluted net loss per common share..... $ (1.66) $ (2.24) $ (1.72) $ (5.76) $ (0.42) $ (0.29) $ (5.98) =========== =========== =========== ============ ============ =========== ============ Weighted average shares outstanding...... 2,117,883 3,586,002 4,731,296 3,424,924 4,372,192 4,968,043 3,540,658 =========== =========== =========== ============ ============ =========== ============ Pro forma basic and diluted net loss per common share............ $ (0.96) $ (1.00) $ (0.75) $ (2.68) $ (0.19) $ (0.11) $ (2.70) =========== =========== =========== ============ ============ =========== ============ Pro forma weighted average shares outstanding...... 3,660,217 8,045,002 10,861,130 7,373,789 9,806,192 13,818,710 7,857,158 =========== =========== =========== ============ ============ =========== ============
See accompanying notes to financial statements. F-4 AUDIBLE, INC. (A Development Stage Company) Statements of Stockholders' Deficit Period November 3, 1995 (Date of Inception) to March 31, 1999
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 --------- --------- ---------- ---------------- ------------------- ------------- Balance at November 3, 1995 (date of inception).................... -- -- -- -- -- -- Common stock issued, net of issuance costs................... 1,000,000 $10,000 $ 54,646 $ (70,000) $ -- $ (5,354) Issuance of common stock in exchange for patent.............. 500,000 5,000 30,000 -- -- 35,000 Net loss.......................... -- -- -- -- (48,884) (48,884) --------- ------- ---------- ----------- ------------ ------------ Balance at December 31, 1995...... 1,500,000 15,000 84,646 (70,000) (48,884) (19,238) Common stock issued............... 1,718,400 17,184 178,605 (195,789) -- -- Issuance of common stock for services rendered................ 94,100 941 34,285 -- -- 35,226 Payments received on notes due from stockholders................ -- -- -- 5,100 -- 5,100 Common stock repurchased.......... (143,400) (1,434) (10,755) 12,189 -- -- Net loss.......................... -- -- -- -- (3,508,770) (3,508,770) --------- ------- ---------- ----------- ------------ ------------ Balance at December 31, 1996...... 3,169,100 31,691 286,781 (248,500) (3,557,654) (3,487,682) Common stock issued............... 1,003,750 10,037 354,837 (364,874) -- -- Issuance of common stock for services rendered................ 48,656 487 87,397 -- -- 87,884 Payments received on notes due from stockholders................ -- -- -- 1,593 -- 1,593 Common stock repurchased.......... (155,370) (1,554) (13,852) 15,406 -- -- Net loss.......................... -- -- -- -- (8,029,247) (8,029,247) --------- ------- ---------- ----------- ------------ ------------ Balance at December 31, 1997...... 4,066,136 40,661 715,163 (596,375) (11,586,901) (11,427,452) Common stock issued............... 1,637,750 16,377 638,427 (654,804) -- -- Issuance of common stock for services rendered................ 7,500 75 16,175 -- -- 16,250 Payments received on notes due from stockholders................ -- -- -- 20,507 -- 20,507 Common stock repurchased.......... (781,816) (7,818) (182,696) 190,514 -- -- Net loss.......................... -- -- -- -- (8,138,074) (8,138,074) --------- ------- ---------- ----------- ------------ ------------ Balance at December 31, 1998...... 4,929,570 49,295 1,187,069 (1,040,158) (19,724,975) (19,528,769) Common stock issued (unaudited)... 153,000 1,530 59,670 (61,200) -- -- Non-cash compensation charge (unaudited)...................... -- -- 4,896 -- -- 4,896 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)...................... (14,390) (144) (1,723) 1,867 -- -- Net loss (unaudited).............. -- -- -- -- (1,461,184) (1,461,184) --------- ------- ---------- ----------- ------------ ------------ Balance at March 31, 1999 (unaudited)...................... 5,068,180 $50,681 $1,248,662 $(1,063,125) $(21,186,159) $(20,949,941) ========= ======= ========== =========== ============ ============
See accompanying notes to financial statements. F-5 AUDIBLE, INC. (A Development Stage Company) Statements of Cash Flows
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) Cash flows from operating activities: Net loss.............. $(3,508,770) $(8,029,247) $(8,138,074) $(19,724,975) $(1,843,770) $(1,461,184) $(21,186,159) 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............... -- -- -- -- -- 4,896 4,896 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 deferred revenue............. -- -- 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) ----------- ----------- ----------- ------------ ----------- ----------- ------------ 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 =========== =========== =========== ============
See accompanying notes to financial statements. F-6 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 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. 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-7 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 subsequent to December 31, 1998 is unaudited)
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 ----- ------- -------- ------------------- ------- -------- ---------------- (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 ===== ======= ======== ======== ======= ======== ===========
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. F-8 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 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. Deferred revenue represents cash received in advance of revenue being earned (see note 7). 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-9 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 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 Statement of Financial Accounting Standards (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-10 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 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, 450,000, 450,000 and 450,000 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 Basic and Diluted Net Loss Per Common Share 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 Company's initial public offering. 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 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. F-11 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 subsequent to December 31, 1998 is unaudited) 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 4,066,136 and 4,929,570, respectively, common stock shares issued and outstanding and 4,892,270 and 8,747,270 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 450,000 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 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. F-12 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 subsequent to December 31, 1998 is unaudited) A summary of common stock issued under Stock Restriction Agreements follows:
Number of shares Weighted average issue price --------- ------------------------------- Balance at November 3, 1995 (date of inception)................... -- -- Issued for notes................. 1,000,000 $.07 Issued in exchange for patent.... 500,000 Fair value of patent--$35,000 --------- Balance at December 31, 1995..... 1,500,000 Issued for notes................. 1,718,400 $.11 Issued in exchange for services.. 94,100 Fair value of services--$35,226 Repurchased...................... (143,400) $.09 --------- Balance at December 31, 1996..... 3,169,100 Issued for notes................. 1,003,750 $.36 Issued in exchange for services.. 48,656 Fair value of services--$87,884 Repurchased...................... (155,370) $.10 --------- Balance at December 31, 1997..... 4,066,136 Issued for notes................. 1,637,750 $.40 Issued in exchange for services.. 7,500 Fair value of services--$16,250 Repurchased...................... (781,816) $.24 --------- Balance at December 31, 1998 (of which 2,895,942 shares are vested at December 31, 1998).... 4,929,570 =========
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 $3.00 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 450,000 shares of common stock at an exercise price of $6.00 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. 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. F-13 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 subsequent to December 31, 1998 is unaudited) 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 share for 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 share for 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. 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 F-14 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 subsequent to December 31, 1998 is unaudited) preferred stock are convertible, which is a share for 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 share for 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 $6.00 per share, 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. 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 F-15 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 subsequent to December 31, 1998 is unaudited) 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:
Maximum number of outstanding Redemption date shares to be redeemed --------------- --------------------- January 1, 2000........................................ 33.33% January 1, 2001........................................ 50.00% January 1, 2002........................................ All remaining shares
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.
Maximum number Redemption Redemption date shares to be redeemed price per share --------------- ---------------------- --------------- February 25, 2003..................... Series B 2,050,000 $1.50 Series C 2,250,000 4.00 Series D 3,850,000 4.00
F-16 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 subsequent to December 31, 1998 is unaudited) 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:
December 31, --------------------- 1997 1998 ---------- ---------- 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 ========== ==========
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. F-17 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 subsequent to December 31, 1998 is unaudited) (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 a license to distribute certain customized software enabling access from users of Microsoft platforms to Audible content. This advance has been deferred until the Company has met certain conditions. Audible will pay Microsoft a royalty on content licensed and distributed by Audible to each end user that accesses its content using the customized software. 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. 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-18 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 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:
Period November 3, 1995 Year ended December 31, (date of inception) ------------------------------------- to December 31, 1996 1997 1998 1998 ----------- ----------- ----------- ------------------- 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 ----------- ----------- ----------- ----------- $ -- $ -- $ -- $ -- =========== =========== =========== ===========
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:
December 31, --------------------- 1997 1998 ---------- ---------- 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..................................... $ -- $ -- ========== ==========
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-19 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 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 25,000 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:
Capital Operating leases leases -------- --------- 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 ========
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. F-20 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 subsequent to December 31, 1998 is unaudited) Equipment under capital leases as of December 31, 1997 and 1998 is summarized as follows:
December 31, ---------------------- 1997 1998 ---------- ---------- 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 ========== ==========
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. 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. F-21 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 subsequent to December 31, 1998 is unaudited) (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 143,400, 155,370, 781,816 and 1,080,586 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. 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. F-22 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 subsequent to December 31, 1998 is unaudited) (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 6,000,000 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 24 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. F-23 [AUDIBLE, INC. LOGO] 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. Securities and Exchange Commission registration fee................. $12,788 National Association of Securities Dealers, Inc. filing fee......... 5,100 Nasdaq National Market listing fee.................................. 1,000 Transfer agent's and registrar's fees............................... * Printing expenses................................................... * Legal fees and expenses............................................. * Accounting fees and expenses........................................ * Blue Sky filing fees and expenses................................... 10,000 Miscellaneous expenses.............................................. * ------- Total............................................................. * =======
- -------- * To be filed by amendment. 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 (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 450,000 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 5,068,180 shares of common stock at purchase prices ranging from $.07 to $4.00 per share, for an aggregate of $1,526,384. 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 3.2* 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-2 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) 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) 10.15 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* Letter Agreement, dated April 22, 1999, by and between Audible and Microsoft Corporation 10.22* Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft Corporation 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 - -------- * To be filed by amendment. (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. II-3 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-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wayne, New Jersey, on the 23rd day of April, 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 Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Each person whose signature appears below in so signing also makes, constitutes and appointed Andrew J. Huffman and Nancy A. Spangler, and each of them acting alone, his true and lawful attorney-in- fact, with full power of substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments and post-effective amendments to this Registration Statement, with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof.
Signature Title Date --------- ----- ---- /s/ Andrew J. Huffman President, Chief Executive April 22, 1999 _________________________________ Officer and Director Andrew J. Huffman (Principal Executive Officer) /s/ Anthony Nash Director of Finance and April 22, 1999 _________________________________ Administration (Principal Anthony Nash Financial Officer) /s/ Donald R. Katz Chairman of the Board of April 19, 1999 _________________________________ Directors Donald R. Katz /s/ Timothy Mott Director April 22, 1999 _________________________________ Timothy Mott /s/ R. Bradford Burnham Director April 21, 1999 _________________________________ R. Bradford Burnham /s/ Thomas Hirschfeld Director April 20, 1999 _________________________________ Thomas Hirschfeld /s/ W. Bingham Gordon Director April 22, 1999 _________________________________ W. Bingham Gordon /s/ Winthrop Knowlton Director April 22, 1999 _________________________________ Winthrop Knowlton /s/ Richard Brass Director April 22, 1999 _________________________________ Richard Brass
II-5 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 3.2* 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) 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) 10.15 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* Letter Agreement, dated April 22, 1999, by and between Audible and Microsoft Corporation 10.22* Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft Corporation 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 - -------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 ________________ Shares Audible, Inc. Common Stock, $.01 par value UNDERWRITING AGREEMENT ---------------------- __________, 1999 CREDIT SUISSE FIRST BOSTON CORPORATION J.P. MORGAN SECURITIES INC. VOLPE BROWN WHELAN & COMPANY, LLC As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Audible, Inc., a Delaware corporation ("Company"), proposes to issue and sell ________________ shares ("Firm Securities") of its common stock, $.01 par value per share ("Securities"), and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than _____________ additional shares ("Optional Securities") of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities". The Company hereby agrees with the several Underwriters named in Schedule A hereto ("Underwriters") as follows: 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement (No. 333-_______) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("Commission") and either (i) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement ("initial registration statement") has been declared effective, either (i) an additional registration statement ("additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the -2- requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. (c) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. (d) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (e) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities. -3- (f) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (g) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for agreements, the requirements of which have been waived prior to the filing of the Registration Statement. (h) The Offered Securities have been approved for listing on Nasdaq Stock Market's National Market. (i) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (j) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities, will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (k) This Agreement has been duly authorized, executed and delivered by the Company. (l) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (m) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if -4- determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole ("Material Adverse Effect"). (n) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (o) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have no knowledge of any infringement of or conflict with the intellectual property rights of others that would individually or in the aggregate have a Material Adverse Effect. (p) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (q) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (r) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and, except as otherwise disclosed in the Prospectus, such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis and the schedules included in each Registration Statement present fairly the information required to be stated therein. (s) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the -5- Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (t) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of $________ per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of the Company, at the office of ________________________, at 10:00 A.M., New York time, on _________________, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at such location as CSFBC shall reasonably request at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the -6- accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of the Company, at the above office of ___________________. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at such location as CSFBC shall reasonably request at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CSFBC's consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will -7- promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and the printing of memoranda relating thereto, for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary -8- prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. (i) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except issuances of Securities pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, or issuances of Securities pursuant to the exercise of such options. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of KPMG LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all material respects -9- with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of such letter, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated net sales, or net operating income, or in the total or per share amounts of consolidated income before extraordinary items or net income, except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. -10- (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iii) any banking moratorium declared by U.S. Federal or New York authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Piper & Marbury L.L.P., counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Securities of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Offered Securities; -11- (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for agreements, the requirements of which have been waived prior to the filing of the Registration Statement; (iv) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (v) The execution, delivery and performance of this Agreement and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement; (vi) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not -12- misleading; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus; and (vii) This Agreement has been duly authorized, executed and delivered by the Company. (e) The Representatives shall have received from Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (g) The Representatives shall have received a letter, dated such Closing Date, of KPMG LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. -13- The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: (i) the table under the first paragraph under the caption "Underwriting", (ii) the concession and reallowance figures -14- appearing in the [fourth] paragraph under the caption "Underwriting" and (iii) the information contained in the [sixth and eighth] paragraphs under the caption "Underwriting." (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not -15- guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (ii), (iii) or (iv) of Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. -16- 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department-- Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 65 Willowbrook Boulevard, Wayne, New Jersey 07470, Attention: President; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. -17- If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, AUDIBLE, INC. By: ----------------------------------- Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION J.P. MORGAN SECURITIES INC. VOLPE BROWN WHELAN & COMPANY, LLC Acting on behalf of themselves and as the Representatives of the several Underwriters By: CREDIT SUISSE FIRST BOSTON CORPORATION By: ---------------------------------------- Name: Title: 374RDF3716/1.A766815-1 -18- SCHEDULE A Number of Underwriter Firm Securities - ----------- --------------- Credit Suisse First Boston Corporation J.P. Morgan Securities Inc. Volpe Brown Whelan & Company, LLC -------------- Total........................ ============== EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION OF AUDIBLE Exhibit 3.1 AUDIBLE, INC. RESTATED CERTIFICATE OF INCORPORATION Audible, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: 1. The name of the Corporation is Audible, Inc., formerly The Audible Words Corporation. The original Certificate of Incorporation was filed with the Secretary of the State of Delaware on November 3, 1995, and was amended by filings with the Secretary of the State of Delaware on December 11, 1995, July 24, 1996, November 19, 1996 and December 30, 1996. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. 3. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: FIRST: The name of the corporation (which is hereinafter called the "Corporation") is: Audible, Inc. SECOND: The address of the registered office in Delaware is The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 12,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), (ii) 534,000 shares of Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), (iii) 534,000 shares of Series A-1 Convertible Preferred Stock, par value $.01 per share (the "Series A-1 Preferred Stock"), (iv) 2,100,000 shares of Series B Preferred Stock, $.01 par value per share (the "Series B Preferred Stock"), and (v) 2,250,000 shares of Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock") (the Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are sometimes collectively referred herein as the "Preferred Stock"). As used herein, the term "Series A Preferred Stock" means the Series A Preferred Stock and the Series A-1 Preferred Stock share-for-share alike and without distinction, as except as the context otherwise requires. The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of capital stock of the Corporation. A. COMMON STOCK. ------------ l. General. The voting, dividend and liquidation rights of the holders of ------- the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock. 2. Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. 3. Dividends. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. 5. Redemption. The Common Stock is not redeemable. ---------- B. PREFERRED STOCK. --------------- The Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall rank, as to dividends and upon Liquidation (as defined in Section 2 (a) hereof) on a parity with each other, and senior and prior to the Common Stock and to all other classes or series of shares issued by the Corporation ("Junior Stock"). The Preferred Stock shall have the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. 1. Dividends. Whenever any dividend or other distribution is declared on --------- any shares of Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution on those shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, if any, on which no dividend or other distribution was declared, based on the relative aggregate Liquidation value of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, so that the outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock will participate equally with each other in such dividend or other distribution. -2- (a) Series A Preferred Stock Dividend. --------------------------------- (i) The holders of the Series A Preferred Stock shall be entitled to receive, out of funds legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, when and if declared by the Board of Directors, annual dividends at the rate per annum of 10% of the Series A Stock Value (as defined below), as adjusted for stock splits, stock dividends, recapitalizations, reclassifications and similar events which affect the number of outstanding shares of the Series A Preferred Stock. Such dividends shall not be cumulative. The "Series A Stock Value" shall be equal to $0.75. (ii) Thereafter, the Board of Directors of the Corporation may declare and pay additional dividends for such period out of funds of the Corporation legally available therefor; provided, however, that any such additional -------- ------- dividends shall be declared and paid in cash upon the Common Stock and Preferred Stock as a single class, with each holder of Common Stock and Series A Preferred Stock being entitled to receive the product of the per share amount of such additional cash dividend, multiplied by the number of shares of Common Stock (i) held by such stockholder or (ii) into which the shares of Series A Preferred Stock held by such stockholder are convertible, as the case may be. (b) Series B Preferred Stock Dividend. --------------------------------- (i) General. Dividends are payable on the Series B Preferred Stock, ------- when, as and if declared by the Board of Directors. (ii) Quarterly Dividends. The holders of the Series B Preferred Stock ------------------- shall be entitled to receive, out of funds legally available therefor, dividends payable quarterly on the first day of January, April, July and October, when, as, and if declared by the Board of Directors, at the annual rate of 10% of the Series B Stock Value (as defined below) per annum, subject to adjustment for stock dividends, stock splits, combinations, recapitalizations or similar events which affect such shares (collectively, "Adjustment"). Such dividends shall not be cumulative. The "Series B Stock Value" shall be equal to $1.50. (iii) Other. So long as any shares of Series B Preferred Stock are ----- outstanding, the Corporation shall not declare or pay any dividend or make any distribution (whether in cash or other property, other than stock dividends referred to in subsection (vii) of Subsection 4(d)) to the holders of Junior Stock or any holders of Series A Preferred Stock or Series C Preferred Stock, unless such dividend or distribution also is payable to the holders of Series B Preferred Stock. -3- (c) Series C Preferred Stock Dividend. --------------------------------- (i) General. Dividends are payable on the Series C Preferred Stock, ------- when, as and if declared by the Board of Directors. (ii) Quarterly Dividends. The holders of the Series C Preferred Stock ------------------- shall be entitled to receive, out of funds legally available therefor, dividends payable quarterly on the first day of January, April, July and October, when, as, and if declared by the Board of Directors, at the annual rate of 10% of the Series C Stock Value (as defined below) per annum, subject to Adjustment. Such dividends shall not be cumulative. The "Series C Stock Value" shall be equal to $4.00. (iii) Other. So long as any shares of Series C Preferred Stock are ----- outstanding, the Corporation shall not declare or pay any dividend or make any distribution (whether in cash or other property, other than stock dividends referred to in subsection (vii) of Subsection 4(d)) to the holders of Junior Stock or any holders of Series A Preferred Stock or Series B Preferred Stock, unless such dividend or distribution also is payable to the holders of Series C Preferred Stock. 2. Liquidation, Dissolution or Winding Up. -------------------------------------- (a) Series A Preferred Stock. ------------------------ (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (a "Liquidation"), the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock (collectively referred to as "Senior Preferred Stock"), but before any payment shall be made to the holders of Junior Stock by reason of their ownership thereof and at the same time as any payment shall be made to any other series of Preferred Stock, an amount equal to the sum of (i) the Series A Stock Value (subject to Adjustment); (ii) 8% of the Series A Stock Value (subject to Adjustment), compounded annually from the date of issuance of the Series A Preferred Stock; and (iii) all declared but unpaid dividends thereon. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series A Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Series A Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts which would otherwise -4- be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (ii) Upon the completion of the distribution required by subparagraph (i) of this Section 2(a) and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each, treating such Series A Preferred Stock on an as-if-converted basis. (b) Series B Preferred Stock. In the event of any Liquidation, the holders ------------------------ of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made to the holders of Junior Stock and at the same time as any payment shall be made to any other series of Preferred Stock, an amount per share equal to the greater of (A) the sum of (i) the Series B Stock Value (subject to Adjustment) and (ii) all declared but unpaid dividends thereon and (B) the amount which would be received if all shares of Series B Preferred Stock had been converted to Common Stock prior to such Liquidation. If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series B Preferred Stock and any class or series of stock ranking on Liquidation on a parity with the Series B Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (c) Series C Preferred Stock. In the event of any Liquidation, the holders ------------------------ of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made to the holders of Junior Stock and at the same time as any payment shall be made to any other series of Preferred Stock, an amount per share equal to the greater of (A) the sum of (i) the Series C Stock Value (subject to Adjustment) and (ii) all declared but unpaid dividends thereon and (B) the amount which would be received if all shares of Series C Preferred Stock had been converted to Common Stock prior to such Liquidation. If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series C Preferred Stock and any class or series of stock ranking on Liquidation on a parity with the Series C Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts which would otherwise be payable in respect -5- of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (d) Mergers, Reorganizations, Etc. The merger, reorganization or ------------------------------ consolidation of the Corporation into or with another corporation (except if the Corporation is the surviving entity) or other similar transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of in exchange for property, rights or securities distributed to holders by the acquiring person, firm or other entity, or the sale of all or substantially all the assets of the Corporation, shall be deemed to be a Liquidation for purposes of this Section 2. Upon any such merger, reorganization or consolidation, in addition to any other rights, preferences, powers, privileges and restrictions, qualifications and limitations set forth herein, the holders of Preferred Stock may elect to a distribution in an amount deemed to be the cash or the value of the property, rights or securities distributed to such holders by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) General. Each holder of outstanding shares of Preferred Stock shall be ------- entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof), at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law, by the provisions of Subsection 3(b)(i), 3(b)(ii), 3(b)(iii), 3(c)(i), 3(c)(ii), 3(c)(iii), 3(d)(i), 3(d)(ii) and 3(d)(iii) below or by the provisions establishing any other series of Preferred Stock, holders of Preferred Stock shall vote together with the holders of Common Stock as a single class. (b) Series A Preferred Stock. ------------------------ (i) The holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Series A Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock for the purpose of electing the director by holders of the Series A Preferred Stock. A vacancy in the directorship filled by the holders of Series A Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series A Preferred Stock. The rights of the holders of the Series A Preferred Stock under this Subsection 3(b)(i) shall terminate on the first date on which there are issued and outstanding less than 25% of the shares of Series A Preferred Stock that may be issued by the Corporation. -6- (ii) The Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (A) amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock; (B) effect any sale, conveyance or other disposition of, or encumbrance upon, all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of; (C) create any new class or series of stock or any other securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Preferred Stock with respect to voting, dividends or upon liquidation; (D) amend Section B 3(b)(i) of Article FOURTH; (E) increase the number of directors above six (6); or (F) pay any dividend on the Common Stock. (iii) For purposes of subsection 3(b)(ii)(A), without limiting the generality of the foregoing, the authorization or issuance of any series of Preferred Stock with preference or priority over, or on a parity with, the Series A Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall be deemed to affect adversely the Series A Preferred Stock. (c) Series B Preferred Stock. ------------------------ (i) Amendment. Any amendment or change in the rights, preferences or --------- privileges of the Series B Preferred Stock shall require the affirmative vote of the holders of at least a majority of the outstanding shares thereof voting as a separate class. (ii) Board of Directors. The holders of record of the shares of ------------------ Series B Preferred Stock, exclusively and as a separate class, shall be entitled to elect two (2) directors of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of at least a majority in interest of the shares of Series B Preferred Stock then outstanding shall constitute a quorum of the Series B Preferred Stock for -7- the purpose of electing directors by holders of the Series B Preferred Stock. The two (2) directors shall be elected by vote of at least 66.67% in interest of the holders of shares of Series B Preferred Stock. A vacancy in any directorship filled by the holders of Series B Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series B Preferred Stock. The rights of the holders of the Series B Preferred Stock under this subsection 3(c)(ii) shall terminate on the first date in which there are issued and outstanding less than 25% of the shares of Series B Preferred Stock that may be issued by the Corporation. (iii) Protective Provisions. So long as any shares of Series B --------------------- Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least a majority in interest of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, voting separately as a class: (A) Extraordinary Transactions. Effect any sale, conveyance -------------------------- or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering (as defined herein)), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. (B) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series B Preferred Stock. (C) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series B Preferred Stock with respect to voting, dividends or upon Liquidation. (D) Increase the Shares. Increase the number of shares of ------------------- any series of Preferred Stock or Common Stock of the Corporation authorized to be issued. (E) Issue Capital Stock, Options or Convertible Securities. ------------------------------------------------------ Except for Excluded Stock (as defined herein), authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation or any Option (as defined herein) or Convertible Security (as defined herein). (F) Amend Charter or By-Laws. Amend, alter or repeal any ------------------------ provision of (A) the Certificate of Incorporation of the Corporation or (B) the By-Laws of the Corporation so as to adversely affect the Series B Preferred Stock. -8- (G) Increase Directors. Increase the number of directors of ------------------ the Corporation above six (6). (H) Declare Dividends. Declare or pay any dividend or make any ----------------- distribution on the Common Stock. (d) Series C Preferred Stock. ------------------------ (i) Amendment. Any amendment or change in the rights, preferences or --------- privileges of the Series C Preferred Stock shall require the affirmative vote of the holders of at least a majority of the outstanding shares thereof voting as a separate class; provided, however, that any amendment or change in the rights, -------- ------- preferences or privileges of Section 3(d)(iv) shall require the affirmative vote of the holders of more than two-thirds of the outstanding shares of Series C Preferred Stock, voting separately as a class. (ii) Board of Directors. The holders of record of the shares of ------------------ Series C Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of at least a majority in interest of the shares of Series C Preferred Stock then outstanding shall constitute a quorum of the Series C Preferred Stock for the purpose of electing directors by holders of the Series C Preferred Stock. The one (1) director shall be elected by vote of at least a majority in interest of the holders of shares of Series C Preferred Stock. A vacancy in any directorship filled by the holders of Series C Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series C Preferred Stock after notice to all holders of Series C Preferred Stock. The rights of the holders of the Series C Preferred Stock under this subsection 3(d)(ii) shall terminate on the first date in which there are issued and outstanding less than 20% of the shares of Series C Preferred Stock that may be issued by the Corporation. (iii) Protective Provisions. Subject to 3(d)(iv) below, so long as --------------------- any shares of Series C Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least a majority in interest of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, voting separately as a class: (A) Extraordinary Transactions. Effect any sale, conveyance -------------------------- or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a -9- Qualified Offering), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. (B) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series C Preferred Stock. (C) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series C Preferred Stock with respect to voting, dividends or upon Liquidation. (D) Increase the Shares. Increase the number of shares of ------------------- any series of Preferred Stock or Common Stock of the Corporation authorized to be issued. (E) Issue Capital Stock, Options or Convertible Securities. ------------------------------------------------------ Except for Excluded Stock, authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation or any Option or Convertible Security. (F) Amend Charter or By-Laws. Amend, alter or repeal any ------------------------ provision of (A) the Certificate of Incorporation of the Corporation or (B) the By-Laws of the Corporation so as to adversely affect the Series C Preferred Stock. (G) Increase Directors. Increase the number of directors of ------------------ the Corporation above six (6). (H) Declare Dividends. Declare or pay any dividend or make any ----------------- distribution on the Common Stock. (iv) For a period of twenty-four (24) months from the date of issuance of the Series C Preferred Stock, and provided that such shares remain outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of more than two-thirds (2/3) in interest of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, voting separately as a class, effect any sale, conveyance or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution in which the price per share is less than or equal to $8.00, subject to Adjustment. -10- 4. Optional Conversion. The holders of the Preferred Stock shall have ------------------- conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall be convertible, ---------------- at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Stock Value for each Series of Preferred Stock by the Conversion Price (as defined below) for such Series in effect at the time of conversion. The conversion price at which shares of Common Stock shall be deliverable upon conversion of Preferred Stock without the payment of additional consideration by the holder thereof (the "Conversion Price") shall initially be $0.75 for the Series A Preferred Stock (the "Series A Conversion Price"), $1.50 for the Series B Preferred Stock (the "Series B Conversion Price") and $4.00 for the Series C Preferred Stock (the "Series C Conversion Price"). Such initial Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a Redemption Notice (as defined below) relating to shares of Preferred Stock pursuant to Section 6 or upon the exercise of the rights set forth in Sections 7 or 8 hereof, as applicable, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the second full day preceding the date fixed for redemption, unless the Redemption Price (as defined below) is not paid when due, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a Liquidation of the Corporation, the Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on Liquidation to the holders of Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (c) Mechanics of Conversion. ----------------------- (i) In order for a holder of Preferred Stock to convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock, at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the -11- certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (ii) The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (iii) Upon any such conversion, no adjustment to the Conversion Price shall be made for any accrued and unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. -12- (iv) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends thereon. Any shares of Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Preferred Stock accordingly. (d) Adjustments to Conversion Price for Diluting Issues. --------------------------------------------------- (i) Special Definitions. For purposes of this Subsection 4(d), the ------------------- following definitions shall apply: (A) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued or deemed to be issued (pursuant to Subsection 4(d)(iii) below) by the Corporation after the Original Issue Date, other than Excluded Stock. (B) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (C) "Employee Stock Options" shall mean (i) existing stock and options granted to employees, directors, or consultants of the Corporation pursuant to any stock award or option plan, agreement or arrangement for officers, directors, consultants, employees and others who render services to the Corporation (a "Plan"), to acquire up to a maximum of 85,000 shares of Common Stock (subject to any Adjustment), and (ii) stock and/or options to be granted to employees, directors or consultants of the Corporation pursuant to any Plan to purchase up to a maximum of 1,076,500 shares of Common Stock (subject to any Adjustment). (D) "Excluded Stock" shall mean (I) Common Stock issued or issuable (a) upon conversion of the Preferred Stock, (b) upon the exercise of Employee Stock Options, (c) pursuant to the Stock Restriction Agreements, (d) upon exercise of the Common Stock Warrants and (e) in transactions referred to in subsections (vi) and (vii) of this Subsection 4(d) and (II) Series B Preferred Stock issuable upon exercise of the Series B Warrants. (E) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding Employee Stock Options, Series B Warrants, or Common Stock Warrants, as described below. -13- (F) "Original Issue Date" shall mean the date on which a share of Preferred Stock was first issued. (G) "Stock Restriction Agreements" shall mean, collectively, (a) the Stock Restriction Agreement, dated December 11, 1995, between the Corporation and Donald Katz, (b) the Stock Purchase and Restriction Agreement, dated December 11, 1995, between the Corporation and Ironwood Capital L.L.C. ("Ironwood"), (c) the Transfer of Technology and Sale of Stock Agreements, dated as of December 1, 1995, between the Corporation and each of Donald Katz and Edwin Lau, as amended as of July 17, 1996, (d) the Stock Restriction Agreements dated July 17, 1996, between the Corporation and each of Robert Krulwich, Jim Schwei, Nancy and Andy Clayman, John and Emily Alter, Howard Clowes, Bill Jacobson, Mitch Ratcliffe, Marianne Radwan, Bing Gordon, Dan Farley, Diane Franciose, Steven Spiro, Guy Story, Patrick Barry, Mimi Bloom and William Fallon, (e) the Stock Purchase and Restriction Agreement dated July 23, 1996 between the Corporation and Ironwood, (f) the Stock Restriction Agreement dated September 10, 1996, between the Corporation and Richard Lewis, (g) the Stock Restriction Agreement dated August 7, 1996, between the Corporation and James Harris, (h) the Stock Restriction Agreements dated December 6, 1996 between the Corporation and each of Grey Voynow, William Bradley, Pauline Eden, Jonathan Jones and Beth Anderson, (i) the Stock Restriction Agreement dated January 20, 1997 between the Corporation and Winthrop Knowlton, (j) the Stock Restriction Agreement dated February 4, 1997 between the Corporation and Carol Markowitz, (k) the Stock Restriction Agreements dated February 7, 1997 between the Corporation and each of Aijt Rajasekharan, Erica Ceravolo, Helene Artz and Ehud Ben-Joesph, (l) the Stock Restriction Agreement dated February 20, 1997 between the Corporation and William Gordon, (m) the Stock Restriction Agreements dated ____, 1997 between the Corporation and each of Jim Russell and IDEO Product Dev. (H) "Series B Warrants" shall mean (i) the Warrant Agreement issued to Comdisco, Inc. and (ii) the Warrant to Purchase Stock issued to Imperial Bancorp. (I) "Common Stock Warrants" shall mean Warrants to purchase Common Stock outstanding from time to time. (ii) No Adjustment of Conversion Price. No adjustment in the number of --------------------------------- shares of Common Stock into which the Preferred Stock is convertible shall be made, by adjustment in the applicable Conversion Price thereof: (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to such issuance, the Corporation receives written notice from the holders of at least 66 2/3% of the then outstanding shares of Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance of Additional Shares of Common Stock. -14- (iii) Issue of Options and Convertible Securities Deemed Issue of ----------------------------------------------------------- Additional Shares of Common Stock. If the Corporation at any time or from time - --------------------------------- to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; and upon the expiration or termination of any unexercised Option, the Conversion Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Conversion Price; and (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; provided, that no readjustment pursuant to this clause -------- (b) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. - ---------------------- -15- (A) Series A and Series B Conversion Prices. In the event --------------------------------------- the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)), without consideration or for a consideration per share less than the Series A or Series B Conversion Price, as the case may be, in effect on the date of and immediately prior to such issue, then and in such event, such Series A or Series B Conversion Price, as the case may be, shall be reduced, concurrently with such issue, to a price determined by multiplying such Series A or Series B Conversion Price, as the case may be, by a fraction, the numerator of which --------- shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A or Series B Conversion Price, as the case may be; and the denominator of which shall be the ----------- number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, -------- however, that, for the purpose of this Subsection 4(d)(iv), (I) all shares of - ------- Common Stock issuable upon conversion of shares of Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (B) Series C Conversion Price. In the event the Corporation ------------------------- shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)), without consideration or for a consideration per share less than the Series C Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series C Conversion Price shall be reduced, concurrently with such issue, as follows: (x) if the consideration per share is greater than or equal to $3.00 per share (subject to Adjustment), to an amount equal to the per share consideration received for each additional share upon such issuance; or (y) if the issuance (or deemed issuance) is without consideration or for a consideration per share less than $3.00 (subject to Adjustment), to a price determined by (i) first reducing the Series C Conversion Price to $3.00 (subject to Adjustment), provided, however, that no reduction -------- ------- pursuant to this clause (i) shall be made if the Series C Conversion Price is already below $3.00 (subject to Adjustment); and (ii) then multiplying such new reduced Series C Conversion Price by a fraction, the numerator of which shall be --------- the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such new Series C Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding - ----------- immediately prior to such issue plus the number of such Additional -16- Shares of Common Stock so issued; provided, that, for the purpose of this -------- Subsection 4(d)(iv), (I) all shares of Common Stock issuable upon conversion of shares of Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii)), such Additional Shares of Common Stock shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this Subsection ------------------------------ 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (a) ----------------- insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (b) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (c) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (a) and (b) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per ---------------------------------- share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. In the case of such consideration or number of shares issuable as referred to in clauses (x) and (y), respectively, the amounts shall be as set forth in the instruments relating thereto without regard to any provision contained therein for a subsequent adjustment of such consideration or number of shares, respectively. -17- (vi) Adjustment for Combinations or Consolidation of Common Stock. ------------------------------------------------------------ If, at any time after the applicable Original Issue Date, the number of shares of Common Stock outstanding are decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (vii) Adjustment for Stock Dividends, Splits, Etc. If the -------------------------------------------- Corporation shall at any time after the applicable Original Issue Date fix a record date for the subdivision, split-up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in outstanding shares; provided, however, that the Conversion Price shall not be decreased at -------- ------- such time if the amount of such reduction would be an amount less than $.01, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.01 or more. (viii) Adjustment for Merger or Reorganization, etc. In case of any -------------------------------------------- recapitalization, consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a subdivision or combination provided for elsewhere in this Section 4 and other than a consolidation, merger or sale which is treated as a liquidation pursuant to Subsection 2(d)), each share of Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. (e) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of -18- this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment ----------------------------- or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Preferred Stock. (g) Notice of Record Date. In the event: --------------------- (i) that the Corporation takes a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class of any other securities or property, or to receive any other right; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of a Liquidation; then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Preferred Stock, and shall cause to be mailed to the holders of the Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least twenty days before the record date specified below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of the applicable class of securities of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or -19- (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of the applicable class of securities of record shall be entitled to exchange their shares of the applicable class of securities for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. (h) Shadow Preferred. ---------------- (i) Special Definitions. For purposes of this Section 4(h), the ------------------- following definitions shall apply: (a) "Dilutive Issuance" with respect to the Series A ----------------- Preferred Stock shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such Series A Preferred Stock in effect on the date of and immediately prior to such issue. (b) "Participating Investor" shall mean any holder of ---------------------- Series A Preferred Stock that purchases at least its Pro Rata Share of a Dilutive Issuance. (c) "Non-Participating Investor" shall mean any -------------------------- holder of Series A Preferred Stock that is not a Participating Investor. (d) "Pro Rata Share" with respect to each holder of -------------- Series A Preferred Stock shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance actually offered to such holder of Series A Preferred Stock by the Board of Directors of the Corporation pursuant to the right of first offer (the "Right of First Offer") set forth in Section 8.6 of the Series A Preferred Stock Purchase Agreement between the Corporation and the purchasers set forth therein, (ii) multiplied by a fraction, the numerator of which is the number of shares of Series A Preferred Stock then held by such holder, and the denominator of which is the total number of shares of Series A Preferred Stock then outstanding; provided; however, that no such conversion shall occur in connection with a particular Dilutive Issuance if, pursuant to the written request of the Corporation, such holder agrees in writing to waive his, her or its Right of First Offer with respect to such Dilutive Issuance. (ii) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of the Preferred Stock entitled to purchase a Pro Rata Share pursuant to the Right of First Offer a written notice (the "Issuance Notice") of its intention, describing the type of securities, the price and number of shares and the general terms upon which the corporation proposes to issue the same, at lease twenty (20) days prior to the date of -20- such Dilutive Issuance. Each such holder of Series A Preferred Stock may, within ten (10) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within said ten-day period, or fails to actually purchase its Pro Rata Share of Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Non-Participating Investor. (iii) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by each Non-Participating Investor, the number of outstanding shares of Series A Preferred Stock held by such Non- Participating Investor determined by multiplying the number of such shares held by the Refused Percentage shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series A Preferred Stock) into an equal number of fully paid and non-assessable shares of Series A-1 Preferred Stock; provided, however, that prior to the Closing Date each Non- Participating Investor shall have the right to convert such shares of Series A Preferred Stock into shares of Common Stock at the Conversion Price in effect for such series as of the date of such conversion. (iv) Upon the conversion of Series A Preferred Stock held by a Non- Participating Investor into shares of Series A-1 Preferred Stock as set forth herein, such shares of Series A Preferred Stock shall no longer be outstanding on the books of the Corporation, and may not be reissued and the Non- Participating Investor shall be treated for all purposes as the record holder of such shares of Series A-1 Preferred Stock on the date of the closing of the applicable Dilutive Issuance. No shares of Series A-1 Preferred Stock shall be issued except as set forth in the Section 4(d) upon conversion of share of Series A Preferred Stock. (v) No adjustment in the Conversion Price of the Series A-1 Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except to the limited extent provided in subsection 4(d) (iii) (to the extent such issuance or deemed issuance under such subsection is without payment of any consideration by such holder for the additional shares of Common Stock issued or issuable) and in subsections 4(d) (vi) and (d) (vii) hereof. 5. Automatic Conversion. -------------------- (a) Qualified Offering. Upon the closing of a Qualified Offering (as ------------------ defined below), all of the then outstanding shares of Preferred Stock shall automatically be 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 shall be immediately payable in cash. A "Qualified Offering" means an Underwritten Offering (as defined below) by the Corporation of authorized but unissued shares of Common Stock at a price per share which (after deducting -21- underwriting commissions and offering expenses) results in proceeds to the Corporation of not less than $6.00 per share, subject to Adjustment, and resulting in net proceeds to the Corporation (after deducting underwriting commissions and offering expenses) of not less than $15,000,000. An "Underwritten Offering" means 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 (the "Commission") pursuant to the Securities Act. (b) Notices. The Corporation shall promptly send by first-class mail, ------- postage prepaid, to each holder of Preferred Stock at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and exhibit and schedule thereto and (ii) each order of the Commission declaring any such registration statement to be effective. (c) No Further Action. In the case of an automatic conversion pursuant to ----------------- this Section 5, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall -------- ------- not be obligated to issue to any holder certificates evidencing the shares of Common Stock issuable such conversion unless certificates evidencing such shares of Preferred Stock are delivered either to the Corporation or any transfer agent of the Corporation. 6. Redemption of Series A Preferred Stock at Corporation's Option. -------------------------------------------------------------- (a) At any time and from time to time after January 1, 2002, the Corporation may, at the option of its Board of Directors, redeem the Series A Preferred Stock, in whole or in part, by paying $0.75 per share (subject to Adjustment), together with declared but unpaid dividends thereon, in cash for each share of Series A Preferred Stock then redeemed (hereinafter referred to as the "Series A Redemption Price"). (b) In the event of any redemption of only a part of the then outstanding Series A Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof based on the number of shares of Series A Preferred Stock held by such holders on the date of the Redemption Notice. (c) Redemptions made pursuant to this Section 6 shall not relieve the Corporation of its obligations to redeem Series A Preferred Stock in accordance with the provisions of Section 7. (d) At least 30 days prior to the date fixed for any redemption of Series A Preferred Stock (hereinafter referred to as the "Series A Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to each holder of record of Series A -22- Preferred Stock to be redeemed, at his or its address last shown on the records of the transfer agent of the Series A Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent), notifying such holder of the election of the Corporation to redeem such shares, specifying the Series A Redemption Date and the date on which such holder's Conversion Rights (pursuant to Section 4 hereof) as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his or its certificate or certificates representing the shares to be redeemed (such notice is hereinafter referred to as the "Series A Redemption Notice"). On or prior to the Series A Redemption Date, each holder of Series A Preferred Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Series A Redemption Notice, and thereupon the Series A Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Series A Redemption Date, unless there shall have been a default in payment of the Series A Redemption Price, all rights of the holders of the Series A Preferred Stock designated for redemption in the Series A Redemption Notice as holders of Series A Preferred Stock of the Corporation (except the right to receive the Series Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (e) On or prior to the Series A Redemption Date, the Corporation shall deposit the Series A Redemption Price of all shares of Series A Preferred Stock designated for redemption in the Series A Redemption Notice and not yet redeemed with a bank or trust company having aggregate capital and surplus in excess of $25,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust company to pay the Series A Redemption Price for such shares to their respective holders on or after the Series A Redemption Date upon receipt of notification from the Corporation that such holder has surrendered his or its share certificate to the Corporation. Such instructions shall also provide that any moneys deposited by the Corporation pursuant to this Subsection 6(e) for the redemption of shares thereafter converted into shares of the Corporation's Common Stock pursuant to Section 4 hereof no later than the close of business on the fifth full day preceding the Series A Redemption Date shall be returned to the Corporation on the Series A Redemption Date. The balance of any monies deposited by the Corporation pursuant to this Subsection 6(e) remaining unclaimed at the expiration of one year following the Series A Redemption Date shall thereafter be returned to the Corporation upon its request expressed in a resolution of its Board of Directors. (f) Subject to the provisions hereof, the Board of Directors of the Corporation shall have authority to prescribe the manner in which Series A Preferred Stock shall be redeemed from time to time. Any shares of Series A Preferred Stock so redeemed shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. Nothing herein contained shall prevent or restrict the purchase by the Corporation, from time to time either at public or private sale, of the whole or any part of the Series A Preferred Stock at such price or prices as the Corporation may determine, subject to the provisions of applicable law. -23- 7. Redemption at Option of Majority of Holders of Series A Preferred ----------------------------------------------------------------- Stock. (a) Irrespective of the provisions of Section 6, at any time after the dates set forth in the chart below (each such date being referred to hereinafter as a "Programmed Redemption Date"), but within 30 days (the "Section 7 Redemption Date") after the receipt by the Corporation of a written request from the holders of not less than a majority of the then outstanding Series A Preferred Stock that all or some of such holders' shares be redeemed, and concurrently with surrender by such holders of the certificates representing such shares, the Corporation shall, subject to the conditions set forth in subsection 7(b), redeem, out of funds legally available therefor, from each holder of Series A Preferred Stock at the Series A Redemption Price, the respective portions set forth in the chart below of the number of shares of Series A Preferred Stock held by such holder on the applicable Programmed Redemption Date: Programmed Maximum Portion of Outstanding Shares of Redemption Date Series A Preferred Stock To Be Redeemed - --------------- --------------------------------------- January 1, 2000 33 1/3% January 1, 2001 50% January 1, 2002 All outstanding shares of Series A Preferred Stock (b) Notwithstanding any of the foregoing provisions, on each Programmed Redemption Date, the holders of the Series A Preferred Stock shall be entitled to receive their aggregate Series A Redemption Price for such date in full, provided that if funds are not legally available to pay such Series A Redemption Price in full, the Company shall use those funds which are legally available to redeem the maximum possible number of such shares and shall effect such redemption pro rata among the holders of the Series A Preferred Stock based on the number of shares of Series A Preferred Stock held by such holders on the date of the Section 7 Redemption Notice. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Programmed Redemption Date but which it has not redeemed. (c) The Corporation shall provide notice of any redemption of Preferred Stock pursuant to this Section 7 specifying the time and place of redemption and the Series A Redemption Price, by certified or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not more than sixty (60) nor less than thirty (30) days prior to the date on which such redemption is to be made. Upon mailing any such notice of redemption and subject to the provisions of Section 7(b) hereof, the Corporation will become obligated to redeem at the time of redemption specified therein all Series A Preferred Stock tendered for redemption pursuant to the terms of this Section 7 (other than such shares of Series A Preferred Stock as are duly converted pursuant to Section 4 prior to the close of business on the fifth full day preceding the Programmed Redemption Date). In case less than all Series A Preferred Stock represented by any certificate is redeemed in any redemption pursuant to this Section 7, a new certificate will be issued representing the unredeemed Series A Preferred Stock without cost to the holder thereof. -24- (d) Unless there shall have been a default in the payment of the Series A Redemption Price, no share of Series A Preferred Stock tendered for redemption under this Section 7 is entitled to any dividends declared after its Programmed Redemption Date, and on such Programmed Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Programmed Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Programmed Redemption Date be deemed to be outstanding. (e) Any Series A Preferred Stock redeemed pursuant to this Section 7 will be canceled and will not under any circumstances be reissued, sold or transferred, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized class of Series A Preferred Stock so redeemed accordingly. 8. Mandatory Redemption at Option of Holders of Series B Preferred Stock --------------------------------------------------------------------- and Series C Preferred Stock. - ---------------------------- (a) Series B Preferred Stock. If, seven (7) years following the Original ------------------------ Issue Date of the Series B Preferred Stock, the Corporation has not completed a Qualified Offering or a Liquidation (including, for these purposes, any event described in Section 2(d)), then, within 45 days (the "Series B Redemption Date") after the receipt by the Corporation of a written request (the "Redemption Request") of holders of not less than a majority of the then outstanding Series B Preferred Stock that all or some of such holders' shares of Series B Preferred Stock be redeemed, and concurrently with surrender by such holder of the certificate(s) representing such shares, the Corporation shall redeem for cash from such holder of Series B Preferred Stock, out of funds legally available therefor, the shares of Series B Preferred Stock held by such holder on the Series B Redemption Date at a price per share (the "Series B Redemption Price") equal to the greater of (i) the Fair Market Value (as defined below) of a share of Common Stock of the Corporation and (ii) the Series B Stock Value (subject to Adjustment), together with declared but unpaid dividends thereon. (b) Series C Preferred Stock. If, seven (7) years following the Original ------------------------ Issue Date of the Series B Preferred Stock, the Corporation has not completed a Qualified Offering or a Liquidation (including, for these purposes, any event described in Section 2(d)), then, within 45 days (the "Series C Redemption Date") after the receipt by the Corporation of a written request (the "Redemption Request") of holders of not less than a majority of the then outstanding Series C Preferred Stock that all or some of such holders' shares of Series C Preferred Stock be redeemed, and concurrently with surrender by such holder of the certificate(s) representing such shares, the Corporation shall redeem for cash from such holder of Series C Preferred Stock, out of funds legally available therefor, the shares of Series C Preferred Stock held by such -25- holder on the Series C Redemption Date at a price per share ("Series C Redemption Price") equal to the greater of (i) the Fair Market Value (as defined below) of a share of Common Stock of the Corporation and (ii) the Series C Stock Value (subject to Adjustment), together with declared but unpaid dividends thereon. (c) Notice. Upon receipt of the Redemption Request, the Corporation shall ------ provide notice (the "Redemption Notice") of any redemption of Preferred Stock pursuant to this Section 8 specifying the time and place of redemption and the Series B Redemption Price or Series C Redemption Price, as the case may be, by certified or registered mail, postage prepaid, to each holder of record of Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than thirty (30) days prior to the Redemption Date. Upon mailing any such Redemption Notice, the Corporation will become obligated to redeem on the Redemption Date all Preferred Stock tendered for redemption pursuant to the terms of this Section 8 (other than such shares of Preferred Stock as are duly converted pursuant to Section 4 prior to the close of business on the fifth full day preceding the Redemption Date). In case less than all shares of Preferred Stock represented by any certificate are redeemed in any redemption pursuant to this Section 8, a new certificate will be issued representing the unredeemed shares of Preferred Stock without cost to the holder thereof. (d) Dividends. Unless there shall have been a default in the payment of --------- the Series B Redemption Price or Series C Redemption Price, as the case may be, no share of Preferred Stock tendered for redemption under this Section 8 is entitled to any dividends declared after its Redemption Date (provided, however, that any dividends declared but unpaid as of the Redemption Date shall be immediately payable in cash), and on such Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Redemption Date be deemed to be outstanding. (e) Cancellation of Stock. Any Preferred Stock redeemed pursuant to this --------------------- Section 8 will be canceled and will not under any circumstances be reissued, sold or transferred, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized class of Preferred Stock so redeemed accordingly. -26- (f) Fair Market Value. The "Fair Market Value" of a share of Common Stock ----------------- shall be as determined by an independent investment banking firm or other firm mutually satisfactory to the Corporation and (i) the holders of at least a majority in interest of the then outstanding Series A Preferred Stock, (ii) the holders of at least a majority in interest of the then outstanding Series B Preferred Stock and (iii) the holders of at least a majority in interest of the then outstanding Series C Preferred Stock, and shall be equal to the value of the Corporation as a whole divided by the number of outstanding shares of Common Stock of the Corporation (with each share of Series A Preferred Stock, Series B Preferred and the Series C Preferred Stock of the Corporation treated as if it had been converted into the number of shares of Common Stock (including fractional shares) into which such share is then convertible, rounded to the nearest one-tenth of a share), and with no liquidity discounts or other discounts for minority ownership). 9. Redemption of Preferred Stock. So long as any shares of a series of ----------------------------- Preferred Stock are outstanding, the Corporation shall not redeem any shares of any other series of Preferred Stock in accordance herewith or otherwise unless simultaneously therewith, the Corporation shall redeem a pro rata portion of the --- ---- other series of Preferred Stock, based on the relative aggregate Liquidation value of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, pursuant to the redemption terms set forth in Section 6, 7 and 8. FIFTH. Board of Directors. In furtherance of and not in limitation of ------------------ powers conferred by statute, it is further provided: (1) Election of directors need not be by written ballot. (2) The Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws of the Corporation. SIXTH. Limitation on Liability. No director of the Corporation shall be ----------------------- personally liable to the Corporation or to any stockholder of the Corporation for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of Delaware or any other statute of the State of Delaware hereafter is amended to authorize the further elimination or limitation of the liability of directors of the corporation, then the liability of a director of the corporation shall be limited to the fullest extent permitted by the statutes of the State of Delaware, as so amended, and such elimination or limitation of liability shall be in addition to, and not in lieu of, the limitation on the liability of a director provided by the foregoing provisions of this Eighth Article. -27- Any repeal of or amendment to this Sixth Article shall be prospective only and shall not adversely affect any limitation on the liability of a director of the corporation existing at the time of such repeal or amendment. SEVENTH. To the extent permitted by law, the Corporation shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. To the extent permitted by law, the Corporation may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. The Corporation may advance expenses (including attorneys' fees) incurred by a director or officer in advance of the final disposition of such action, suit or proceeding upon the receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to indemnification. The Corporation may advance expenses (including attorneys' fees) incurred by an employee or agent in advance of the final disposition of such action, suit or proceeding upon such terms and conditions, if any, as the Board of Directors deems appropriate. EIGHTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and the Certificate of Incorporation and subject to the limitations set forth in Section 3 of this Amended and Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. 4. This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors in accordance with Section 245 of the General Corporation Law of the Sate of Delaware. 5. This Amended and Restated Certificate of Incorporation was duly adopted by written consent of the stockholders in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. -28- IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Restated Certificate of Incorporation to be signed by its President this 31st day of March, 1997. AUDIBLE, INC. By: /s/ Donald Katz --------------------------- President Donald Katz -29- EX-3.1.1 4 CERT OF AMEND OF CERT OF INC., 7/22/97 EXHIBIT 3.1.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF AUDIBLE, INC. Pursuant to Section 242 of the General Corporation Law of the State of Delaware ------------------------ Audible, Inc. (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: FIRST: At a meeting held in accordance with the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation adopted resolutions pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth amendments to the Certificate of Incorporation of the Corporation and declaring said amendments to be advisable. The stockholders of the Corporation duly approved said proposed amendments by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendments. The resolutions setting forth the amendments are as follows: RESOLVED: That the first paragraph of Article FOURTH of the Certificate of --------- Incorporation of the Corporation be and hereby is deleted and the following first paragraph of Article FOURTH is inserted in lieu thereof: FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 12,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), (ii) 534,000 shares of Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), (iii) 534,000 shares of Series A-1 Convertible Preferred Stock, par value $.01 per share (the "Series A-1 Preferred Stock"), (iv) 2,100,000 shares of Series B Preferred Stock, $.01 par value per share (the "Series B Preferred Stock"), and (v) 2,300,000 shares of Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock") (the Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are sometimes collectively referred herein as the "Preferred Stock"). As used herein, the term "Series A Preferred Stock" means the Series A Preferred Stock and the Series A-1 Preferred Stock share-for-share alike and without distinction, as except as the context otherwise requires. RESOLVED: That Sections 4(d)(i)(D) and 4(d)(i)(E) of "B. PREFERRED STOCK" --------- of Article FOURTH of the Certificate of Incorporation of the Corporation be and hereby are deleted and the following Sections be inserted in lieu thereof: "(D) "Excluded Stock" shall mean (I) Common Stock issued or issuable (a) upon conversion of the Preferred Stock, (b) upon the exercise of Employee Stock Options, (c) pursuant to the Stock Restriction Agreements, (d) upon exercise of the Common Stock Warrants, (e) in transactions referred to in subsections (vi) and (vii) of this Subsection 4(d), (II) Series B Preferred Stock issuable upon exercise of the Series B Warrants, and (III) Series C Preferred Stock issuable upon exercise of the Series C Warrants." "(E) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding Employee Stock Options, Series B Warrants, Series C Warrants or Common Stock Warrants, as described below." RESOLVED: That the following sections be added as Sections 4(d)(i)(J) of --------- "B. PREFERRED STOCK" of Article FOURTH of the Certificate of Incorporation: "(J) "Series C Warrants" shall mean the Warrant Agreement issued to Comdisco, Inc." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its President this 22nd day of July, 1997. AUDIBLE, INC. By: /s/ Donald Katz --------------- Donald Katz, President -2- EX-3.1.2 5 CERT OF AMEND OF CERT OF INCORPORATION 2/5/98 EXHIBIT 3.1.2 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF AUDIBLE INC. Audible Inc., (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: FIRST: By way of a Unanimous Written Consent of the Board of Directors dated February 25, 1998 the Board of Directors of the Corporation adopted resolutions pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth amendments to the Certificate of Incorporation of the Corporation (the "Certificate") and declaring said amendments to be advisable. The stockholders of the Corporation duly approved the proposed amendments in accordance with Section 242 of the General Corporation Law of the State of Delaware by written consent in lieu of a meeting pursuant to and in accordance with Section 228 of the General Corporation Law of the State of Delaware. The resolutions setting forth the amendments are as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of the -------- Corporation be and hereby is deleted in its entirety and replaced as follows: FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 13,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), (ii) 534,000 shares of Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Stock"), (iii) 534,000 shares of Series A-1 Convertible Preferred Stock, par value $.01 per share (the "Series A-1 Preferred Stock"), (iv) 2,100,000 shares of Series B Preferred Stock, $.01 par value per share (the "Series B Preferred Stock"), (v) 2,300,000 shares of Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), and (vi) 1,375,000 shares of Series D Preferred Stock, par value $.01 per share (the "Series D Preferred Stock") (the Series A Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are sometimes collectively referred herein as the "Preferred Stock"). As used herein, the term "Series Preferred A Stock" means the Series A Stock and the Series A-1 Preferred Stock share-for-share alike and without distinction, as except as the context otherwise requires. The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of capital stock of the Corporation. A. COMMON STOCK. ------------ l. General. The voting, dividend and liquidation rights of the holders of ------- the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock. DRAFT 02/21/98 -------------- 2. Voting. The holders of the Common Stock are entitled to one vote for ------ each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. 3. Dividends. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, ----------- whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. 5. Redemption. The Common Stock is not redeemable. ---------- B. PREFERRED STOCK. --------------- The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall rank, as to dividends and upon Liquidation (as defined in Section 2 (a) hereof) on a parity with each other, and senior and prior to the Common Stock and to all other classes or series of shares issued by the Corporation ("Junior Stock"). The Preferred Stock shall have the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. 1. Dividends. Whenever any dividend or other distribution is declared on --------- any shares of Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution on those shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, if any, on which no dividend or other distribution was declared, based on the relative aggregate Liquidation value of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, so that the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock will participate equally with each other in such dividend or other distribution. Specifically, each Series of Preferred Stock shall be entitled in such situation to a dividend for that particular Series of Preferred Stock, calculated as set forth below for that particular Series. -2- DRAFT 02/21/98 -------------- (a) Series A Preferred Stock Dividend. --------------------------------- (i) General. The holders of the Series A Preferred Stock shall be ------- entitled to receive, out of funds legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, when, as and if declared by the Board of Directors, annual dividends at the rate per annum of 10% of the Series A Stock Value (as defined below), as adjusted for stock splits, stock dividends, recapitalizations, reclassifications and similar events (such events being referred to as an "Adjustment"), which affect the number of outstanding shares of the Series A Preferred Stock. Such dividends shall not be cumulative. The "Series A Stock Value" shall be equal to $0.75. (ii) Other. Thereafter, the Board of Directors of the Corporation ----- may declare and pay additional dividends for such period out of funds of the Corporation legally available therefor; provided, however, that any such -------- ------- additional dividends shall be declared and paid in cash upon the Common Stock and Preferred Stock as a single class, with each holder of Common Stock and Preferred Stock being entitled to receive the product of the per share amount of such additional cash dividend, multiplied by the number of shares of Common Stock (i) held by such stockholder or (ii) into which the shares of Preferred Stock held by such stockholder are convertible, as the case may be. Notwithstanding anything to the contrary contained elsewhere in this subsection (ii), no dividend will be paid on the shares of Series A Preferred Stock unless, simultaneously therewith, the same dividend is declared and paid on the shares of Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock pursuant to subsections 1(b) (iii), 1(c) (iii) and 1(d) (iii), respectively. (b) Series B Preferred Stock Dividend. --------------------------------- (i) General. Dividends are payable on the Series B Preferred Stock, ------- when, as and if declared by the Board of Directors. (ii) Quarterly Dividends. The holders of the Series B Preferred ------------------- Stock shall be entitled to receive, out of funds legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, when, as, and if declared by the Board of Directors, dividends payable quarterly on the first day of January, April, July and October, at the annual rate of 10% of the Series B Stock Value (as defined below) per annum, subject to any Adjustment. Such dividends shall not be cumulative. The "Series B Stock Value" shall be equal to $1.50. (iii) Other. So long as any shares of Series B Preferred Stock are ----- outstanding, the Corporation shall not declare or pay any dividend or make any distribution -3- DRAFT 02/21/98 -------------- (whether in cash or other property, other than stock dividends referred to in subsection (vii) of Subsection 4(d)) to the holders of Junior Stock or any holders of Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, unless such dividend or distribution also is payable to the holders of Series B Preferred Stock. (c) Series C Preferred Stock Dividend. --------------------------------- (i) General. Dividends are payable on the Series C Preferred Stock, ------- when, as and if declared by the Board of Directors. (ii) Quarterly Dividends. The holders of the Series C Preferred ------------------- Stock shall be entitled to receive, out of funds legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, when, as, and if declared by the Board of Directors, dividends payable quarterly on the first day of January, April, July and October, at the annual rate of 10% of the Series C Stock Value (as defined below) per annum, subject to any Adjustment. Such dividends shall not be cumulative. The "Series C Stock Value" shall be equal to $4.00. (iii) Other. So long as any shares of Series C Preferred Stock are ----- outstanding, the Corporation shall not declare or pay any dividend or make any distribution (whether in cash or other property, other than stock dividends referred to in subsection (vii) of Subsection 4(d)) to the holders of Junior Stock or any holders of Series A Preferred Stock, Series B Preferred Stock or Series D Preferred Stock, unless such dividend or distribution also is payable to the holders of Series C Preferred Stock. (d) Series D Preferred Stock Dividend. --------------------------------- (i) General. Dividends are payable on the Series D Preferred Stock, ------- when, as and if declared by the Board of Directors. (ii) Quarterly Dividends. The holders of the Series C Preferred ------------------- Stock shall be entitled to receive, out of funds legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, when, as, and if declared by the Board of Directors, dividends payable quarterly on the first day of January, April, July and October, at the annual rate of 10% of the Series C Stock Value (as defined below) per annum, subject to any Adjustment. Such dividends shall not be cumulative. The "Series D Stock Value" shall be equal to $4.00. -4- DRAFT 02/21/98 -------------- (iii) Other. So long as any shares of Series D Preferred Stock are ----- outstanding, the Corporation shall not declare or pay any dividend or make any distribution (whether in cash or other property, other than stock dividends referred to in subsection (vii) of Subsection 4(d)) to the holders of Junior Stock or any holders of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, unless such dividend or distribution also is payable to the holders of Series D Preferred Stock. 2. Liquidation, Dissolution or Winding Up. -------------------------------------- (a) Series A Preferred Stock. ------------------------ (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (a "Liquidation"), the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock (collectively referred to as "Senior Preferred Stock"), but before any payment shall be made to the holders of Junior Stock by reason of their ownership thereof and at the same time as any payment shall be made to any other series of Preferred Stock, an amount equal to the sum of (i) the Series A Stock Value (subject to Adjustment); (ii) 8% of the Series A Stock Value (subject to Adjustment), compounded annually from the date of issuance of the Series A Preferred Stock; and (iii) all declared but unpaid dividends thereon. If upon any such Liquidation, the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled and the full amount to which the holders of any class or series of stock ranking on Liquidation on a parity with the Series A Preferred Stock shall be entitled, the holders of shares of Series A Preferred Stock and any class or series of stock ranking on Liquidation on a parity with the Series A Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution, if all amounts payable on or with respect to such shares were paid in full. (ii) Upon the completion of the distribution required by subparagraph (i) of this Section 2(a) and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each, treating such Series A Preferred Stock on an as-if- converted basis. (b) Series B Preferred Stock. In the event of any Liquidation, the holders ------------------------ of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be -5- DRAFT 02/21/98 -------------- made to the holders of Junior Stock and at the same time as any payment shall be made to any other series of Preferred Stock, an amount per share equal to the greater of (A) the sum of (i) the Series B Stock Value (subject to Adjustment) and (ii) all declared but unpaid dividends thereon and (B) the amount which would be received if all shares of Series B Preferred Stock had been converted to Common Stock prior to such Liquidation. If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled and the full amount to which the holders of any class or series of stock ranking on Liquidation on a parity with the Series B Preferred Stock shall be entitled, the holders of shares of Series B Preferred Stock and any class or series of stock ranking on Liquidation on parity with the Series B Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution, if all amounts payable on or with respect to such shares were paid in full. (c) Series C Preferred Stock. In the event of any Liquidation, the holders ------------------------ of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made to the holders of Junior Stock and at the same time as any payment shall be made to any other series of Preferred Stock, an amount per share equal to the greater of (A) the sum of (i) the Series C Stock Value (subject to Adjustment) and (ii) all declared but unpaid dividends thereon and (B) the amount which would be received if all shares of Series C Preferred Stock had been converted to Common Stock prior to such Liquidation. If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred Stock the full amount to which they shall be entitled and the full amount to which the holders of any class or series of stock ranking on Liquidation on a parity with the Series C Preferred Stock shall be entitled, the holders of shares of Series C Preferred Stock and any class or series of stock ranking on Liquidation on parity with the Series C Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (d) Series D Preferred Stock. In the event of any Liquidation, the holders ------------------------ of shares of Series D Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made to the holders of Junior Stock and at the same time as any payment shall be made to any other series of Preferred Stock, an amount per share equal to the greater of (A) the sum of (i) the Series D Stock Value (subject to Adjustment) and (ii) all declared but unpaid dividends thereon and (B) the amount which would be received if all shares of Series D Preferred Stock had been converted to Common Stock prior to such Liquidation. If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series D Preferred Stock the full amount to which -6- DRAFT 02/21/98 -------------- they shall be entitled and the full amount to which the holders of, any class or series of stock ranking on Liquidation on a parity with the Series D Preferred Stock shall be entitled, the holders of shares of Series D Preferred Stock and any class or series of stock ranking on Liquidation on parity with the Series D Preferred Stock shall share ratably in the distribution of the entire remaining assets and funds of the Corporation legally available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (e) Mergers, Reorganizations, Etc. The merger, reorganization or ------------------------------ consolidation of the Corporation into or with another corporation (except if the Corporation is the surviving entity) or other similar transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of in exchange for property, rights or securities distributed to holders by the acquiring person, firm or other entity, or the sale of all or substantially all the assets of the Corporation, shall be deemed to be a Liquidation for purposes of this Section 2. Upon any such merger, reorganization or consolidation, in addition to any other rights, preferences, powers, privileges and restrictions, qualifications and limitations set forth herein, any holders of Preferred Stock may elect to receive Liquidation treatment, in which case such holder shall receive a distribution in an amount deemed to be the cash or the value of the property, rights or securities distributed to such holders by the acquiring person, firm or other entity. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 3. Voting. ------ (a) General. Each holder of outstanding shares of Preferred Stock ------- shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 4 hereof), at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law, by the provisions of Subsection 3(b)(i), 3(b)(ii), 3(b)(iii), 3(c)(i), 3(c)(ii), 3(d)(i), 3(d)(ii), 3(d)(iii), 3(d)(iv), 3(e)(i), 3(e)(ii), and 3(e)(iii) below or by the provisions establishing any other series of Preferred Stock, holders of Preferred Stock shall vote together with the holders of Common Stock as a single class. (b) Series A Preferred Stock. ------------------------ (i) Board of Directors. The holders of record of the shares of ------------------ Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of Series A Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock for the purpose of electing the director by holders of the Series A Preferred Stock. A vacancy in the directorship filled by -7- DRAFT 02/21/98 -------------- the holders of Series A Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series A Preferred Stock. The rights of the holders of the Series A Preferred Stock under this Subsection 3(b)(i) shall terminate on the first date on which there are issued and outstanding less than 133,500 of the shares of Series A Preferred Stock. (ii) Protective Provisions. The Corporation shall not, without --------------------- first obtaining the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (A) Extraordinary Transactions. Effect any sale, -------------------------- conveyance or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering (as defined herein)), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. (B) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series A Preferred Stock. (C) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series A Preferred Stock with respect to voting, dividends or upon Liquidation. (D) amend Section B 3(b)(i) of Article FOURTH; (E) Increase Directors. Increase the number of directors ------------------ of the Corporation above six (6). (F) Declare Dividends. Declare or pay any dividend or ----------------- make any distribution on the Common Stock. (iii) For purposes of subsection 3(b)(ii)(A), without limiting the generality of the foregoing, the authorization or issuance of any series of Preferred Stock with preference or priority over, or on a parity with, the Series A Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall be deemed to affect adversely the Series A Preferred Stock. -8- DRAFT 02/21/98 -------------- (c) Series B Preferred Stock. ------------------------ (i) Board of Directors. The holders of record of the shares of ------------------ Series B Preferred Stock, exclusively and as a separate class, shall be entitled to elect two (2) directors of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of at least a majority in interest of the shares of Series B Preferred Stock then outstanding shall constitute a quorum of the Series B Preferred Stock for the purpose of electing directors by holders of the Series B Preferred Stock. The two (2) directors shall be elected by vote of at least 66.67% in interest of the holders of shares of Series B Preferred Stock. A vacancy in any directorship filled by the holders of Series B Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series B Preferred Stock. The rights of the holders of the Series B Preferred Stock under this subsection 3(c)(ii) shall terminate on the first date in which there are issued and outstanding less than 525,000 of the shares of Series B Preferred Stock that may be issued by the Corporation. (ii) Protective Provisions. So long as any shares of Series B --------------------- Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least a majority in interest of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (A) Extraordinary Transactions. Effect any sale, conveyance -------------------------- or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering (as defined herein)), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. (B) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series B Preferred Stock. (C) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series A Preferred Stock with respect to voting, dividends or upon Liquidation. (D) Increase the Shares. Increase the number of shares ------------------- of any series of Preferred Stock or Common Stock of the Corporation authorized to be issued. -9- DRAFT 02/21/98 -------------- (E) Issue Capital Stock, Options or Convertible Securities. ------------------------------------------------------ Except for Excluded Stock (as defined herein), authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation or any Option (as defined herein) or Convertible Security (as defined herein). (F) Amend Charter or By-Laws. Amend, alter or repeal any ------------------------ provision of (A) the Certificate of Incorporation of the Corporation or (B) the By-Laws of the Corporation so as to adversely affect the Series B Preferred Stock. (G) Increase Directors. Increase the number of directors of ------------------ the Corporation above six (6). (H) Declare Dividends. Declare or pay any dividend or make any ----------------- distribution on the Common Stock. (d) Series C Preferred Stock. ------------------------ (i) Amendment. Any amendment or change in the rights, preferences or --------- privileges of the Series C Preferred Stock shall require the affirmative vote of the holders of at least a majority of the outstanding shares thereof voting as a separate class; provided, however, that any amendment or change in the rights, -------- ------- preferences or privileges of Section 3(d)(iv) shall require the affirmative vote of the holders of more than two-thirds of the outstanding shares of Series C Preferred Stock, voting separately as a class. (ii) Board of Directors. The holders of record of the shares of ------------------ Series C Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of at least a majority in interest of the shares of Series C Preferred Stock then outstanding shall constitute a quorum of the Series C Preferred Stock for the purpose of electing directors by holders of the Series C Preferred Stock. The one (1) director shall be elected by vote of at least a majority in interest of the holders of shares of Series C Preferred Stock. A vacancy in any directorship filled by the holders of Series C Preferred Stock shall be filled only by vote or written consent in lieu of a meeting of the holders of the Series C Preferred Stock after notice to all holders of Series C Preferred Stock. The rights of the holders of the Series C Preferred Stock under this subsection 3(d)(ii) shall terminate on the first date in which there are issued and outstanding less than 460,000 shares of Series C Preferred Stock that may be issued by the Corporation. (iii) Protective Provisions. Subject to 3(d)(iv) below, so long --------------------- as any shares of Series C Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least a majority in interest of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: -10- DRAFT 02/21/98 -------------- (A) Extraordinary Transactions. Effect any sale, conveyance or -------------------------- other disposition of, or encumbrance upon , all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. (B) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series C Preferred Stock. (C) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series C Preferred Stock with respect to voting, dividends or upon Liquidation. (D) Increase the Shares. Increase the number of shares of ------------------- any series of Preferred Stock or Common Stock of the Corporation authorized to be issued. (E) Issue Capital Stock, Options or Convertible Securities. ------------------------------------------------------ Except for Excluded Stock, authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation or any Option or Convertible Security. (F) Amend Charter or By-Laws. Amend, alter or repeal any ------------------------ provision of (A) the Certificate of Incorporation of the Corporation or (B) the By-Laws of the Corporation so as to adversely affect the Series C Preferred Stock. (G) Increase Directors. Increase the number of directors ------------------ of the Corporation above six (6). (H) Declare Dividends. Declare or pay any dividend or ----------------- make any distribution on the Common Stock. (iii) For a period of twenty-four (24) months from the date of issuance of the Series C Preferred Stock, and provided that such shares remain outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of more than two-thirds (2/3) in interest of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, voting separately as a class, effect any sale, conveyance or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than -11- DRAFT 02/21/98 -------------- fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution in which the price per share is less than or equal to $8.00, subject to Adjustment. (e) Series D Preferred Stock. ------------------------ (i) Amendment. Any amendment or change in the rights, preferences or --------- privileges of the Series D Preferred Stock shall require the affirmative vote of the holders of at least a majority of the outstanding shares thereof voting as a separate class; provided, however, that any amendment or change in the rights, -------- ------- preferences or privileges of Section 3(e)(iii) shall require the affirmative vote of the holders of more than two-thirds of the outstanding shares of Series D Preferred Stock, voting separately as a class. (ii) Protective Provisions. Subject to 3(e)(iii) below, so long --------------------- as any shares of Series D Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least a majority in interest of the then outstanding shares of Series D Preferred Stock, given in writing or by vote at a meeting, voting separately as a class: (A) Change the Preferred Stock. Amend, alter, repeal or -------------------------- impair, in any manner whatsoever, the rights, preferences, powers, privileges, restrictions, qualifications or limitations of the Series D Preferred Stock. (B) Create New Stock. Create any new class or series of ---------------- equity or debt securities or any securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series D Preferred Stock with respect to voting, dividends or upon Liquidation. (C) Increase the Shares. Increase the number of shares of ------------------- any series of Preferred Stock or Common Stock of the Corporation authorized to be issued. (D) Issue Capital Stock, Options or Convertible Securities. ------------------------------------------------------ Except for Excluded Stock, authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation or any Option or Convertible Security. (E) Amend Charter or By-Laws. Amend, alter or repeal any ------------------------ provision of (A) the Certificate of Incorporation of the Corporation or (B) the By-Laws of the Corporation so as to adversely affect the Series D Preferred Stock. (F) Increase Directors. Increase the number of directors ------------------ of the Corporation above six (6). -12- DRAFT 02/21/98 -------------- (G) Declare Dividends. Declare or pay any dividend or ----------------- make any distribution on the Common Stock. (iii) So long as any shares of Series D Preferred Stock are outstanding, the Corporation shall not, without first obtaining the written consent or affirmative vote of the holders of at least 50% of the then outstanding shares of Series D Preferred Stock, given in writing or by note at a meeting voting separately as a class effect any sale, conveyance or other disposition of, or encumbrance upon, all or substantially all of its property, assets or business or merge with or into or consolidate with any other corporation or entity or entities, or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is transferred or disposed of (other than in connection with a Qualified Offering), or effect any voluntary dissolution or liquidation or partial liquidation or distribution or transaction in the nature of any partial liquidation or distribution. 4. Optional Conversion. The holders of the Preferred Stock shall have ------------------- conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall be ---------------- convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and non assessable shares of Common Stock as is determined by dividing the Stock Value for each Series of Preferred Stock by the Conversion Price (as defined below) for such Series in effect at the time of conversion. The conversion price at which shares of Common Stock shall be deliverable upon conversion of Preferred Stock without the payment of additional consideration by the holder thereof (the "Conversion Price") shall initially be $0.75 for the Series A Preferred Stock (the "Series A Conversion Price"), $1.50 for the Series B Preferred Stock (the "Series B Conversion Price"), $4.00 for the Series C Preferred Stock (the "Series C Conversion Price") and $4.00 for the Series D Preferred Stock (the "Series D Conversion Price"). Such initial Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a Redemption Notice (as defined below) relating to shares of Preferred Stock pursuant to Section 6 or upon the exercise of the rights set forth in Sections 7 or 8 hereof, as applicable, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the second full day preceding the date fixed for redemption, unless the Redemption Price (as defined below) is not paid when due, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a Liquidation of the Corporation, the Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on Liquidation to the holders of Preferred Stock. (b) Fractional Shares. No fractional shares of Common Stock shall ----------------- be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by -13- DRAFT 02/21/98 -------------- the then effective Conversion Price. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (c) Mechanics of Conversion. ----------------------- (i) For a holder of Preferred Stock to convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock, at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (ii) The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and -14- DRAFT 02/21/98 -------------- legally issue fully paid and non assessable shares of Common Stock at such adjusted Conversion Price. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (iii) Upon any such conversion, no adjustment to the Conversion Price shall be made for any accrued and unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. (iv) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends thereon. Any shares of Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Preferred Stock accordingly. (d) Adjustments to Conversion Price for Diluting Issues. --------------------------------------------------- (i) Special Definitions. For purposes of this Subsection ------------------- 4(d), the following definitions shall apply: (A) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued or deemed to be issued (pursuant to Subsection 4(d)(iii) below) by the Corporation after the Original Issue Date, other than Excluded Stock. (B) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (C) "Employee Stock Options" shall mean (i) existing stock or options granted to employees, directors, or consultants of the Corporation pursuant to any stock award or option plan, agreement or arrangement for officers, directors, consultants, employees and others who render services to the Corporation (a "Plan"), to acquire up to a maximum of 1,007,000 shares of Common Stock (subject to any Adjustment), and (ii) stock or options to be granted to employees, directors or consultants of the Corporation pursuant to any Plan to purchase up to a maximum of 865,830 shares of Common Stock (subject to any Adjustment), which number may be increased from time to time to reflect repurchases by the Corporation of stock from employees, directors or consultants. -15- DRAFT 02/21/98 -------------- (D) "Excluded Stock" shall mean (I) Common Stock issued or issuable (a) upon conversion of the Preferred Stock, (b) upon the exercise of Employee Stock Options, (c) pursuant to the Stock Restriction Agreements, (d) upon exercise of the Common Stock Warrants and (e) in transactions referred to in subsections (vi) and (vii) of this Subsection 4(d); (II) Series B Preferred Stock issuable upon exercise of the Series B Warrants; (III) Series C Preferred Stock issuable upon exercise of the Series C Warrants; and (IV) Series D Preferred Stock issuable upon exercise of the Series D Warrants. (E) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding Employee Stock Options, Series B Warrants, Series C Warrants, Series D Warrants or Common Stock Warrants, as described below. (F) "Original Issue Date" shall mean the date on which a share of Preferred Stock was first issued. (G) "Stock Restriction Agreements" shall mean, collectively the following stock restriction agreements by and between the Corporation and the parties noted hereinbelow:
Agreement Type Party Date - ------------------------------------------------------------------------------------------------------------ Transfer of Technology and Sale of Stock Donald Katz 12/01/95 Agreement - ------------------------------------------------------------------------------------------------------------ Transfer of Technology and Sale of Stock Edwin Lau 12/01/95 Agreement - ------------------------------------------------------------------------------------------------------------ Stock Purchase and Restriction Agreement Ironwood Capital 12/11/95 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement (as amended Donald Katz 12/11/95 7/17/96) - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement (as amended Christopher Stack 5/28/96 7/1/796) - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Robert Krulwich 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jim Schwei 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Nancy and Andy Clayman 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement John and Emily Alter 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Howard Clowes 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Bill Jacobson 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Mitch Ratcliffe 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Marianne Radwan 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Bing Gordon 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Dan Farley 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Diane Franciose 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement William Fallon 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Steven Spiro 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Guy Story 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Patrick Barry 7/17/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Mimi Bloom 7/17/96 - ------------------------------------------------------------------------------------------------------------
-16- DRAFT 02/21/98 --------------
- ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jim Russell 7/23/96 - ------------------------------------------------------------------------------------------------------------ Stock Purchase and Restriction Agreement Ironwood Capital 7/23/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement James Harris 8/07/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Elizabeth Roxby 9/02/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Richard Lewis 9/10/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Greg Voynow 12/06/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement William Bradley 12/06/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Pauline Eden 12/06/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jonathan Jones 12/06/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Beth Anderson 12/06/96 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Winthrop Knowlton 1/20/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Carol Markowitz 2/04/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ajit Rajasekharan 2/07/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Erica Ceravolo 2/07/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Helene Artz 2/07/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ehud Ben -Joseph 2/07/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement William Gordon 2/20/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Connors Communications 4/05/97 Stock Restriction Agreement Jim Russell 4/21/97 Stock Restriction Agreement Andrew Pontious 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Andrew Cohen 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Anthony Nash 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement April Allsteadt 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Sugeet Shah 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Teresa Canonico 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jonathan Korzen 5/08/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Tanya Curry 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Brian Fielding 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ehud Ben-Joseph 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Fritzgerald Francois 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement James Mariany 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Matthew Fine 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Al Perez 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Tan Chong 6/17/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Craig Ploth 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Guy Story 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jenifer Weining 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jim DeFilice 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Micheal Stevens 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Patrick Barry 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Peter Mattei 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Stefan Winz 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement William Fallon 7/29/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Albert Noyes 9/02/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Connors Communications 9/02/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Bob Jacobs 10/10/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Mike Rothstein 10/10/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Craig Juntunen 10/10/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ajit Rajasekharan 11/03/97 - ------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Anthony Nash 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Brandher Espinal 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Carol Clark 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Carol Markowitz 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Gautam Guliani 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Joe Palarmo 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jonathan Korzen 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Jordan Berson 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement John Portacio 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Kimya Brown 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Mathew Skaria 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ricardo Alverez 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Robert Smith 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Sugeet Shah 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Suzanne Salem 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Teresa Canonico 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Travis Millman 11/03/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Larry Van der Veen 12/12/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Freedman Associates 12/12/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Funny Garbage 12/12/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Googoplex Multimedia 12/12/97 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Stephen Orowitz 01/02/98 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement Ramsey/Beirne Associates 01/31/98 - ------------------------------------------------------------------------------------------------------------ Stock Restriction Agreement IDEO Product Dev - ------------------------------------------------------------------------------------------------------------
(H) "Series B Warrants" shall mean (i) the Warrant Agreement issued to Comdisco, Inc. and (ii) the Warrant to purchase stock issued to Imperial Bancorp. (I) "Series C Warrants" shall mean the Warrant Agreement issued to Comdisco, Inc. (J) "Series D Warrants" shall mean a warrant or warrants to purchase up to 25,000 shares of Series D Preferred Stock, which warrants may be issued at any time after the date the first share of Series D Preferred Stock is issued by the Corporation. (K) "Common Stock Warrants" shall mean Warrants to purchase up to 450,000 shares of Common Stock issued to the original purchasers of the Corporation's Series C Preferred Stock. (ii) No Adjustment of Conversion Price. No adjustment in --------------------------------- the number of shares of Common Stock into which the Preferred Stock is convertible shall be made, by adjustment in the applicable Conversion Price thereof: (a) unless the consideration per share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if prior to such -18- DRAFT 02/21/98 -------------- issuance, the Corporation receives written notice from the holders of at least 66-2/3% of the then outstanding shares of Series A Preferred Stock taken as a separate class, the holders of 66-2/3% of the then outstanding shares of Series B Preferred Stock taken as a separate class and the holders of 66-2/3% of the then outstanding shares of Series C Preferred Stock and Series D Preferred Stock voting together as a class, agreeing that no such adjustment shall be made as the result of the issuance of Additional Shares of Common Stock. (iii) Issue of Options and Convertible Securities Deemed Issue of ----------------------------------------------------------- Additional Shares of Common Stock. If the Corporation at any time or - ---------------------------------- from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 4(d)(v) (b) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; and upon the expiration or termination of any unexercised Option, the Conversion Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Conversion Price; and (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; provided, that no readjustment pursuant to this clause -------- (b) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the -19- DRAFT 02/21/98 -------------- Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. - ---------------------- (A) Series A and Series B Conversion Prices. In the --------------------------------------- event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)), without consideration or for a consideration per share less than the Series A or Series B Conversion Price, as the case may be, in effect on the date of and immediately prior to such issue, then and in such event, such Series A or Series B Conversion Price, as the case may be, shall be reduced, concurrently with such issue, to a price determined by multiplying such Series A or Series B Conversion Price, as the case may be, by a fraction, the numerator of which --------- shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A or Series B Conversion Price, as the case may be; and the denominator of which shall be the ----------- number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, -------- however, that, for the purpose of this Subsection 4(d)(iv), (I) all shares of - ------- Common Stock issuable upon conversion of shares of Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock and Series A Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (B) Series C Conversion Price. In the event the ------------------------- Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)), without consideration or for a consideration per share less than the Series C Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series C Conversion Price shall be reduced, concurrently with such issue, as follows: (x) if the consideration per share is greater than or equal to $3.00 per share (subject to Adjustment), to an amount equal to the per share consideration received for each additional share upon such issuance; or (y) if the issuance (or deemed issuance) is without consideration or for a consideration per share less than $3.00 (subject to Adjustment), to a price determined by (i) first reducing the Series C Conversion Price to $3.00 (subject to Adjustment), provided, however, that no reduction -------- ------- pursuant to this clause (i) shall be made if the Series C Conversion Price is already below $3.00 (subject to Adjustment); and (ii) then multiplying such -20- DRAFT 02/21/98 -------------- new reduced Series C Conversion Price by a fraction, the numerator of which --------- shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such new Series C Conversion Price; and the denominator of which shall be the number of shares of Common ----------- Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, that, for the purpose of -------- this Subsection 4(d)(iv)(B), (I) all shares of Common Stock issuable upon conversion of shares of Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii)), such Additional Shares of Common Stock shall be deemed to be outstanding. (C) Series D Conversion Price. In the event the ------------------------- Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsections 4(d)(iii)) during the six-month period commencing on the date the first share of Series D Preferred Stock is issued and ending on the six-month anniversary thereof, without consideration or for a consideration price per share less than the Series D Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series D Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest tenth of a cent) equal to the lowest consideration per share received for each additional share upon such issuance. Notwithstanding anything to the contrary contained in the preceding sentence if the Corporation shall issue such Additional Shares of Common Stock for no consideration, then the Series D Conversion price shall be reduced to equal one-tenth of one cent. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)) at any time after the date six-months and one day following the date the first share of Series D Preferred Stock is issued and ending on the 18-month anniversary of the date such first share of Series D Preferred Stock was first issued, without consideration or for a consideration per share less than the Series D Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series D Conversion Price shall be reduced, concurrently with such issue, as follows: (x) if the consideration per share is greater than or equal to $3.00 per share (subject to Adjustment), to an amount equal to the per share consideration received for each additional share upon such issuance; or (y) if the issuance (or deemed issuance) is without consideration or for a consideration per share less than $3.00 (subject to Adjustment), to a price -21- DRAFT 02/21/98 -------------- determined by (i) first reducing the Series D Conversion Price to $3.00 (subject to Adjustment), provided, however, that no reduction pursuant to this clause (i) -------- ------- shall be made if the Series D Conversion Price is already below $3.00 (subject to Adjustment); and (ii) then multiplying such new reduced Series D Conversion Price by a fraction, the numerator of which shall be the number of shares of --------- Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such new Series D Conversion Price; and the denominator of ----------- which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, that, for the purpose of this Subsection 4(d)(iv)(C), (I) all -------- shares of Common Stock issuable upon conversion of shares of Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii)), such Additional Shares of Common Stock shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this ------------------------------ Subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (a) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (b) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (c) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (a) and (b) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The ---------------------------------- consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by -22- DRAFT 02/21/98 -------------- (y) the maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. In the case of such consideration or number of shares issuable as referred to in clauses (x) and (y), respectively, the amounts shall be as set forth in the instruments relating thereto without regard to any provision contained therein for a subsequent adjustment of such consideration or number of shares, respectively. (vi) Adjustment for Combinations or Consolidation of Common ------------------------------------------------------ Stock. If, at any time after the applicable Original Issue Date, the number - ------ of shares of Common Stock outstanding are decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (vii) Adjustment for Stock Dividends, Splits, Etc. If -------------------------------------------- the Corporation shall at any time after the applicable Original Issue Date fix a record date for the subdivision, split-up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in outstanding shares; provided, however, that the Conversion Price shall not be decreased at such time if the amount of such reduction would be an amount less than $.01, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.01 or more. (viii) Adjustment for Merger or Reorganization, etc. In -------------------------------------------- case of any recapitalization, consolidation or merger of the Corporation with or into another corporation or the sale of all or substantially all of the assets of the Corporation to another corporation (other than a subdivision or combination provided for elsewhere in this Section 4 and other than a consolidation, merger or sale which is treated as a liquidation pursuant to Subsection 2(e) with respect to one or more series of Preferred Stock), each share of Preferred Stock (excluding any shares that are treated as liquidated in accordance with Subsection 2(e)), shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Preferred Stock would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that the provisions set -23- DRAFT 02/21/98 -------------- forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. (e) No Impairment. The Corporation will not, by amendment of ------------- its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Preferred Stock. (g) Notice of Record Date. In the event: --------------------- (i) that the Corporation takes a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class of any other securities or property, or to receive any other right; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of a Liquidation; -24- DRAFT 02/21/98 -------------- then the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Preferred Stock, and shall cause to be mailed to the holders of the Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least twenty days before the record date specified below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of the applicable class of securities of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of the applicable class of securities of record shall be entitled to exchange their shares of the applicable class of securities for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up. (h) Shadow Preferred. ---------------- (i) Special Definitions. For purposes of this Section ------------------- 4(h), the following definitions shall apply: (a) "Dilutive Issuance" with respect to the Series ----------------- A Stock shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such Series A Stock in effect on the date of and immediately prior to such issue. (b) "Participating Investor" shall mean any holder ---------------------- of Series A Stock that purchases at least its Pro Rata Share of a Dilutive Issuance. (c) "Non-Participating Investor" shall mean any -------------------------- holder of Series A Stock that is not a Participating Investor. (d) "Pro Rata Share" with respect to each holder -------------- of Series A Stock shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance actually offered to such holder of Series A Stock by the Board of Directors of the Corporation pursuant to the right of first offer (the "Right of First Offer") set forth in Section 8.6 of the Series A Stock Purchase Agreement between the Corporation and the purchasers set forth therein, (ii) multiplied by a fraction, the numerator of which is the number of shares of Series A Stock then held by such holder, and the denominator of which is the total number of shares of Series A Stock then outstanding; provided; however, that no such conversion shall occur in connection with a particular Dilutive Issuance if, pursuant to the -25- DRAFT 02/21/98 -------------- written request of the Corporation, each holder of Series A Stock agrees in writing to waive his, her or its Right of First Offer with respect to such Dilutive Issuance. (ii) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of the Series A Stock entitled to purchase a Pro Rata Share pursuant to the Right of First Offer a written notice (the "Issuance Notice") of its intention, describing the type of securities, the price and number of shares and the general terms upon which the corporation proposes to issue the same, at least twenty (20) days prior to the date of such Dilutive Issuance. Each such holder of Series A Stock may, within ten (10) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within said ten-day period, or fails to actually purchase its Pro Rata Share of Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Non-Participating Investor. (iii) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by each Non-Participating Investor, the number of outstanding shares of Series A Stock held by such Non-Participating Investor determined by multiplying the number of such shares held by the Refused Percentage shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series A Stock) into an equal number of fully paid and non-assessable shares of Series A-1 Preferred Stock; provided, however, that prior to the Closing Date each Non-Participating Investor shall have the right to convert such shares of Series A Stock into shares of Common Stock at the Conversion Price in effect for such series as of the date of such conversion. (iv) Upon the conversion of Series A Stock held by a Non- Participating Investor into shares of Series A-1 Preferred Stock as set forth herein, such shares of Series A Stock shall no longer be outstanding on the books of the Corporation, and may not be reissued and the Non-Participating Investor shall be treated for all purposes as the record holder of such shares of Series A-1 Preferred Stock on the date of the closing of the applicable Dilutive Issuance. No shares of Series A-1 Preferred Stock shall be issued except as set forth in this Section 4(h) upon conversion of shares of Series A Stock. (v) No adjustment in the Conversion Price of the Series A-1 Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except to the limited extent provided in subsection 4(d) (iii) (to the extent such issuance or deemed issuance under such subsection is without payment of any consideration by such holder for the additional shares of Common Stock issued or issuable) and in subsections 4(d) (vi) and (d) (vii) hereof. -26- DRAFT 02/21/98 -------------- 5. Automatic Conversion. -------------------- (a) Qualified Offering. Upon the closing of a Qualified Offering ------------------ (as defined below), all of the then outstanding shares of Preferred Stock shall automatically be 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 shall be immediately payable in cash. A "Qualified Offering" means an Underwritten Offering (as defined below) by the Corporation of authorized but unissued shares of Common Stock at a price per share which (after deducting underwriting commissions and offering expenses) of not less than $6.00 per share, subject to Adjustment, and resulting in net proceeds to the Corporation (after deducting underwriting commissions and offering expenses) of not less than $15,000,000. An "Underwritten Offering" means 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 (the "Commission") pursuant to the Securities Act. (b) Notices. The Corporation shall promptly send by first-class ------- mail, postage prepaid, to each holder of Preferred Stock at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and exhibit and schedule thereto and (ii) each order of the Commission declaring any such registration statement to be effective. (c) No Further Action. In the case of an automatic conversion ----------------- pursuant to this Section 5, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Preferred Stock are delivered either to the Corporation or any transfer agent of the Corporation. 6. Redemption of Series A Preferred Stock at Corporation's Option. -------------------------------------------------------------- (a) At any time and from time to time after January 1, 2002, the Corporation may, at the option of its Board of Directors, redeem the Series A Preferred Stock, in whole or in part, by paying $0.75 per share (subject to Adjustment), together with declared but unpaid dividends thereon, in cash for each share of Series A Preferred Stock then redeemed (hereinafter referred to as the "Series A Redemption Price"). (b) In the event of any redemption of only a part of the then outstanding Series A Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof based on the number of shares of Series A Preferred Stock held by such holders on the date of the Redemption Notice. -27- DRAFT 02/21/98 -------------- (c) Redemptions made pursuant to this Section 6 shall not relieve the Corporation of its obligations to redeem Series A Preferred Stock in accordance with the provisions of Section 7. (d) At least 30 days prior to the date fixed for any redemption of Series A Preferred Stock (hereinafter referred to as the "Series A Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock to be redeemed, at his or its address last shown on the records of the transfer agent of the Series A Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent), notifying such holder of the election of the Corporation to redeem such shares, specifying the Series A Redemption Date and the date on which such holder's Conversion Rights (pursuant to Section 4 hereof) as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his or its certificate or certificates representing the shares to be redeemed (such notice is hereinafter referred to as the "Series A Redemption Notice"). On or prior to the Series A Redemption Date, each holder of Series A Preferred Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Series A Redemption Notice, and thereupon the Series A Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Series A Redemption Date, unless there shall have been a default in payment of the Series A Redemption Price, all rights of the holders of the Series A Preferred Stock designated for redemption in the Series A Redemption Notice as holders of Series A Preferred Stock of the Corporation (except the right to receive the Series Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (e) On or prior to the Series A Redemption Date, the Corporation shall deposit the Series A Redemption Price of all shares of Series A Preferred Stock designated for redemption in the Series A Redemption Notice and not yet redeemed with a bank or trust company having aggregate capital and surplus in excess of $25,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust company to pay the Series A Redemption Price for such shares to their respective holders on or after the Series A Redemption Date upon receipt of notification from the Corporation that such holder has surrendered his or its share certificate to the Corporation. Such instructions shall also provide that any moneys deposited by the Corporation pursuant to this Subsection 6(e) for the redemption of shares thereafter converted into shares of the Corporation's Common Stock pursuant to Section 4 hereof no later than the close of business on the fifth full day preceding the Series A Redemption Date shall be returned to the Corporation on the Series A Redemption Date. The balance of any monies deposited by the Corporation pursuant to this Subsection 6(e) remaining unclaimed at the -28- DRAFT 02/21/98 -------------- expiration of one year following the Series A Redemption Date shall thereafter be returned to the Corporation upon its request expressed in a resolution of its Board of Directors. (f) Subject to the provisions hereof, the Board of Directors of the Corporation shall have authority to prescribe the manner in which Series A Preferred Stock shall be redeemed from time to time. Any shares of Series A Preferred Stock so redeemed shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. Nothing herein contained shall prevent or restrict the purchase by the Corporation, from time to time either at public or private sale, of the whole or any part of the Series A Preferred Stock at such price or prices as the Corporation may determine, subject to the provisions of applicable law. 7. Redemption at Option of Majority of Holders of Series A Preferred Stock. ----------------------------------------------------------------------- (a) Irrespective of the provisions of Section 6, at any time after the dates set forth in the chart below (each such date being referred to hereinafter as a "Programmed Redemption Date"), but within 30 days (the "Section 7 Redemption Date") after the receipt by the Corporation of a written request from the holders of not less than a majority of the then outstanding Series A Preferred Stock that all or some of such holders' shares be redeemed, and concurrently with surrender by such holders of the certificates representing such shares, the Corporation shall, subject to the conditions set forth in subsection 7(b), redeem, out of funds legally available therefor, from each holder of Series A Preferred Stock at the Series A Redemption Price, the respective portions set forth in the chart below of the number of shares of Series A Preferred Stock held by such holder on the applicable Programmed Redemption Date: Programmed Maximum Portion of Outstanding Shares of Redemption Date Series A Preferred Stock To Be Redeemed - --------------- --------------------------------------- January 1, 2000 33 1/3% January 1, 2001 50% January 1, 2002 All outstanding shares of Series A Preferred Stock (b) Notwithstanding any of the foregoing provisions, on each Programmed Redemption Date, the holders of the Series A Preferred Stock shall be entitled to receive their aggregate Series A Redemption Price for such date in full, provided that if funds are not legally available on such date to pay such Series A Redemption Price in full, the Company shall use those funds which are legally available to redeem the maximum possible number of such shares and shall effect such redemption pro rata among the holders of the Series A Preferred Stock based on the number of shares of Series A Preferred Stock held by such holders on the date of the Section 7 Redemption Notice. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series A Preferred Stock, such funds will -29- DRAFT 02/21/98 -------------- immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Programmed Redemption Date but which it has not redeemed; provided, however, that any such redemption shall be pari pasu among the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock who request redemption of such shares of Preferred Stock pursuant to the terms and conditions of Section 8 commencing five years following the Original Issue Date. (c) The Corporation shall provide notice of any redemption of Preferred Stock pursuant to this Section 7 specifying the time and place of redemption and the Series A Redemption Price, by certified or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not more than sixty (60) nor less than thirty (30) days prior to the date on which such redemption is to be made. Upon mailing any such notice of redemption and subject to the provisions of Section 7(b) hereof, the Corporation will become obligated to redeem at the time of redemption specified therein all Series A Preferred Stock tendered for redemption pursuant to the terms of this Section 7 (other than such shares of Series A Preferred Stock as are duly converted pursuant to Section 4 prior to the close of business on the fifth full day preceding the Programmed Redemption Date). In case less than all Series A Preferred Stock represented by any certificate is redeemed in any redemption pursuant to this Section 7, a new certificate will be issued representing the unredeemed Series A Preferred Stock without cost to the holder thereof. (d) Unless there shall have been a default in the payment of the Series A Redemption Price, no share of Series A Preferred Stock tendered for redemption under this Section 7 is entitled to any dividends declared after its Programmed Redemption Date, and on such Programmed Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Programmed Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Programmed Redemption Date be deemed to be outstanding. (e) Any Series A Preferred Stock redeemed pursuant to this Section 7 will be canceled and will not under any circumstances be reissued, sold or transferred, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized class of Series A Preferred Stock so redeemed accordingly. 8. Mandatory Redemption at Option of Holders of Series B Preferred Stock, ---------------------------------------------------------------------- Series C Preferred Stock, and Series D Preferred Stock. - ------------------------------------------------------ (a) Series B Preferred Stock. If, five (5) years following the ------------------------ Original Issue Date of the Series D Preferred Stock, the Corporation has not completed a Qualified Offering or a Liquidation (including, for these purposes, any event described in Section 2(e)), then, within 45 days (the "Series B Redemption Date") after the receipt by the Corporation of a written request -30- DRAFT 02/21/98 -------------- (the "Redemption Request") of holders of not less than a majority of the then outstanding Series B Preferred Stock that all or some of such holders' shares of Series B Preferred Stock be redeemed, and concurrently with surrender by such holder of the certificate(s) representing such shares, the Corporation shall redeem for cash from such holder of Series B Preferred Stock, out of funds legally available therefor, the shares of Series B Preferred Stock held by such holder on the Series B Redemption Date at a price per share (the "Series B Redemption Price") equal to the greater of (i) the Fair Market Value (as defined below) of a share of Common Stock of the Corporation and (ii) the Series B Stock Value (subject to Adjustment), together with declared but unpaid dividends thereon. (b) Series C Preferred Stock. If, five (5) years following the Original ------------------------ Issue Date of the Series D Preferred Stock, the Corporation has not completed a Qualified Offering or a Liquidation (including, for these purposes, any event described in Section 2(e)), then, within 45 days (the "Series C Redemption Date") after the receipt by the Corporation of a written request (the "Redemption Request") of holders of not less than a majority of the then outstanding Series C Preferred Stock that all or some of such holders' shares of Series C Preferred Stock be redeemed, and concurrently with surrender by such holder of the certificate(s) representing such shares, the Corporation shall redeem for cash from such holder of Series C Preferred Stock, out of funds legally available therefor, the shares of Series C Preferred Stock held by such holder on the Series C Redemption Date at a price per share ("Series C Redemption Price") equal to the greater of (i) the Fair Market Value (as defined below) of a share of Common Stock of the Corporation and (ii) the Series C Stock Value (subject to Adjustment), together with declared but unpaid dividends thereon. (c) Series D Preferred Stock. If, five (5) years following the Original ------------------------ Issue Date of the Series D Preferred Stock, the Corporation has not completed a Qualified Offering or a Liquidation (including, for these purposes, any event described in Section 2(e)), then, within 45 days (the "Series D Redemption Date") after the receipt by the Corporation of a written request (the "Redemption Request") of holders of not less than a majority of the then outstanding Series D Preferred Stock that all or some of such holders' shares of Series D Preferred Stock be redeemed, and concurrently with surrender by such holder of the certificate(s) representing such shares, the Corporation shall redeem for cash from such holder of Series D Preferred Stock, out of funds legally available therefor, the shares of Series D Preferred Stock held by such holder on the Series D Redemption Date at a price per share ("Series D Redemption Price") equal to the greater of (i) the Fair Market Value (as defined below) of a share of Common Stock of the Corporation and (ii) the Series D Stock Value (subject to Adjustment), together with declared but unpaid dividends thereon. (d) Notice. Upon receipt of the Redemption Request, the Corporation ------ shall provide notice (the "Redemption Notice") of any redemption of Preferred Stock pursuant to this Section 8 specifying the time and place of redemption and the Series B Redemption Price, Series C Redemption Price or the Series D Redemption Price, as the case may be, by certified or registered mail, postage prepaid, to each holder of record of Preferred Stock at the address for -31- DRAFT 02/21/98 -------------- such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not less than thirty (30) days prior to the Redemption Date. Upon mailing any such Redemption Notice, the Corporation will become obligated to redeem on the Redemption Date all Preferred Stock tendered for redemption pursuant to the terms of this Section 8 (other than such shares of Preferred Stock as are duly converted pursuant to Section 4 prior to the close of business on the fifth full day preceding the Redemption Date). In case less than all shares of Preferred Stock represented by any certificate are redeemed in any redemption pursuant to this Section 8, a new certificate will be issued representing the unredeemed shares of Preferred Stock without cost to the holder thereof. (e) Dividends. Unless there shall have been a default in the --------- payment of the Series B Redemption Price, Series C Redemption Price or Series D Redemption Price, as the case may be, no share of Preferred Stock tendered for redemption under this Section 8 is entitled to any dividends declared after its Redemption Date (provided, however, that any dividends declared but unpaid as of the Redemption Date shall be immediately payable in cash), and on such Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Redemption Date be deemed to be outstanding. (f) Cancellation of Stock. Any Preferred Stock redeemed pursuant --------------------- to this Section 8 will be canceled and will not under any circumstances be reissued, sold or transferred, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized class of Preferred Stock so redeemed accordingly. (g) Fair Market Value. The "Fair Market Value" of a share of ----------------- Common Stock shall be as determined by an independent investment banking firm or other firm mutually satisfactory to the Corporation and (i) the holders of at least a majority in interest of the then outstanding Series A Preferred Stock, (ii) the holders of at least a majority in interest of the then outstanding Series B Preferred Stock, (iii) the holders of at least a majority in interest of the then outstanding Series C Preferred Stock and (iv) the holders of at least a majority in interest of the then outstanding Series D Preferred Stock, and shall be equal to the value of the Corporation as a whole divided by the number of outstanding shares of Common Stock of the Corporation (with each share of Series A Preferred Stock, Series B Preferred, Series C Preferred Stock and Series D Preferred Stock of the Corporation treated as if it had been converted into the number of shares of Common Stock (including fractional shares) into which such share is then convertible, rounded to the nearest one-tenth of a share), and with no liquidity discounts or other discounts for minority ownership). 9. Redemption of Preferred Stock. So long as any shares of a series of ----------------------------- Preferred Stock are outstanding, the Corporation shall not redeem any shares of any other series of Preferred Stock in accordance herewith or otherwise unless simultaneously therewith, the -32- DRAFT 02/21/98 -------------- Corporation shall redeem a pro rata portion of the other series of Preferred --- ---- Stock, based on the relative aggregate Liquidation value of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, pursuant to the redemption terms set forth in Section 6, 7 and 8. SECOND: This amendment to Certificate of Incorporation shall be effective as of the date set forth below. -33- DRAFT 02/21/98 -------------- IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Donald Katz, its President this 25th day of February, 1998. AUDIBLE INC. By:/s/ Donald Katz --------------- Donald Katz, President THE UNDERSIGNED, the President of Audible Inc., who executed on behalf of the Corporation the foregoing Certificate of Amendment to Certificate of Incorporation of Audible Inc., hereby acknowledges in the name and on behalf of the said Corporation the foregoing Certificate of Amendment to Certificate of Incorporation to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information and belief the matters set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ Donald Katz --------------- Donald Katz President -34- EX-3.1.3 6 CERT OF AMEND OF CERT OF INCORPORATION 12/18/98 EXHIBIT 3.1.3 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF AUDIBLE, INC. Audible, Inc., (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: FIRST: By way of a Unanimous Written Consent of the Board of Directors, dated December 18, 1998, the Board of Directors of the Corporation adopted resolutions pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth amendments to the Certificate of Incorporation of the Corporation (the "Certificate") and declaring said amendments to be advisable. The stockholders of the Corporation duly approved the proposed amendments in accordance with Section 242 of the General Corporation Law of the State of Delaware by written consent in lieu of a meeting, dated December 18, 1998, pursuant to and in accordance with Section 228 of the General Corporation Law of the State of Delaware. The resolutions setting forth the amendments are as follows: RESOLVED: That the first paragraph of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 16,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), (ii) 534,000 shares of Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Stock"), (iii) 534,000 shares of Series A-1 Convertible Preferred Stock, par value $.01 per share (the "Series A-1 Preferred Stock"), (iv) 2,100,000 shares of Series B Preferred Stock, $.01 par value per share (the "Series B Preferred Stock"), (v) 2,300,000 shares of Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), and (vi) 4,375,000 shares of Series D Preferred Stock, par value $.01 per share (the "Series D Preferred Stock") (the Series A Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are sometimes collectively referred herein as the "Preferred Stock"). As used herein, the term "Series A Preferred Stock" means the Series A Stock and the Series A-1 Preferred Stock share-for-share alike and without distinction, as except as the context otherwise requires. RESOLVED: That Paragraph B(3)(b)(ii)(E) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (E) Increase Directors. Increase the number of directors of the ------------------ Corporation above eight (8). RESOLVED: That Paragraph B(3)(c)(ii)(G) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (G) Increase Directors. Increase the number of directors of the ------------------ Corporation above eight (8). RESOLVED: That Paragraph B(3)(d)(iii)(G) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (G) Increase Directors. Increase the number of directors of the ------------------ Corporation above eight (8). RESOLVED: That Paragraph B(3)(e)(ii)(F) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (F) Increase Directors. Increase the number of directors of the ------------------ Corporation above eight (8). RESOLVED: That Paragraph B(4)(d)(i)(C) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (C) "Employee Stock Options" shall mean (i) existing stock or options granted to employees, directors, or consultants of the Corporation pursuant to any stock award or option plan, agreement or arrangement for officers, directors, consultants, employees and others who render services to the Corporation (a "Plan"), to acquire up to a maximum of 28,250 shares of Common Stock (subject to any Adjustment), and (ii) stock or options to be granted to employees, directors or consultants of the Corporation pursuant to any Plan to purchase up to a maximum of 474,630 shares of Common Stock (subject to any Adjustment), which number may be increased from time to time to reflect repurchases by the Corporation of stock from employees, directors or consultants. RESOLVED: That Paragraph B(4)(d)(i)(F) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (F) "Original Issue Date" shall mean, with respect to a series of Preferred Stock, the date on which the first share of that series of Preferred Stock was issued. RESOLVED: That Paragraph B(4)(d)(i)(G) of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is amended by adding the following stock restriction agreements: - -------------------------------------------------------------------------------- Stock Restriction Agreement CKC Communications, Inc. 01/31/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement (unsigned) Clay Carlson 02/24/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Andrew Huffman 02/28/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Beth Anderson 05/06/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Helene Artz 05/06/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Erica Ceravolo 05/06/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Brian Fielding 05/06/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Matthew Fine 05/06/98 - -------------------------------------------------------------------------------- Stock Restriction Agreement Fritzgerald Francois 05/06/98 - -------------------------------------------------------------------------------- -2- - ------------------------------------------------------------------------------- Stock Restriction Agreement Jonathan Korzen 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement James Mariany 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Travis Millman 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Ajit Rajasekharan 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Sugeet Shah 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Chong Tan 05/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Frederic Rose 06/10/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Rozsa Kovesdi 06/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Foy Sperring 06/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Sarah Scharf 07/06/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Anthony Huffman 07/20/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Lee Delplane 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Alexander Galkin 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Dale Hardman 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Adam Levin 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Anthony Nash 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Michele Ramsay 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Joann Stone 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Seyeoul Yom 09/15/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Igor Grebnev 10/30/98 - ------------------------------------------------------------------------------- Stock Restriction Agreement Matthew Skaria 10/30/98 - ------------------------------------------------------------------------------- RESOLVED: That Paragraph B(4)(d)(iv)(C)of Article FOURTH of the -------- Certificate of Incorporation of the Corporation be and hereby is deleted in its entirety and replaced as follows: (C) Series D Conversion Price. In the event the Corporation shall ------------------------- issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)) without consideration or for a consideration per share less than the Series D Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Series D Conversion Price shall be reduced, concurrently with such issue, as follows: (x) if the consideration per share is greater than or equal to $3.00 per share (subject to Adjustment), but less than $4.00 per share, to an amount equal to the per share consideration received for each additional share upon such issuance; or (y) if the issuance (or deemed issuance) is without consideration or for a consideration per share less than $3.00 (subject to Adjustment), to a price determined by (i) first reducing the Series D Conversion Price to $3.00 (subject to Adjustment), provided, however, that no reduction pursuant to this -------- ------- clause (i) shall be made if the Series D Conversion Price is already below $3.00 (subject to Adjustment); and (ii) then multiplying such new reduced Series D Conversion Price by a fraction, the numerator of which shall be the number of --------- shares of -3- Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such new Series D Conversion Price; and the denominator ----------- of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, that, for the purpose of this Subsection 4(d)(iv)(C), (I) all -------- shares of Common Stock issuable upon conversion of shares of Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and (II) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 4(d)(iii)), such Additional Shares of Common Stock shall be deemed to be outstanding. SECOND: This amendment to Certificate of Incorporation shall be effective as of the date set forth below. -4- IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Andrew Huffman, its President this 18 day of December, 1998. AUDIBLE, INC. By: /s/ Andrew Huffman ------------------------------------ Andrew Huffman, President -5- EX-3.3 7 BYLAWS OF AUDIBLE EXHIBIT 3.3 AUDIBLE, INC. (Formerly Known as THE AUDIBLE WORDS CORPORATION) B Y L A W S ------------ ARTICLE I OFFICES Section 1.1 The registered office shall be in the City of Wilmington, ----------- County of Newcastle, State of Delaware. Section 1.2 The corporation may also have offices at such other places ----------- both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1 All meetings of the stockholders shall be held at such ----------- time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2 A meeting of stockholders shall be held in each year for ----------- the election of directors at such time and place as the board of directors shall determine. Any other proper business, notice of which was given in the notice of the meeting or in a duly executed waiver of notice thereof, may be transacted at the annual meeting. Elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation. Section 2.3 Unless otherwise provided by law, written notice of the ----------- annual meeting shall be given to each stockholder entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting. Section 2.4 The officer who has charge of the stock ledger of the ----------- corporation shall prepare and make, at least ten days before every election of directors, a complete list of the stockholders entitled to vote at said election, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder during ordinary business hours, for a period of at least ten days prior to the election, either at a place within the city, town or village where the election is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. Section 2.5 Special meetings of the stockholders, for any purpose or ----------- purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of stockholders -1- owning 10% of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 2.6 Unless otherwise provided by law, written notice of a ----------- special meeting of stockholders, stating the time, place and object thereof, shall be given to each stockholder entitled to vote thereat, not less than ten nor more than sixty days before the date fixed for the meeting. Section 2.7 Business transacted at any special meeting of stockholders ----------- shall be limited to the purposes stated in the notice. Section 2.8 The holders of a majority of the stock issued and ----------- outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.9 When a quorum is present at any meeting, the vote of the ----------- holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 2.10 Each stockholder shall at every meeting of the ------------ stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period, and, except where the transfer books of the corporation have been closed or a date has been fixed as a record date for the determination of its stockholders entitled to vote, no share of stock shall be voted on at any election for directors which has been transferred on the books of the corporation within twenty days next preceding such election of directors. Section 2.11 Any action required to be taken at any annual or special ------------ meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. -2- ARTICLE III DIRECTORS Section 3.1 The number of directors which shall constitute the whole ----------- board shall be 5. Except as hereinafter provided in Section 3.2 of this Article, the directors, other than those constituting the first board of directors, shall be elected by the stockholders, and each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. Section 3.2 Vacancies and newly created directorships resulting from ----------- any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. Section 3.3 The business of the corporation shall be managed by its ----------- board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 3.4 The board of directors of the corporation may hold ----------- meetings, both regular and special, either within or without the State of Delaware. Section 3.5 The first meeting of each newly elected board of directors ----------- shall be held immediately after and at the same place as the meeting of the stockholders at which it was elected and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. Section 3.6 Regular meetings of the board of directors may be held ----------- without notice at such time and at such place as shall from time to time be determined by the board. Section 3.7 Special meetings of the board may be called by the ----------- president on two days notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors. Section 3.8 At all meetings of the board a majority of directors shall ----------- constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. -3- Section 3.9 Unless otherwise restricted by the certificate of ----------- incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. COMMITTEES OF DIRECTORS Section 3.10 The board of directors may, by resolution passed by a ------------ majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution or amending the by-laws of the corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 3.11 Each committee shall keep regular minutes of its meetings ------------ and report the same to the board of directors when required. COMPENSATION OF DIRECTORS Section 3.12 The board of directors shall have the authority to fix ------------ the compensation of directors. PARTICIPATION IN MEETING BY TELEPHONE Section 3.13 Members of the board of directors or any committee ------------ designated by such board may participate in a meeting of the board or of a committee of the board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting. -4- ARTICLE IV NOTICES Section 4.1 Notices to directors and stockholders shall be in writing ----------- and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram. Section 4.2 Whenever any notice is required to be given under the ----------- provisions of the statutes or of the certificate of incorporation or by these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular, or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. ARTICLE V OFFICERS Section 5.1 The officers of the corporation shall be chosen by the ----------- board of directors and shall be a president, a vice-president, a secretary and a treasurer. The board of directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation otherwise provides. Section 5.2 The board of directors at its first meeting after each ----------- annual meeting of stockholders shall choose a president, one or more vice- presidents, a secretary and a treasurer. Section 5.3 The board of directors may appoint such other officers and ----------- agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 5.4 The salaries of all officers and agents of the corporation ----------- shall be fixed by the board of directors. Section 5.5 The officers of the corporation shall hold office until ----------- their successors are chosen and qualified. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. -5- THE PRESIDENT Section 5.6 The president shall be the chief executive officer of the ----------- corporation, shall preside at all meetings of the stockholders and the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. Section 5.7 He shall execute bonds, mortgages and other contracts ----------- requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. THE VICE-PRESIDENTS Section 5.8 The vice-president, or if there shall be more than one, ----------- the vice-presidents in the order determined by the board of directors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARIES Section 5.9 The secretary shall attend all meetings of the board of ----------- directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 5.10 The assistant secretary, or if there be more than one, ------------ the assistant secretaries in the order determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 5.11 The treasurer shall have the custody of the corporate ------------ funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. -6- Section 5.12 He shall disburse the funds of the corporation as may be ------------ ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors at its regular meetings or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 5.13 If required by the board of directors, he shall give the ------------ corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 5.14 The assistant treasurer, or if there shall be more than ------------ one, the assistant treasurers in the order determined by the board of directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES OF STOCK Section 6.1 Every holder of stock in the corporation shall be entitled ----------- to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or president or a vice- president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Section 6.2 Where a certificate is signed (l) by a transfer agent or ----------- an assistant transfer agent or (2) by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any such chairman or vice-chairman of the board of directors, president, vice-president, treasurer, assistant treasurer, secretary or assistant secretary may be facsimile. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the corporation, such certificate or certificates may nevertheless be adopted by the corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation. -7- LOST CERTIFICATES Section 6.3 The board of directors may direct a new certificate or ----------- certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed upon the issuance of such new certificate. TRANSFERS OF STOCK Section 6.4 Upon surrender to the corporation or the transfer agent of ----------- the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transactions upon its books, unless the corporation has a duty to inquire as to adverse claims with respect to such transfer which has not been discharged. The corporation shall have no duty to inquire into adverse claims with respect to such transfer unless (a) the corporation has received a written notification of an adverse claim at a time and in a manner which affords the corporation a reasonable opportunity to act on it prior to the issuance of a new, reissued or re-registered share certificate and the notification identifies the claimant, the registered owner and the issue of which the share or shares is a part and provides an address for communications directed to the claimant; or (b) the corporation has required and obtained, with respect to a fiduciary, a copy of a will, trust, indenture, articles of co-partnership, by-laws or other controlling instruments, for a purpose other than to obtain appropriate evidence of the appointment or incumbency of the fiduciary, and such documents indicate, upon reasonable inspection, the existence of an adverse claim. Section 6.5 The corporation may discharge any duty of inquiry by any ----------- reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or, if there be no such address, at his residence or regular place of business that the security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty days from the date of mailing the notification, either (a) an appropriate restraining order, injunction or other process issues from a court of competent jurisdiction; or (b) an indemnity bond, sufficient in the corporation's judgment to protect the corporation and any transfer agent, registrar or other agent of the corporation involved from any loss which it or they may suffer by complying with the adverse claim, is filed with the corporation. FIXING RECORD DATE Section 6.6 (a) In order that the corporation may determine the ----------- stockholders entitled to notice or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful -8- action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. (b) If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (3) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6.7 Prior to due presentment for transfer of any share or ----------- shares, the corporation shall treat the registered owner thereof as the person exclusively entitled to vote, to receive notifications and to all other benefits of ownership with respect to such share or shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 7.1 Dividends upon the capital stock of the corporation, ----------- subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 7.2 Before payment of any dividend, there may be set aside out ----------- of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. -9- ANNUAL STATEMENT Section 7.3 The board of directors shall present at each annual ----------- meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. CHECKS Section 7.4 All checks or demands for money and notes of the ----------- corporation shall be signed by such officer or officers or such other persons as the board of directors may from time to time designate. FISCAL YEAR Section 7.5 The fiscal year of the corporation shall be the calendar ----------- year. SEAL Section 7.6 The corporate seal shall have inscribed thereon the name ----------- of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. ARTICLE VIII AMENDMENTS Section 8.1 These by-laws may be altered or repealed at any regular ----------- meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration or repeal be contained in the notice of such special meeting. ARTICLE IX INDEMNIFICATION Section 9.1 The corporation shall indemnify any person who was or is a ----------- party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its -10- equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 9.2 The corporation shall indemnify any person who was or is a ----------- party, or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 9.3 To the extent that a director, officer, employee or agent ----------- of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in sections 9.1 or 9.2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 9.4 Any indemnification under sections 9.1 or 9.2 of this ----------- Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in such section. Such determination shall be made: 1. By the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or 2. If such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or 3. By the stockholders. Section 9.5 Expenses incurred in defending a civil or criminal action, ----------- suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. -11- Section 9.6 The indemnification and advancement of expenses provided ----------- by, or granted pursuant to, this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 9.7 The corporation shall have power to purchase and maintain ----------- insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 9.8 The indemnification and advancement of expenses provided ----------- by or granted pursuant to, this Article IX shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -12- EX-3.3.1 8 AMEND #1 TO AUDIBLE BYLAWS EXHIBIT 3.3.1 AMENDMENT NO. 1 TO AUDIBLE INC. BY-LAWS WHEREAS, pursuant to ARTICLE VIII of the By-Laws of Audible Inc., a Delaware corporation (the "Company"), the Company's By-Laws may be amended from time to time by the Board of Directors at any regular or special meeting (or by written action in lieu thereof); and WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company to amend its By-Laws to allow the Board of Directors to increase the number of directors constituting the Board of Directors; WHEREAS, by written consent in lieu of a special meeting of the Board of Directors, the following amendment to the By-Laws was adopted. NOW THEREFORE, the By-Laws of the Company are hereby amended as follows: Section 3.1 shall be deleted in its entirety and the following Section 3.1 ----------- ----------- shall be inserted in lieu thereof: "Section 3.1 The number of directors which shall constitute the whole ----------- board shall be 7 and, subject to the terms and conditions of the Certificate of Incorporation, may be expanded from time to time as the Board of Directors shall determine. Except as hereinafter provided in Section 3.2 of this Article, the directors, other than those constituting the first board of directors, shall be elected by the stockholders, and each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders." This Amendment No. 1 to By-Laws was adopted and approved by way of Unanimous Written Consent of the Board of Directors in Lieu of Special Meeting dated March 17, 1998. BOARD OF DIRECTORS: - ------------------- /s/ Donald R. Katz /s/ Tim Mott - ------------------ ------------ Donald R. Katz Tim Mott /s/ Thomas P. Hirschfeld /s/ Brad Burnham - ------------------------ ---------------- Tom Hirschfeld Brad Burnham /s/ Bingham Gordon /s/ Winthrop Knowlton - ------------------ --------------------- Bingham Gordon Winthrop Knowlton /s/ Andrew J. Huffman - --------------------- Andrew Huffman EX-10.5 9 MASTER LEASE AGREEMENT EXHIBIT 10.5 M A S T E R L E A S E A G R E E M E N T MASTER LEASE AGREEMENT (the "Master Lease") dated November 19, 1996 by and between COMDISCO, INC. ("Lessor") and THE AUDIBLE WORDS CORPORATION ("Lessee"). IN CONSIDERATION of the mutual agreements described below, the parties agree as follows (all capitalized terms are defined in Section 14.18): 1. PROPERTY LEASED. Lessor leases to Lessee all of the Equipment described on each Summary Equipment Schedule. In the event of a conflict, the terms of the applicable Schedule prevail over this Master Lease. 2. TERM. On the Commencement Date, Lessee will be deemed to accept the Equipment, will be bound to its rental obligations for each item of Equipment and the term of a Summary Equipment Schedule will begin and continue through the Initial Term and thereafter until terminated by either party upon prior written notice received during the Notice Period. No termination may be effective prior to the expiration of the Initial Term. 3. RENT AND PAYMENT. Rent is due and payable advance on the first day of each Rent Interval at the address specified in Lessor's invoice. Interim Rent is due and payable when invoiced. If any payment is not made when due, Lessee will pay a Late Charge on the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay Lessor the Advance specified on the Schedule. The Advance will be credited towards the final Rent payment if Lessee is not then in default. No interest will be paid on the Advance. 4. SELECTION; WARRANTY AND DISCLAIMER OF WARRANTIES. 4.1 SELECTION. Lessee acknowledges that it has selected the Equipment and disclaims any reliance upon statements made by the Lessor, other than as set forth in the Schedule. 4.2 WARRANTY AND DISCLAIMER OF WARRANTIES. Lessor warrants to Lessee that, so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and peaceful possession, and unrestricted use of the Equipment. To the extent permitted by the manufacturer, Lessor assigns to Lessee during the term of the Summary Equipment Schedule any manufacturer's warranties for the Equipment. LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or expense of any kind (including strict liability in tort) caused by the Equipment except for any loss or damage caused by the willful misconduct or negligent acts of Lessor. In no event is Lessor responsible for special, incidental or consequential damages. 5. TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT. 5.1 TITLE. Lessee holds the Equipment subject and subordinate to the rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes Lessor, as Lessee's agent, and at Lessor's expense, to prepare, execute and file in Lessee's name precautionary Uniform Commercial Code financing statements showing the interest of the Owner, Lessor, and any Assignee or Secured Party in the Equipment and to insert serial numbers in Summary Equipment Schedules as appropriate. Lessee will, at its expense, keep the Equipment free and clear from any liens or encumbrances of any kind (except any caused by Lessor) and will indemnify and hold the Owner, Lessor, any Assignee and Secured Party harmless from and against any loss caused by Lessee's failure to do so, except where such is caused by Lessor. 5.2 RELOCATION OR SUBLEASE. Upon prior written notice, Lessee may relocate Equipment to any location within the continental United States provided (i) the Equipment will not be used by an entity exempt from federal income tax, and (ii) all additional costs (including any administrative fees, additional taxes and insurance coverage) are reconciled and promptly paid by Lessee. Lessee may sublease the Equipment upon the reasonable consent of the Lessor and the Secured Party. Such consent to sublease will be granted if: (i) Lessee meets the relocation requirements set out above, (ii) the sublease is expressly subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its rights in the sublease to Lessor and the Secured Party as additional collateral and security, (iv) Lessee's obligation to maintain and insure the Equipment is not altered, (v) all financing statements required to continue the Secured Party's prior perfected security interest are filed, and (vi) Lessee executes sublease documents acceptable to Lessor. No relocation or sublease will relieve Lessee from any of its obligations under this Master Lease and the relevant Schedule. 5.3 ASSIGNMENT BY LESSOR. The terms and conditions of each Schedule have been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer its interest or grant a security interest in each Schedule and/or the Equipment to a Secured Party or Assignee. In that event, the term Lessor will mean the Assignee and any Secured Party. However, any assignment, sale, or other transfer by Lessor will not relieve Lessor of its obligations to Lessee and will not materially change Lessee's duties or materially increase the burdens or risks imposed on Lessee. The Lessee consents to and will acknowledge such assignments in a written notice given to Lessee. Lessee also agrees that: (a) The Secured Party will be entitled to exercise all of Lessor's rights, but will not be obligated to perform any of the obligations of Lessor. The Secured Party will not disturb Lessee's quiet and peaceful possession and unrestricted use of the Equipment so long as Lessee is not in default and the Secured Party continues to receive all Rent payable under the Schedule; and (b) Lessee will pay all Rent and all other amounts payable to the Secured Party, despite any defense or claim which it has against Lessor. Lessee reserves its right to have recourse directly against Lessor for any defense or claim; (c) Subject to and without impairment of Lessee's leasehold rights in the Equipment, Lessee holds the Equipment for the Secured Party to the extent of the Secured Party's rights in that Equipment. 6. NET LEASE; TAXES AND FEES. 6.1 NET LEASE. Each Summary Equipment Schedule constitutes a net lease. Lessee's obligation to pay Rent and all other amounts due hereunder is absolute and unconditional and is not subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever. 6.2 TAXES AND FEES. Lessee will pay when due or reimburse Lessor for all taxes, fees or any other charges (together with any related interest or penalties not arising from the negligence of Lessor) accrued for or arising during the term of each Summary Equipment Schedule against Lessor, Lessee or the Equipment by any governmental authority (except only Federal, state, local and franchise taxes on the capital or the net income of Lessor). Lessor will file all personal property tax returns for the Equipment and pay all such property taxes due. Lessee will reimburse Lessor for property taxes within thirty (30) days of receipt of an invoice. 7. CARE, USE AND MAINTENANCE; INSPECTION BY LESSOR. 7.1 CARE, USE AND MAINTENANCE. Lessee will maintain the Equipment in good operating order and appearance, protect the Equipment from deterioration, other than normal wear and tear, and will not use the Equipment for any purpose other than that for which it was designed. If commercially available and considered common business practice for each item of Equipment, Lessee will maintain in force a standard maintenance contract with the manufacturer of the Equipment, or another party acceptable to Lessor, and will provide Lessor with a complete copy of that contract. If Lessee has the Equipment maintained by a party other than the manufacturer or self maintains, Lessee agrees to pay any costs necessary for the manufacturer to bring the Equipment to then current release, revision and engineering change levels, and to re-certify the Equipment as eligible for manufacturer's maintenance at the expiration of the lease term, provided re- certification is available and is required by Lessor. The lease term will continue upon the same terms and conditions until recertification has been obtained. 7.2 INSPECTION BY LESSOR. Upon reasonable advance notice, Lessee, during reasonable business hours and subject to Lessee's security requirements, will make the Equipment and its related log and maintenance records available to Lessor for inspection. 8. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee hereby represents, warrants and covenants that with respect to the Master Lease and each Schedule executed hereunder: (a) The Lessee is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to do business in each jurisdiction (including the jurisdiction where the Equipment is, or is to be, located) where its ownership or lease of property or the conduct of its business requires such qualification, except for where such lack of qualification would not have a material adverse effect on the Company's business; and has full corporate power and authority to hold property under the Master Lease and each Schedule and to enter into and perform its obligations under the Master Lease and each Schedule. (b) The execution and delivery by the Lessee of the Master Lease and each Schedule and its performance thereunder have been duly authorized by all necessary corporate action on the part of the Lessee, and the Master Lease and each Schedule are not inconsistent with the Lessee's Articles of Incorporation or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Master Lease and each Schedule constitute legal, valid and binding agreements of the Lessee, enforceable in accordance with their terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and rules of law concerning equitable remedies. (c) There are no actions, suits, proceedings or patent claims pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Lessee to perform its obligations under the Master Lease and each Schedule. (d) The Equipment is personal property and when subjected to use by the Lessee will not be or become fixtures under applicable law. (e) The Lessee has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except the liabilities and obligations of the Lessee as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been, in any case or in the aggregate, materially adverse to Lessee's ongoing business. (f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has access to, or can become licensed on reasonable terms under all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operations of its business as now conducted, with no known infringement of, or conflict with, the rights of others. (g) All material contracts, agreements and instruments to which the Lessee is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Lessee in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies. 9. DELIVERY AND RETURN OF EQUIPMENT. Lessee hereby assumes the full expense of transportation and in-transit insurance to Lessee's premises and installation thereat of the Equipment. Upon termination (by expiration or otherwise) of each Summary Equipment Schedule, Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense (including, without limitation, expenses of transportation and in-transit insurance), return the Equipment to Lessor in the same operating order, repair, condition and appearance as when received, less normal depreciation and wear and tear. Lessee shall return the Equipment to Lessor at 6111 North River Road, Rosemont, Illinois 60018 or at such other address within the continental United States as directed by Lessor, provided, however, that Lessee's expense shall be limited to the cost of returning the equipment to Lessor's address as set forth herein. During the period subsequent to receipt of a notice under Section 2, Lessor may demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations. 10. LABELING. Upon request, Lessee will mark the Equipment indicating Lessor's interest with labels provided by Lessor. Lessee will keep all Equipment free from any other marking or labeling which might be interpreted as a claim of ownership. 11. INDEMNITY. With regard to bodily injury and property damage liability only, Lessee will indemnify and hold Lessor, any Assignee and any Secured Party harmless from and against any and all claims, costs, expenses, damages and liabilities, including reasonable -2- attorneys' fees, arising out of the ownership (for strict liability in tort only), selection, possession, leasing, operation, control, use, maintenance, delivery, return or other disposition of the Equipment during the term of this Master Lease or until Lessee's obligations under the Master Lease terminate. However, Lessee is not responsible to a party indemnified hereunder for any claims, costs, expenses, damages and liabilities occasioned by the negligent acts of such indemnified party. Lessee agrees to carry bodily injury and property damage liability insurance during the term of the Master Lease in amounts and against risks customarily insured against by the Lessee on equipment owned by it. Any amounts received by Lessor under that insurance will be credited against Lessee's obligations under this Section. 12. RISK OF LOSS. Effective upon delivery and until the Equipment is returned, Lessee relieves Lessor of responsibility for all risks of physical damage to or loss or destruction of the Equipment. Lessee will carry casualty insurance for each item of Equipment in an amount not less than the Casualty Value. All policies for such insurance will name the Lessor and any Secured Party as additional insured and as loss payee, and will provide for at least thirty (30) days prior written notice to the Lessor of cancellation or expiration, will be primary without right of contribution from any insurance effected by Lessor. Upon the execution of any Schedule, the Lessee will furnish appropriate evidence of such insurance acceptable to Lessor. Lessee will promptly repair any damaged item of Equipment unless such Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Lessee will provide written notice of that loss to Lessor and Lessee will, at Lessee's option, either (a) replace the item of Equipment with Like Equipment and marketable title to the Like Equipment will automatically vest in Lessor or (b) pay the Casualty Value and after that payment and the payment of all other amounts due and owing with respect to that item of Equipment, Lessee's obligation to pay further Rent for the item of Equipment will cease. 13. DEFAULT, REMEDIES AND MITIGATION. 13.1 DEFAULT. The occurrence of any one or more of the following Events of Default constitutes a default under a Summary Equipment Schedule: (a) Lessee's failure to pay Rent or other amounts payable by Lessee when due if that failure continues for five (5) business days after written notice; or (b) Lessee's failure to perform any other term or condition of the Schedule or the material inaccuracy of any representation or warranty made by the Lessee in the Schedule or in any document or certificate furnished to the Lessor hereunder if that failure or inaccuracy continues for ten (10) business days after written notice; or (c) An assignment by Lessee for the benefit of its creditors, the failure by Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee or the filing against Lessee of any petition under any bankruptcy or insolvency law or for the appointment of a trustee or other officer with similar powers, the adjudication of Lessee as insolvent, the liquidation of Lessee, or the taking of any action for the purpose of the foregoing; or (d) The occurrence of an Event of Default under any Schedule, Summary Equipment Schedule or other agreement between Lessee and Lessor or its Assignee or Secured Party. 13.2 REMEDIES. Upon the occurrence of any of the above Events of Default, Lessor, at its option, may: (a) enforce Lessee's performance of the provisions of the applicable Schedule by appropriate court action in law or in equity; (b) recover from Lessee any damages and or expenses, including Default Costs; (c) with notice and demand, recover all sums due and accelerate and recover the present value of the remaining payment stream of all Rent due under the defaulted Schedule (discounted at the same rate of interest at which such defaulted Schedule was discounted with a Secured Party plus any prepayment fees charged to Lessor by the Secured Party or, if there is no Secured Party, then discounted at 6%) together with all Rent and other amounts currently due as liquidated damages and not as a penalty; (d) with notice and process of law and in compliance with Lessee's security requirements, Lessor may enter on Lessee's premises to in remove and repossess the Equipment without being liable to Lessee for damages due to the repossession, except those resulting from Lessor's, its assignees', agents' or representatives' negligence; and (e) pursue any other remedy permitted by law or equity. The above remedies, in Lessor's discretion and to the extent permitted by law, are cumulative and may be exercised successively or concurrently. 13.3 MITIGATION. Upon return of the Equipment pursuant to the terms of Section 13.2, Lessor will use its best efforts in accordance with its normal business procedures (and without obligation to give any priority to such Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise dispose of all or any part of the Equipment at a public or private sale for cash or credit with the privilege of purchasing the Equipment. The proceeds from any sale, lease or other disposition of the Equipment are defined as either: (a) if sold or otherwise disposed of, the cash proceeds less the Fair Market Value of the Equipment at the expiration of the Initial Term less the Default Costs; or (b) if leased, the present value (discounted at 3 percent (3%) over the U.S. Treasury Notes of comparable maturity to the term of the re-lease) of the rentals for a term not to exceed the Initial Term, less the Default Costs. Any proceeds will be applied against liquidated damages and any other sums due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may recover, the amount by which the proceeds are less than the liquidated damages and other sums due to Lessor from Lessee. 14. ADDITIONAL PROVISIONS. 14.1 BOARD ATTENDANCE. One representative of Lessor will have the right to attend Lessee's corporate Board of Directors meetings and Lessee will give Lessor reasonable notice in advance of any special Board of Directors meeting, which notice will provide an agenda of the subject matter to be discussed at such board meeting. -3- Lessee will provide Lessor with a certified copy of the minutes of each Board of Directors meeting within thirty (30) days following the date of such meeting held during the term of this Master Lease. 14.2 FINANCIAL STATEMENTS. As soon as practicable at the end of each month (and in any event within thirty (30) days), Lessee will provide to Lessor the same information which Lessee provides to its Board of Directors, but which will include not less than a monthly income statement, balance sheet and statement of cash flows prepared in accordance with generally accepted accounting principles, consistently applied (the "Financial Statements"). As soon as practicable at the end of each fiscal year, Lessee will provide to Lessor audited Financial Statements setting forth in comparative form the corresponding figures for the fiscal year (and in any event within ninety (90) days), and accompanied by an audit report and opinion of the independent certified public accountants selected by Lessee. Lessee will promptly furnish to Lessor any additional information (including, but not limited to, tax returns, income statements, balance sheets and names of principal creditors) as Lessor reasonably believes necessary to evaluate Lessee's continuing ability to meet financial obligations. After the effective date of the initial registration statement covering a public offering of Lessee's securities, the term "Financial Statements" will be deemed to refer to only those statements required by the Securities and Exchange Commission. 14.3 OBLIGATION TO LEASE ADDITIONAL EQUIPMENT. Upon notice to Lessee, Lessor will not be obligated to lease any Equipment which would have a Commencement Date after said notice if: (i) Lessee is in default under this Master Lease or any Schedule; (ii) Lessee is in default under any loan agreement, the result of which would allow the lender or any secured party to demand immediate payment of any material indebtedness; (iii) there is a material adverse change in Lessee's credit standing; or (iv) Lessor determines (in reasonable good faith) that Lessee will be unable to perform its obligations under this Master Lease or any Schedule. 14.4 MERGER AND SALE PROVISIONS. Lessee will notify Lessor of any proposed Merger at least sixty (60) days prior to the closing date. Lessor may, in its discretion, either (i) consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, or (ii) terminate the Lease and all relevant Schedules. If Lessor elects to consent to the assignment, Lessee and its successor will sign the assignment documentation provided by Lessor. If Lessor elects to terminate the Master Lease and all relevant Schedules, then Lessee will pay Lessor all amounts then due and owing and a termination fee equal to the present value (discounted at 6%) of the remaining Rent for the balance of the Initial Term(s) of all Schedules, and will return the Equipment in accordance with Section 9. Lessor hereby consents to any Merger in which the acquiring entity has a Moody's Bond Rating of BA3 or better or a commercially acceptable equivalent measure of creditworthiness as reasonably determined by Lessor. 14.5 ENTIRE AGREEMENT. This Master Lease and associated Schedules and Summary Equipment Schedules supersede all other oral or written agreements or understandings between the parties concerning the Equipment including, for example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED. 14.6 NO WAIVER. No action taken by Lessor or Lessee will be deemed to constitute a waiver of compliance with any representation, warranty or covenant contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of a breach of any provision of this Master Lease or a Schedule will not operate or be construed as a waiver of any subsequent breach. 14.7 BINDING NATURE. Each Schedule is binding upon, and inures to the benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS. 14.8 SURVIVAL OF OBLIGATIONS. All agreements, obligations including, but not limited to those arising under Section 6.2, representations and warranties contained in this Master Lease, any Schedule, Summary Equipment Schedule or in any document delivered in connection with those agreements are for the benefit of Lessor and any Assignee or Secured Party and survive the execution, delivery, expiration or termination of this Master Lease. 14.9 NOTICES. Any notice, request or other communication to either party by the other will be given in writing and deemed received upon the earlier of actual receipt or three days after mailing if mailed postage prepaid by regular or airmail to Lessor (to the attention of "the one Comdisco Venture Group") or Lessee, at the address set out in the Schedule or, one day after it is sent by courier or on the same day as sent via facsimile transmission, provided that the original is sent by personal delivery or mail by the receiving party. 14.10 APPLICABLE LAW. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE. 14.11 SEVERABILITY. If any one or more of the provisions of this Master Lease or any Schedule is for any reason held invalid, illegal or unenforceable, the remaining provisions of this Master Lease and any such Schedule will be unimpaired, and the invalid, illegal or unenforceable provision replaced by a mutually acceptable valid, legal and enforceable provision that is closest to the original intention of the parties. 14.12 COUNTERPARTS. This Master Lease and any Schedule may be executed in any number of counterparts, each of which will be deemed an original, but all such counterparts together constitute and the same instrument. If Lessor grants a security interest in all or any part of a Schedule, the Equipment or sums payable thereunder, only that counterpart Schedule marked "Secured Party's Original" can transfer Lessor's rights and all other counterparts will be marked "Duplicate." 14.13 LICENSED PRODUCTS. Lessee will obtain no title to Licensed Products which will at all times remain the property of the owner of the Licensed Products. A license from the owner may be required and it is Lessee's responsibility to obtain any required license before the use of the Licensed Products. Lessee agrees to treat the Licensed Products as confidential information of the owner, to observe all copyright restrictions, and not to reproduce or sell the Licensed Products. 14.14 SECRETARY'S CERTIFICATE. Lessee will, upon execution of this Master Lease, provide Lessor with a secretary's certificate of incumbency and authority. Upon the execution of each Schedule with a purchase price in excess of $1,000,000, Lessee will provide Lessor with an opinion from Lessee's counsel in a form acceptable to Lessor regarding the representations and warranties in Section 8. 14.15 ELECTRONIC COMMUNICATIONS. Each of the parties may communicate with the other by electronic means under mutually agreeable terms. -4- 14.16 LANDLORD/MORTGAGEE WAIVER. Lessee agrees to provide Lessor with a Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in a form satisfactory to Lessor. 14.17 EQUIPMENT PROCUREMENT CHARGES/PROGRESS PAYMENTS. Lessee hereby agrees that Lessor shall not, by virtue of its entering into this Master Lease, be required to remit any payments to any manufacturer or other third party until Lessee accepts the Equipment subject to this Master Lease. 14.18 DEFINITIONS. ADVANCE - means the amount due to Lessor by Lessee upon Lessee's execution of - ------- each Schedule. ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as - -------- owner and Lessor of Equipment. CASUALTY LOSS - means the irreparable loss or destruction of Equipment. - ------------- CASUALTY VALUE - means the greater of the aggregate Rent remaining to be paid - -------------- for the balance of the lease term or the Fair Market Value of the Equipment immediately prior to the Casualty Loss. However, if a Casualty Value Table is attached to the relevant Schedule its terms will control. COMMENCEMENT DATE - is defined in each Schedule. - ----------------- DEFAULT COSTS - means reasonable attorney's fees and remarketing costs resulting - ------------- from a Lessee default or Lessor's enforcement of its remedies. DELIVERY DATE - means date of delivery of Inventory Equipment to Lessee's - ------------- address. EQUIPMENT - means the property described on a Summary Equipment Schedule and any - --------- replacement for that property required or permitted by this Master Lease or a Schedule. EVENT OF DEFAULT - means the events described in Subsection 13.1. - ---------------- FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an - ----------------- arm's-length transaction between an informed and willing buyer/user and an informed and willing seller under no compulsion to sell. INITIAL TERM - means the period of time beginning on the first day of the first - ------------ full Rent Interval following the Commencement Date for all items of Equipment and continuing for the number of Rent Intervals indicated on a Schedule. INTERIM RENT - means the pro-rata portion of Rent due for the period from the - ------------ Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term. LATE CHARGE - means the lesser of five percent (5%) of the payment due or the - ----------- maximum amount permitted by the law of the state where the Equipment is located. LICENSED PRODUCTS - means any software or other licensed products attached to - ----------------- the Equipment. LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same - -------------- model, type, configuration and manufacture as Equipment. MERGER - means any consolidation or merger of the Lessee with or into any other - ------ corporation or entity, or any sale or conveyance of all or substantially all of the assets or stock of the Lessee to any other person or entity, in which Lessee is not the surviving entity. NOTICE PERIOD - means not less than ninety (90) days nor more than twelve (12) - ------------- months prior to the expiration of the lease term. OWNER - means the owner of Equipment. - ----- RENT - means the rent Lessee will pay for each item of Equipment expressed in a - ---- Summary Equipment Schedule either as a specific amount or an amount equal to the amount which Lessor pays for an item of Equipment multiplied by a lease rate factor plus all other amounts due to Lessor under this Master Lease or a Schedule. -5- RENT INTERVAL - means a full calendar month or quarter as indicated on a - ------------- Schedule. SCHEDULE - means either an Equipment Schedule or a Licensed Products Schedule - -------- which incorporates all of the terms and conditions of this Master Lease. SECURED PARTY - means an entity to whom Lessor has granted a security interest - ------------- for the purpose of securing a loan. SUMMARY EQUIPMENT SCHEDULE - means a certificate provided by Lessor summarizing - -------------------------- all of the Equipment for which Lessor has received Lessee approved vendor invoices, purchase documents and/or evidence of delivery during a calendar quarter which will incorporate all of the terms and conditions of the related Schedule and this Master Lease and will constitute a separate lease for the equipment leased thereunder. IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as of the day and year first above written. THE AUDIBLE WORDS CORPORATION, COMDISCO, INC., as Lessee as Lessor By: /s/ Patrick Barry By: /s/ James Labe -------------------------------- ---------------------------------- James P. Labe, President Title: CFO Title: Venture Lease Division ----------------------------- ------------------------------- -6- EX-10.5.1 10 ADDENDUM TO MASTER LEASE AGREEMENT EXHIBIT 10.5.1 ADDENDUM TO MASTER LEASE AGREEMENT DATED NOVEMBER 19,1996 BETWEEN COMDISCO, INC., AS LESSOR AND THE AUDIBLE WORDS CORPORATION, AS LESSEE The terms and conditions of the above-referenced Master Lease Agreement shall be modified and amended as follows: 1. Section 3, "Rent and Payment" ---------------- In line 1, after the word "payable" insert the word, "in". In line 2, after the word "payable" insert the words, "within fifteen (15) days of". In line 3, after the word "made" insert the words, "within fifteen (15) days of". 2. Subsection 4.2, "Warranty and Disclaimer of Warranties" ------------------------------------- In line 8, after the word, "PURPOSE" insert the words, "(other than Lessor's warranty that it holds clear title in and to the Equipment or has the right to lease the Equipment to Lessee)". 3. Subsection 5.1, "Title" ----- In line 1, after the word "subordinate" insert the words "(except as provided herein)". 4. Subsection 5.3, "Assignment by Lessor" -------------------- At the end of this Subsection, insert the following: "Notwithstanding anything to the contrary stated above, in no event shall any assignment between Lessor and any third party in any way abridge or otherwise alter Lessee's rights against Lessor or Lessor obligations provided for hereunder, it being the express understanding of the parties that any such assignment shall not in any way affect Lessee's rights against Lessor." 5. Subsection 6.1, "Net Lease" --------- At the end of this Subsection, insert the following: "Notwithstanding anything to the contrary stated above, Lessee's obligations to pay Rent hereunder shall exclude any income and franchise taxes based on the net income of Lessor." 6. Subsection 6.2, "Taxes and Fees" -------------- In line 6, after the word "Lessor)" insert the words "provided that the Lessee shall not be obligated to make such payment so long as the Lessee is diligently contesting the amount or validity thereof in good faith by adequate proceedings, so long as such contest does not result in the seizure or forfeiture of the Equipment." 7. Subsection 7.1, "Care, Use and Maintenance" ------------------------- In line 7, after the word "party" insert the word "reasonably". 8. Section 8, "Representations and Warranties of Lessee" ---------------------------------------- In line 4 of paragraph (b), after the word "Bylaws" insert the words "to the best of its knowledge". In line 2 of paragraph (d), delete the period after the word "law" and insert the following: ", except to the extent the owner of the real estate, pursuant to an instrument acceptable to Lessor, recognizes the ownership interest of the Lessor or its Assignee and the security interest of the Secured Party and agrees to permit removal of such Equipment to the extent entitled to do so hereunder." 9. Section 9, "Delivery and Return of Equipment" -------------------------------- In line 9, after the word "as" insert the word "reasonably". In line 10, delete the words "address as set forth herein" and insert the words "refurbishment facility located in Schaumburg, Illinois. 10. Section 12, "Risk of Loss" ------------ At the end of the second paragraph insert the following: "Any proceeds paid to Lessor by Lessee's insurance carrier will be made available to the Lessee to cover the cost of repairs." 11. Subsection 13.1, "Default" ------- In line 4 of paragraph (b), after the word "notice" insert the words ", provided that if such failure cannot be corrected within the ten (10) day period that Lessee is diligently pursuing a cure, the Lessee shall be entitled to an additional ten (10) business days to effectuate a cure" In line 3 of paragraph (c), after the word "law" insert the words "(provided that the filing of an involuntary petition shall not constitute an Event of Default until the earlier of (I) the expiration of sixty (60) days from filing or (ii) the entry of an Order for Relief)". -2- 12. Subsection 13.2, "Remedies" -------- In line 5 of paragraph (d), after the word "negligence" insert the words "and Lessor will promptly repair any damage caused by such negligence in the removal". 13. Subsection 14.16, "Landlord/Mortgage Waiver" ------------------------ In line 1, after the word "to" insert the words "use its best efforts to". THE AUDIBLE WORDS CORPORATION, COMDISCO, INC., AS LESSEE AS LESSOR By: /s/ Patrick C. Barry By: /s/ James P. Labe ---------------------------- ------------------------------- James P. Labe, President Title: CFO Title: Venture Lease Division ------------------------- ---------------------------- Date: Nov 20, 1996 Date:_____________________________ ------------------------- GP - 10/29/96 -3- EX-10.6 11 WARRANT AGREEMENT EXHIBIT 10.6 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT AGREEMENT To Purchase Shares of Preferred Stock of AUDIBLE, INC. (Formerly, The Audible Words Corporation) Dated as of November 19, 1996 (the "Effective Date") Re-Issued as of August 17, 1998 WHEREAS, Audible, Inc. (formerly, The Audible Words Corporation), a Delaware corporation (the "Company") has entered into a Master Lease Agreement dated as of November 19, 1996, Equipment Schedule Nos. VL-1 and VL-2 dated as of November 19, 1996, and related Schedules (collectively the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, in consideration for such Leases, the Company entered into a Warrant Agreement dated as of November 19, 1996 (the "Original Warrant Agreement"), whereby the Company granted the Warrantholder the right to purchase shares based on a formula which results in the right to purchase 33,852 shares of the Company's Series B Preferred Stock; and WHEREAS, pursuant to and in accordance with the Original Warrant Agreement, the Warrantholder has transferred to Gregory Stento, effective as of August 17, 1998, the Warantholder's rights under the Original Warrant Agreement with respect to the purchase of 3,009 shares of the Company's Series B Preferred Stock (the "Warrant Transfer"); and WHEREAS, the Company and the Warrantholder acknowledge the Warrant Transfer and, accordingly, the Company is reissuing, as of August 17, 1998, the Warrants provided for in the Original Warrant Agreement, and the Company and the Warrantholder are entering into this Warrant Agreement, to reflect the Warrant Transfer and the Warrantholder's right to purchase 30,573 shares of Series B Preferred Stock as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and the mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. ---------------------------------------------- The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, 30,573 fully paid and non- assessable shares of the Company's Series B Preferred Stock ("Preferred Stock") at a purchase price of $2.68 per share (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided in section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. ----------------------------- Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (i) ten (10) years or (ii) five (5) years from the effective date of the Company's initial public offering, whichever is longer. 3. EXERCISE OF THE PURCHASE RIGHTS. ------------------------------- The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: X=Y(A-B) ------ A Where: X = the number of shares of Preferred Stock to be issued to the Warrantholder. -2- Y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Preferred Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Preferred Stock shall mean with respect to each share of Preferred Stock: (i) if the exercise is in connection with an initial public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public offering has been declared effective by the SEC, then the fair market value per share shall be the product of (x) the initial "Price to Public" specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (ii) if this Warrant is exercised after, and not in connection with the Company's initial public offering, and: (a) if traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices over a twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; or (b) if actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) over the twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the product of (x) the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Preferred Stock shall be deemed to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. -3- Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. --------------------- (a) Authorization and Reservation of Shares. During the term of this --------------------------------------- Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. Following the Company's initial public offering, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights to purchase Common Stock as provided for herein. (b) Registration or Listing. This Warrant shall be subject to the ----------------------- requirement that if any shares of Preferred Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the 1933 Act, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. Warrantholder agrees to cooperate in completing any necessary documentation required in any such registration. 5. NO FRACTIONAL SHARES OR SCRIP. ----------------------------- No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDER. ------------------------ This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 7. WARRANTHOLDER REGISTRY. ---------------------- The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. ----------------- -4- The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital ------------------ ------ reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation whether or not the Company is the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of preferred stock or other securities of the successor corporation resulting from such Merger Event, equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable) shall be applicable to the greatest extent possible. (b) Reclassification of Shares. If the Company at any time shall, by -------------------------- combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall ------------------------------------ combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend --------------- payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's Preferred Stock, then the Exercise Price shall be adjusted, from and after the record date of such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of all shares of the Company's Preferred Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's Preferred Stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock -5- (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Antidilution Rights. Additional antidilution rights applicable to the ------------------- Preferred Stock purchasable hereunder are as set forth in the Company's Certificate of Incorporation, as amended through the Effective Date, a true and complete copy of which is attached hereto as Exhibit ___ (the "Charter"). The Company shall promptly provide the Warrantholder with any restatement, amendment, modification or waiver of the Charter. The Company shall provide Warrantholder with prior written notice of any issuance of its stock or other equity security to occur after the Effective Date of this Warrant, which triggers any such antidilution rights, which notice shall include (a) the price at which such stock or security is to be sold, (b) the number of shares to be issued, and (c) such other information as necessary for Warrantholder to determine if a dilutive event has occurred. (f) Notice of Certain Events. If: (i) the Company shall declare any ------------------------ dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; (iv) there shall be an initial public offering; or (v) there shall be any voluntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the Company's reasonable estimate of the effective date thereof. Each such written notice shall set forth, in reasonable detail, (i) the event, (ii) the amount of the adjustment, if any, (iii) the method by which such adjustment, if any, was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (g) Timely Notice. Failure to timely provide such notice required by ------------- subsection (f) above shall entitle Warrantholder to retain the benefit of the applicable notice period -6- notwithstanding anything to the contrary contained in any insufficient notice received by Warrantholder. The notice period shall begin on the date Warrantholder actually receives a written notice containing all the information specified above. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. -------------------------------------------------------- (a) Reservation of Preferred Stock. The Preferred Stock issuable upon ------------------------------ exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and Bylaws, as amended. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. (b) Due Authority. The execution and delivery by the Company of this ------------- Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of, giving of notice to, ---------------------- registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act and any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) Issued Securities. All issued and outstanding shares of Common Stock, ----------------- Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all -7- Federal and state securities laws. In addition, as of the Effective Date: (i) The authorized capital of the Company consists of (A) 7,000,000 shares of Common Stock, of which 2,804,100 shares are issued and outstanding, and (B) 3,550,000 shares of preferred stock, of which (i) 1,350,000 shares have been designated Series A Preferred Stock (consisting of 675,000 shares of Series A-I Preferred Stock) of which 534,000 shares of Series A Preferred Stock and no shares of Series A-i Preferred Stock are outstanding and (ii) 2,200,000 shares have been designated Series B Preferred Stock of which 2,050,000 shares are issued and outstanding. (ii) The Company has reserved (A) 615,000 shares of Common Stock for issuance to employees, consultants and directors of which 437,000 options are outstanding at an average price of $.15 per share. Exhibit IV hereto sets forth the other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Charter, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock, other than holders of the Company's Series A and Series B Preferred Stock pursuant to an Amendment to a Stockholders Agreement dated November 19, 1996, by and among the Company and the other parties thereto (the "Stockholders' Agreement"). (e) Insurance. The Company has in full force and effect insurance --------- policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (f) Other Commitments to Register Securities. As of the Effective Date, ---------------------------------------- except as set forth in the Registration Rights Agreement dated July 25, 1996, among the Company and the parties named therein the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) Exempt Transaction. Based on the Warrantholder's representations in ------------------ Section 10 hereof, the issuance of the Warrant and the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the applicable state securities laws. (h) Compliance with Rule 144. At the written request of the ------------------------ Warrantholder, who proposes to sell Common Stock issuable upon conversion of the Preferred Stock issued upon the exercise of the Warrant in compliance with Rule 144 promulgated by the -8- Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. -------------------------------------------------- This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) Investment Purpose. The right to acquire the Warrant or the Preferred ------------------ Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred ------------- Stock issuable upon exercise of this Warrant is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the ------------------------------------- Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as -9- hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in -------------- financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the ----------------------- Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to Section 15(d), of the 1934 Act", or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) Accredited Investor. Warrantholder is an "accredited investor" within ------------------- the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect. 11. RIGHT OF FIRST OFFER. -------------------- The Warrantholder shall have the right to purchase additional shares of stock in accordance with the provisions of Amendment No. 1 to the Stockholders Agreement in the form attached hereto as Exhibit ____. 12. TRANSFERS. --------- Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee to not more than three (3) persons who are "accredited investors" provided, however, that any such transferee shall have acquired the rights to purchase at least 20% of the Preferred Stock issuable hereunder. 13. MISCELLANEOUS. ------------- (a) Effective Date. The provisions of this Warrant Agreement shall be -------------- construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. -10- (b) Attorney's Fees. In any litigation, arbitration or court proceeding --------------- between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and ------------- construed for all purposes under and in accordance with the laws of the State of Illinois. (d) Counterparts. This Warrant Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018, attention: James Labe, Venture Group, cc: Legal Department, attn: General Counsel, (and/or, if by facsimile, (847) 518-5465 and (847) 518-5088) and (ii) to the Company at 65 Willowbrook Boulevard, Wayne, New Jersey 07470 attention: Patrick C. Barry (and/or if by facsimile, (973) 890-4070) or at such other address as any such party may subsequently designate by written notice to the other party. (f) Remedies. In the event of any default hereunder, the non-defaulting -------- party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. (g) No Impairment of Rights. The Company will not, by amendment of its ----------------------- Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) Survival. The representations, warranties, covenants and conditions of -------- the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this ------------ Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. -11- (j) Amendments. Any provision of this Warrant Agreement may be amended by a ---------- written instrument signed by the Company and by the holders of the rights to purchase a majority of the shares of Preferred Stock issuable hereunder. (k) Additional Documents. The Company, upon execution of this Warrant -------------------- Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), (f) and (g) of Section 9 above. The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of August 17,1998. Company: AUDIBLE, INC. By: /s/ Andy Huffman ---------------------------------- Title: President and CEO ------------------------------- Warrantholder: COMDISCO, INC. By: /s/ John J. Vosicky ---------------------------------- Title: Executive Vice President & CFO ------------------------------- -12- EXHIBIT I NOTICE OF EXERCISE To:________________ (1) The undersigned Warrantholder hereby elects to purchase _______ shares of the Series B Preferred Stock of Audible, Inc., pursuant to the terms of the Warrant Agreement dated the 17th day of August, 1998 (the `Warrant Agreement") between Audible, Inc. and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Series B Preferred Stock of Audible, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series B Preferred Stock in the name of the undersigned or in such other name as is specified below. _________________________________ (Name) _________________________________ (Address) Warrantholder: COMDISCO, INC. By:______________________________ Title:___________________________ Date:____________________________ -13- EXHIBIT II ACKNOWLEDGMENT OF EXERCISE The undersigned _______________________________________, hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ____ shares of the Series B Preferred Stock of Audible, Inc., pursuant to the terms of the Warrant Agreement, and further acknowledges that ______ shares remain subject to purchase under the terms of the Warrant Agreement. Company: By:_____________________________________ Title:__________________________________ Date:___________________________________ -14- EXHIBIT III TRANSFER NOTICE (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to ________________________________________________________________________________ (Please Print) whose address is________________________________________________________________ ________________________________________________________________________________ Dated____________________________________________________________ Holder's Signature_______________________________________________ Holder's Address_________________________________________________ _________________________________________________________________ Signature Guaranteed:___________________________________________________________ NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. -15- EX-10.7 12 WARRANT AGREEMENT EXHIBIT 10.7 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT AGREEMENT To Purchase Shares of Series C Preferred Stock of AUDIBLE, INC. Dated as of July 24, 1997 (the "Effective Date") WHEREAS, Audible, Inc., a Delaware corporation (the "Company") has entered into a Master Lease Agreement dated as of November 19, 1996, Equipment Schedule Nos. VL-3 and VL-4 dated as of July 24, 1997, and related Summary Equipment Schedules (collectively, the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. ---------------------------------------------- The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, that number of fully paid and non- assessable shares of the Company's Series C Preferred Stock ("Preferred Stock") equal to Forty-Eight Thousand Seven Hundred Fifty Dollars ("$48,750.00) divided by the exercise price ("Exercise Price"). The Exercise Price shall be equal to the sum of $4.00 per share of the Preferred Stock (the "Last Round") plus the product of (a) the difference between the price per share of the next round of Preferred Stock equity financing in which the Company sells shares of its capital stock to institutional or other professional investors (the "Next Round") and the Last Round, multiplied by (b) the fraction resulting from dividing (x) the number of days from the date of closing of the Last Round to the date of execution of the Leases, by (y) the number of days from the date of the closing of the Last Round to the date of the closing of the Next Round; provided, however, if the Next Round is not successfully completed by December 31, 1997, then the Exercise Price shall be equal to the price per share of the Last Round. The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. ----------------------------- Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (I) ten (10) years or (ii) five (5) years from the effective date of the Company's initial public offering, whichever is longer. 3. EXERCISE OF THE PURCHASE RIGHTS. ------------------------------- The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of `Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: X=Y(A-B) ------ A Where: X = the number of shares of Preferred Stock to be issued to the Warrantholder. Y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Preferred Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Preferred Stock shall mean with respect to each share of Preferred Stock: (i) if the exercise at or prior to the closing of the initial public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public -2- offering has been declared effective by the SEC, then the fair market value per share shall be the product of (x) the initial "Price to Public" specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (ii) if this Warrant is exercised for Common Stock after, and not at the closing of, the Company's initial public offering, and: (a) if traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices over a twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; or (b) if actively traded over-the-counter, the fair market Value shall be deemed to be the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) over the twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the product of (x) the highest price per share which the Company could obtain from a willing buyer (not a current employee and or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Preferred Stock shall be deemed to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. --------------------- (a) Authorization and Reservation of Shares. During the term of this --------------------------------------- Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. Following the Company's initial public offering, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights to purchase Common Stock as provided for herein. (b) Registration or Listing. This Warrant shall be subject to the ----------------------- requirement that if -3- any shares of Preferred Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the 1933 Act, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. Warrantholder agrees to cooperate in completing any necessary documentation required in any such registration. 5. NO FRACTIONAL SHARES OR SCRIP. ----------------------------- No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDER. ------------------------ This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 7. WARRANTHOLDER REGISTRY. ---------------------- The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. ----------------- The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital ------------------------- reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation whether or not the Company is the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of preferred stock or other securities of the successor corporation resulting from such Merger Event, equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable) shall be applicable to the greatest extent -4- possible. (b) Reclassification of Shares, If the Company at any time shall, by -------------------------- combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time ------------------------------------ shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend --------------- payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's Preferred Stock, then the Exercise Price shall be adjusted, from and after the record date of such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of all shares of the Company's Preferred Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of the Company's Preferred Stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Antidilution Rights. Additional antidilution rights applicable to ------------------- the Preferred Stock purchasable hereunder are as set forth in the Company's Certificate of Incorporation, as amended through the Effective Date, a true and complete copy of which is attached hereto as Exhibit A (the "Charter"). The Company shall promptly provide the Warrantholder with any restatement, amendment, modification or waiver of the Charter. The Company shall provide Warrantholder with prior written notice of any issuance of its stock or other equity security to occur after the Effective Date of this Warrant which triggers any such antidilution rights, which notice shall include (a) the price at which such stock or security is to be sold, (b) the number of shares to be issued, and (c) such other information as necessary for Warrantholder to determine if a dilutive event has occurred. (f) Notice of Certain Events. If: (i) the Company shall declare any ------------------------ dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; (iv) there shall be an initial public offering; or (v) there shall be any voluntary dissolution, -5- liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the Company's reasonable estimate of the effective date thereof. Each such written notice shall set forth, in reasonable detail, (i) the event, (ii) the amount of the adjustment, if any, (iii) the method by which such adjustment, if any, was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to any such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (g) Timely Notice. Failure to timely provide such notice required by ------------- subsection (f) above shall entitle Warrantholder to retain the benefit of the applicable notice period notwithstanding anything to the contrary contained in any insufficient notice received by Warrantholder. The notice period shall begin on the date Warrantholder actually receives a written notice containing all the information specified above. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. -------------------------------------------------------- (a) Reservation of Preferred Stock. The Preferred Stock issuable upon ------------------------------ exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and Bylaws, as amended. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved the issuance and delivery of any certificate in a name other than that of the Warrantholder. (b) Due Authority. The execution and delivery by the Company of this ------------- Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contra- -6- vene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of giving of notice ---------------------- to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act and any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) Issued Securities. All issued and outstanding shares of Common ----------------- Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) 12,000,000 shares of Common Stock, of which 3,444,350 shares are issued and outstanding, (ii) 534,000 shares designated Series A Preferred Stock, of which 534,000 are issued and outstanding, (iii) 534,000 shares designated Series A-l Preferred Stock of which no shares are outstanding, (iv) 2,100,000 shares designated Series B Preferred Stock of which 2,050,000 shares are issued and outstanding; and (v) 2,300,000 shares designated Series C Preferred Stock of which 2,250,000 shares are issued and outstanding. (ii) The Company has reserved (A) 974,750 shares of Common Stock for issuance to employees, consultants and directors of which 13,750 options are outstanding, (B) 450,000 shares for Common Stock Warrants. Exhibit B hereto sets forth the other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) In accordance with the Company's Charter, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock, other than holders of the Company's Series A, Series B and Series C Preferred Stock pursuant to an Amended and Restated Stockholders' Agreement dated March 31, 1997, by and among the Company and the other parties thereto (the "Stockholders' Agreement"). (e) Insurance. The Company has in full force and effect insurance --------- policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. -7- (f) Other Commitments to Register Securities. Except as set forth in ---------------------------------------- the Amended and Restated Registration Rights Agreement dated March 31, 1997, among the Company and the parties named therein, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) Exempt Transaction. Based on the Warrantholder's representations ------------------ in Section 10 hereof, the issuance of the Warrant and the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the applicable state securities laws. (h) Compliance with Rule 144. At the written request of the ------------------------ Warrantholder, who proposes to sell Common Stock issuable upon conversion of the Preferred Stock issued upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. -------------------------------------------------- This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) Investment Purpose. The right to acquire the Warrant or the Preferred ------------------ Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred ------------- Stock issuable upon exercise of this Warrant is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the ------------------------------------- Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding, the foregoing, the restrictions -8- imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience -------------- in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the ----------------------- Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to Section 15(d), of the 1934 Act", or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) Accredited Investor. Warrantholder is an "accredited investor" ------------------- within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect. 11. TRANSFERS. Subject to the terms and conditions contained in Section 10 --------- hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee to not more than three (3) persons who are "accredited investors" provided, however, that any such transferee shall have acquired the rights to purchase at least 20% of the Preferred Stock issuable hereunder. 12. MISCELLANEOUS. ------------- (a) Effective Date. The provisions of this Warrant Agreement shall be -------------- construed and shall be given effect in all respects as if it had been executed and delivered by the Company on -9- the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding --------------- between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and ------------- construed for all purposes under and in accordance with the laws of the State of New Jersey. (d) Counterparts. This Warrant Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Notices. Any notice required or permitted hereunder shall be given ------- in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrant- holder at 6111 North River Road, Rosemont, Illinois 60018, attention: Venture Group, cc: Legal Department, attn: General Counsel, (and/or, if by facsimile, (847) 518-5465 and (847) 518-5088) and (ii) to the Company at 65 Willowbrook Boulevard, Wayne, New Jersey 07470 attention: Patrick C. Barry (and/or if by facsimile, (201) 890-2442) or at such other address as any such party may subsequently designate by written notice to the other party. (f) Remedies. In the event of any default hereunder, the non-defaulting -------- party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. (g) No Impairment of Rights. The Company will not, by amendment of its ----------------------- Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) Survival. The representations, warranties, covenants and conditions -------- of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this ------------ this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or -10- unenforceable provision. (j) Amendments. Any provision of this Warrant Agreement may be amended by ---------- a written instrument signed by the Company and by the holders of the rights to purchase a majority of the shares of Preferred Stock issuable hereunder. (k) Additional Documents. The Company, upon execution of this Warrant -------------------- Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), (f) and (g) of Section 9 above. The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of the Effective Date. Company: AUDIBLE, INC. By: /s/ Patrick C. Barry ------------------------------- Title: CFO ------------------------------ Warrantholder: COMDISCO, INC. By: /s/ James P. Labe ------------------------------- James P. Labe, President Title: Comdisco Ventures Division ------------------------------ -11- EXHIBIT I NOTICE OF EXERCISE To: ____________________________ (1) The undersigned Warrantholder hereby elects to purchase _______ shares of the Series C Preferred Stock of _________________, pursuant to the terms of the Warrant Agreement dated the ______ day of July, 1997 (the "Warrant Agreement") between Audible, Inc. and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Series C Preferred Stock of Audible, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series C Preferred Stock in the name of the undersigned or in such other name as is specified below. _________________________________ (Name) _________________________________ (Address) Warrantholder: COMDISCO, INC. By: _____________________________ Title: __________________________ Date: ___________________________ -12- EXHIBIT II ACKNOWLEDGMENT OF EXERCISE The undersigned ____________________________________, hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ____ shares of the Series C Preferred Stock of Audible, Inc., pursuant to the terms of the Warrant Agreement, and further acknowledges that ______ shares remain subject to purchase under the terms of the Warrant Agreement. Company: Audible, Inc. By:________________________________ Title:_____________________________ Date:______________________________ -13- EXHIBIT III TRANSFER NOTICE (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to _________________________________________________________________ (Please Print) whose address is_________________________________________________ _________________________________________________________________ Dated_______________________________________ Holder's Signature__________________________ Holder's Address____________________________ ____________________________________________ Signature Guaranteed:____________________________________________ NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant agreement. -14- EX-10.8 13 LOAN AND SECURITY AGREEMENT EXHIBIT 10.8 LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT is entered into as of April 6, 1998, by and between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02181, doing business under the name "Silicon Valley East" ("Bank") and AUDIBLE, INC., a Delaware corporation with its chief executive office located at 65 Willowbrook Boulevard, Wayne, New Jersey 07470 ("Borrower"). RECITALS -------- Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT --------- The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION ---------------------------- 1.1 Definitions. As used in this Agreement, the following terms shall ----------- have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a loan advance under the Committed Revolving Line. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Person's managers and members. "Agreement" means this Loan and Security Agreement. "Bank Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding) whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including, without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to seventy five percent (75%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close . "Closing Date" means the date of this Agreement. "Code" means the Massachusetts Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached --------- hereto. "Committed Revolving Line" means a credit extension of up to One Million Dollars ($1,000,000.00). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Credit Extension" means each Advance, Letter of Credit, or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; -2- (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (d) Accounts with respect to which the account debtor does not have its principal place of business in the United States; (e) Accounts with respect to which the account debtor is a federal, state, or local governmental entity or any department, agency, or instrumentality thereof, except for those Accounts of the United States or any department, agency or instrumentality thereof as to which the payee has assigned its rights to payment thereof to Bank and the assignment has been acknowledged, pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. 3727); (f) Accounts with respect to which Borrower is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts etc.); (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower; (i) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (j) Accounts the collection of which Bank reasonably determines to be doubtful. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. -3- "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Letter of Credit" means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.2. "Letter of Credit Reserve" has the meaning set forth in Section 2.1.2. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other present or future agreement entered into between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means the date which is one (1) day prior to one (1) year from the Closing Date. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Payment Date" means the first (1st) calendar day of each month commencing on the first such date after the Closing Date and ending on the Maturity Date. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; -4- (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) Capitalized lease obligations; and (f) Indebtedness secured by Permitted Liens. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank; (c) loans and advances to officers, directors and employees in the ordinary course of business, in the maximum aggregate amount of $100,000.00; and (d) promissory notes made payable to Borrower by officers, directors and employees in exchange for stock in the Borrower. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are maintained on Borrower's Books in accordance with GAAP, provided the -------- same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is -------- confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Leases or subleases and licenses or sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license provided that such leases, subleases, licenses and sublicenses do not prohibit the grant of the security interest granted hereunder; (e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal -------- or replacement Lien shall be limited to the property encumbered by the -5- existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (f) Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons or entities imposed without action of such parties, provided that the payment thereof is not yet required; (g) Liens incurred or deposits made in the ordinary course of Borrower's business in connection with worker's compensation, unemployment insurance, social security and other like laws; (h) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default; (i) Easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not interfering in any material respect with the ordinary conduct of Borrower's business; (j) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (k) Liens that are not prior to Bank's security interest which constitute rights of set-off of a customary nature; (l) Liens in favor of Bank and any of its Affiliates and/or successors and assigns; (m) Any interest or title of a lessor in equipment subject to any capitalized lease; and (n) Any Liens arising from the filing of any financing statements relating to true leases. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Responsible Officer" means each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means with respect to any Person, corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. -6- "Tangible Net Worth" means as of any applicable date, the consolidated total assets of Borrower and its Subsidiaries minus, without ----- duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, and (ii) Total Liabilities. --- "Total Liabilities" means as of any applicable date, as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. 1.2 Accounting and Other Terms. All accounting terms not specifically -------------------------- defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. The terms "including"/ "includes" shall always be read as meaning "including (or includes) without limitation", when used herein or in any other Loan Document. 2. LOAN AND TERMS OF PAYMENT ------------------------- 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in ----------------- lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, - --------- based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account. (c) The Committed Revolving Line shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 and other amounts due under this Agreement (except as otherwise expressly specified herein) shall be immediately due and payable. 2.1.2 Letters of Credit. ----------------- (1) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the account of Borrower in an aggregate outstanding face amount not to exceed (i) the Committed Revolving Line, minus (ii) the then outstanding principal balance of the Advances; provided that the face amount of outstanding Letters of -------- Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit -7- Reserve) shall not in any case exceed One Million Dollars ($1,000,000.00). Each Letter of Credit shall have an expiry date no later than the Maturity Date. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement. (2) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (3) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (4) Upon the issuance of any letter of credit payable in a currency other than United States Dollars, Bank shall create a reserve (the "Letter of Credit Reserve") under the Committed Revolving Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such letter of credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such letter of credit remains outstanding. 2.2 Overadvances. If, at any time or for any reason, the amount of ------------ Advances owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1.2 of this Agreement is greater than the Committed Revolving Line, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. ------------------------------------------ (1) Interest Rate. Except as set forth in Section 2.3(b), any ------------- Advances shall bear interest, on the average daily balance thereof, at a per annum rate equal to one (1.0%) percentage point above the Prime Rate. (2) Default Rate. All Obligations shall bear interest, from and ------------ after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (3) Payments. Interest hereunder shall be due and payable on -------- each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number _____________________ for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. -8- (4) Computation. In the event the Prime Rate is changed from ----------- time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, ------------------ Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment, whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: ---- (1) Facility Fee. A Facility Fee equal to Three Thousand Dollars ------------ ($3,000.00), which fee shall be due on the Closing Date and shall be fully earned and non-refundable; (2) Financial Examination and Appraisal Fees. Bank's customary fees ---------------------------------------- and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents. The Bank shall keep the results of any such appraisal or examination confidential, in accordance with the provisions of Section 12.9 hereof; (3) Bank Expenses. Upon demand from Bank, including, without ------------- limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due; and (4) Letter of Credit Fee. An annual Letter of Credit Fee equal to two -------------------- (2%) percent of the face amount of any Letter of Credit issued by the Bank for the account of the Borrower (the "L/C Fee") pursuant to Section 2.1.2, which fee shall be payable at the issuance of any Letter of Credit by the Bank. Notwithstanding the foregoing, provided that the Borrower maintains during the term of this Agreement demand deposit accounts with the Bank in an average quarterly amount equal to or greater than Two Hundred Thousand ($200,000.00) Dollars (the "L/C Minimum Balance"), then the Letter of Credit Fee required pursuant to this Section 2.5(d) shall be reduced to one and one quarter (1.25%) percent of the face amount of any Letter of Credit issued by the Bank (the "Reduced L/C Fee"). In the event the Bank has issued a Letter of Credit on behalf of the Borrower under this Agreement and the Borrower (i) has paid the Reduced L/C Fee, and (ii) has failed to maintain at any time thereafter (while the Letter of Credit is issued and outstanding) the L/C Minimum Balance, then the Borrower shall pay to the Bank, on demand, an amount equal to the difference between the L/C Fee and the Reduced L/C Fee. 2.6 Additional Costs. In case any law, regulation, treaty or official ---------------- directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the -9- compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (1) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (2) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (3) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 Term. Except as otherwise set forth herein, this Agreement shall ---- become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS ------------------- 3.1 Conditions Precedent to Initial Credit Extension. The obligation of ------------------------------------------------ Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (1) this Agreement; (2) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (3) a negative pledge agreement covering intellectual property; (4) a warrant to purchase stock, registration rights agreement, and antidilution agreement (5) an opinion of Borrower's counsel; (6) financing statements (Forms UCC-1); (7) insurance certificate; -10- (8) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof (with the exception of the Letter of Credit Fee described in Section 2.5(d), which shall be paid by the Borrower upon the issuance of a Letter of Credit by the Bank); (9) Certificate of Foreign Qualification (if applicable); and (10) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of --------------------------------------------- Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (1) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (2) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST ----------------------------- 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a -------------------------- continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt payment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 4.2 Delivery of Additional Documentation Required. Borrower shall --------------------------------------------- from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, ---------------- or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral, provided that Bank will use reasonable efforts so as not to interfere with Borrower's business operations. 5. REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary ---------------------------------- is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where a failure to be so qualified could not have a Material Adverse Effect. -11- 5.2 Due Authorization; No Conflict. The execution, delivery, and ------------------------------ performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles/Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the --------------------- Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide --------------------------- existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is in all material respects of ---------------------- good and marketable quality, free from all material defects. 5.6 Name; Location of Chief Executive Office. Except as disclosed in the ---------------------------------------- Schedule, Borrower has not done business and will not without at least thirty (30) days prior written notice to Bank do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 Litigation. Except as set forth in the Schedule, there are no actions ---------- or proceedings pending, or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.8 No Material Adverse Change in Financial Statements. All consolidated -------------------------------------------------- financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.9 Solvency. Borrower is able to pay its debts (including trade debts) -------- as they mature. 5.10 Regulatory Compliance. Borrower and each Subsidiary has met the --------------------- minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). To the best of Borrower's knowledge, Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. To the best of Borrower's knowledge, Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. -12- 5.11 Environmental Condition. None of Borrower's or any Subsidiary's ----------------------- properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release, or other disposition of hazardous waste or hazardous substances into the environment. 5.12 Taxes. Borrower and each Subsidiary has filed or caused to be filed ----- all tax returns required to be filed on a timely basis, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.13 Subsidiaries. Borrower does not own any stock, partnership interest ------------ or other equity securities of any Person, except for Permitted Investments. 5.14 Government Consents. Borrower and each Subsidiary has obtained all ------------------- consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.15 Full Disclosure. No representation, warranty or other statement made --------------- by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading in any material respect. 6. AFFIRMATIVE COVENANTS --------------------- Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its ------------- Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each --------------------- Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver ------------------------------------------- to Bank: (a) as soon as available, but in any event within twenty five (25) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by an officer of Borrower (without any personal liability therefore, other than liability based on fraud or criminal misconduct) reasonably acceptable to Bank; (b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower -13- prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within twenty (20) days after the last day of each month (or portion thereof) during which there are any Advances made or Obligations outstanding under the Committed Revolving Line, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable. - --------- Within twenty five (25) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit ------- D hereto. - - Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted (i) no more often than every twelve (12) months unless an Event of Default has occurred and is continuing, and (ii) only in the event the Borrower has requested Advances under the Committed Revolving Line. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and ------------------ marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, ----- due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law (which shall include any extensions in accordance with applicable law, provided no penalties would be incurred, the result of which would have a Material Adverse Effect, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if (i) the amount or validity of such payment is contested in good faith by appropriate proceedings, (ii) Borrower or Subsidiary, as the case may be, has established proper reserves (to the extent required by GAAP) and (iii) no lien other than a Permitted Lien results. 6.6 Insurance. --------- (1) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. -14- (2) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal -------------------- depository and operating accounts with Bank. 6.8 Tangible Net Worth. Borrower shall maintain, as of the last day of ------------------ each calendar month commencing with the first calendar month ending after the Closing Date, a Tangible Net Worth of not less than One Million Five Hundred Thousand Dollars ($1,500,000.00). 6.9 Further Assurances. At any time and from time to time Borrower shall ------------------ execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS ------------------ Borrower covenants and agrees that, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of ------------ (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers: (i) of inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (iii) that constitute payment of normal and usual operating expenses in the ordinary course of business; or (iv) of worn-out or obsolete Equipment. 7.2 Changes in Business, Ownership, or Management, Business Locations. ----------------------------------------------------------------- Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership or management. Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office or add any new offices or business locations. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its ----------------------- Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 7.4 Indebtedness. Create, incur, assume or be or remain liable with ------------ respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with ------------ respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. -15- 7.6 Distributions. Pay any dividends or make any other distribution or ------------- payment on account of or in redemption, retirement or purchase of any capital stock other than: (i) repurchase of stock held by an employee, officer or director upon the resignation or termination of such Person; and (ii) redemption of preferred stock of Borrower pursuant to mandatory redemption obligations set forth in the Certificate of Incorporation of Borrower as of the date hereof or any substantially similar obligations with respect to future series of preferred stock. 7.7 Investments. Directly or indirectly acquire or own, or make any ----------- Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or ---------------------------- permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated ----------------- Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or --------- similar party unless Bank has received a pledge of any warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in the Schedule and in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" or a company controlled ---------- by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA; permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral; or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT ----------------- Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the --------------- Obligations. 8.2 Covenant Default. ---------------- (1) If Borrower fails to perform any obligation under Sections 6.3, 6.7, or 6.8, or violates any of the covenants contained in Article 7 of this Agreement; or (2) If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the -16- Borrower receives notice thereof or an officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 Material Adverse Change. If there (i) occurs a material adverse change ----------------------- in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, ---------- seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment entered by a court of competent jurisdiction or other claim in excess of $50,000 (exclusive of amounts covered by insurance) becomes a lien or encumbrance upon any material portion of Borrower's assets (except for Permitted Lines), or if a notice of lien, levy, or assessment for an amount in excess of $50,000 (exclusive of amounts covered by insurance) is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency ---------- Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within 30 days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default in any agreement to which ---------------- Borrower is a party with a third party or parties resulting in the acceleration of the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7 Subordinated Debt. If Borrower makes any payment on account of ----------------- Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an --------- amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material ------------------ misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or writing delivered to Bank by Borrower or any Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES -------------------------- -17- 9.1 Rights and Remedies. Upon the occurrence and during the continuance ------------------- of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (1) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (2) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (3) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (4) In addition to all rights and remedies set forth in this Section 9.1 (including, without limitation, subparagraph (c) hereinabove), the Bank may, in its sole and absolute discretion, upon or after the occurrence of an Event of Default and during the continuance thereof, make Advances hereunder in the aggregate amounts of any and all Letters of Credit, the cash proceeds of which shall secure any issued and outstanding Letters of Credit, which Advance(s), if made, shall constitute additional Obligations of the Borrower to the Bank under this Agreement and may be made by the Bank without prior notice or request by the Borrower and notwithstanding any lack of availability under the Borrowing Base or borrowing constraints set forth in Sections 2.1.1 or 2.1.2 of this Agreement. The Bank may exercise its rights hereunder with respect to such Advances upon the occurrence of an Event of Default notwithstanding that any Letters of Credit may be undrawn. (5) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (6) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (7) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (8) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the -18- Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (9) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order it deems appropriate; (10) Bank may credit bid and purchase at any public sale, or at any private sale as permitted by law; and (11) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the ----------------- continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; and (f) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law, provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence and during the continuance ------------------- of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any ------------- required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Bank's Liability for Collateral. So long as Bank complies with ------------------------------- reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; -19- or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, ------------------- the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, --------------- notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES ------- Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower Audible, Inc. 65 Willowbrook Boulevard Wayne, New Jersey 07470 Attn: Mr. Patrick Barry, Chief Financial Officer FAX:(973) 890-0178 with a copy to: Piper & Marbury, LLP 1200 Nineteenth Street, N.W. Washington, D.C. 20036 Attn: Mitchell S. Marder, Esquire FAX: (202) 223-2085 If to Bank Silicon Valley Bank 40 William Street Wellesley, Massachusetts 02181 Attn: David E. Rodriguez, Assistant Vice President FAX: (781) 431-9906 with a copy to: Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Attn: David A. Ephraim, Esquire FAX: (617) 723-6831 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. -20- 11. CHOICE OF LAW AND VENUE; JURY WAIVER - ----------------------------------------- The laws of the Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS ------------------ 12.1 Successors and Assigns. This Agreement shall bind and inure to the ---------------------- benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder -------- ------- may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall, indemnify, defend, protect and hold --------------- harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all --------------- obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be -------------------------- severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be ---------------------------------- amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. -21- 12.6 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this -------- Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 Countersignature. This Agreement shall become effective only when it ---------------- shall have been executed by Borrower and Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of Bank in California). 12.9 Confidentiality. In handling any confidential information Bank shall --------------- exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, and (v) as Bank may deem appropriate in connection with the exercise of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. AUDIBLE, INC. By: /s/ Patrick C. Barry Title: Vice President CFO Patrick C. Barry By:___________________________________ Title:________________________________ -22- SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST By: /s/ Dave Rodriguez Name: Dave Rodriguez Title: Assistant Vice President SILICON VALLEY BANK By: /s/ Amy B. Young Name: Amy B. Young Title: Vice President (Signed in Santa Clara County, California) -23- EXHIBIT A --------- The Collateral shall consist of all right, title and interest of Borrower in and to the following: (1) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (2) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (3) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, claims, literature, reports, catalogs, income tax refunds, payments of insurance and rights to payment of any kind; (4) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing; (5) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; and (6) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. Notwithstanding the foregoing, the Collateral shall not be deemed to include any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; any patents, trademarks, servicemarks and applications therefor; any trade secret rights, including any rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; or any claims for damages by way of any past, present and future infringement of any of the foregoing. -24- EXHIBIT B --------- LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________________ FAX#: (408) ________________________ TIME: ______________________________ FROM: AUDIBLE, INC. FROM:___________________________________________________________________________ AUTHORIZED SIGNER'S NAME ________________________________________________________________________________ AUTHORIZED SIGNATURE PHONE:__________________________________________________________________________ FROM ACCOUNT #_____________________________ TO ACCOUNT#_________________________ - -------------------------------------------------------------------------------- REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $ PRINCIPAL PAYMENT (ONLY) $ $ INTEREST PAYMENT (ONLY) $ PRINCIPAL AND INTEREST (PAYMENT) $ OTHER INSTRUCTIONS: - -------------------------------------------------------------------------------- All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Advance Request; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. - -------------------------------------------------------------------------------- BANK USE ONLY: TELEPHONE REQUEST: ------------------ The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. _________________________ Authorized Requester ___________________________________ Authorized Signature (Bank) Phone #____________________________ - -------------------------------------------------------------------------------- -25- -26- EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Audible, Inc. Bank: Silicon Valley Bank Commitment Amount: $1,000,000.00 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $___________ 2. Additions (please explain on reverse) $___________ 3. TOTAL ACCOUNTS RECEIVABLE $___________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $___________ 5. Balance of 50% over 90 day accounts $___________ 6. Concentration Limits $___________ 7. Foreign Accounts $___________ 8. Governmental Accounts $___________ 9. Contra Accounts $___________ 10. Promotion or Demo Accounts $___________ 11. Intercompany/Employee Accounts $___________ 12. Other (please explain on reverse) $___________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $___________ 14. Eligible Accounts (#3 minus #13) $___________ 15. LOAN VALUE OF ACCOUNTS (75% of #14) $___________ BALANCES 16. Maximum Loan Amount $1,000,000.00 17. Total Funds Available [Lesser of #16 or #15] $___________ 18. Present balance owing on Line of Credit $___________ 19. Face amount of issued and outstanding Letters of Credit $___________ 20. RESERVE POSITION (#17 minus #18 and #19) $___________ The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: [STAMP APPEARS HERE] AUDIBLE, INC. By: _______________________ Authorized Signer -27- -28- EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: AUDIBLE, INC. The undersigned authorized officer of AUDIBLE, INC., hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that no borrowings may be requested by the Borrower at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Monthly financial statements Monthly within 25 days Yes No Annual (CPA Audited) FYE within 120 days Yes No 10Q and 10K Within 5 days after filing with the SEC Yes No BB and A/R Agings Monthly within 20 days* Yes No
*when borrowing under Committed Revolving Line
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Tangible Net Worth $1,500,000.00 $_______ Yes No
COMMENTS REGARDING EXCEPTIONS: [STAMP APPEARS HERE] Sincerely, _______________________ Date:_______________ Signature ________________________ Title -29- -30- EX-10.9 14 WARRANT TO PURCHASE STOCK EXHIBIT 10.9 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Audible Inc., a Delaware corporation Number of Shares: 5,000 shares Class of Stock: Series D Convertible Preferred Stock, $0.01 par value (the "Series D Preferred Stock") Initial Exercise Price: $4.00 per share Issue Date: April 6, 1998 Expiration Date: April 5, 2003 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the Series D Preferred Stock (the "Shares") of Audible Inc. (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. -------- 1.1 Method of Exercise. Holder may exercise this Warrant by ------------------ delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is ---------- exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as ---------------- specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 Intentionally Omitted --------------------- 1.4 Fair Market Value. If the Shares are traded in a public market, ----------------- the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder --------------------------------------- exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company. ----------------------------------------------------------- 1.7.1. "Acquisition". For the purpose of this Warrant, ------------- "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. Assumption of Warrant. Upon the closing of any --------------------- Acquisition the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3 Purchase Right. Notwithstanding the foregoing, at the -------------- election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. ------------------------- 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a ---------------------------- dividend on its Common Stock (or the Shares if the Shares are securities other than Common Stock) payable in Common Stock, or other securities, subdivides the outstanding Common Stock into a greater amount of Common Stock, or, if the Shares are securities other than Common Stock, subdivides the Shares in a transaction that increases the amount of Common Stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any ------------------------------------------ reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to Common Stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's Stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are --------------------------------- combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Dilutive Issuances. In the event of the issuance ---------------------------------- (a "Dilutive Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, then the number of shares of Common Stock issuable upon conversion of the Shares shall be adjusted in accordance with those provisions (the "Provisions") of the Company's Certificate of Incorporation which apply to Dilutive Issuances. The Company agrees that the Provisions, as in effect on the Issue Date, shall be deemed to remain in full force and effect as to the Holder during the term of the Warrant notwithstanding any subsequent amendment, waiver or termination thereof by the Company's shareholders, except if and to the extent that the Holder agrees in writing to any such subsequent amendment, waiver or termination. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Dilutive Issuance. 2.5 No Impairment. The Company shall not, by amendment of its ------------- Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. 2.6 Fractional Shares. No fractional Shares shall be issuable upon ----------------- exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.7 Certificate as to Adjustments. Upon each adjustment of the ----------------------------- Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. -------------------------------------------- 3.1 Representations and Warranties. The Company hereby represents ------------------------------ and warrants to the Holder as follows: (a) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (b) The authorized capital stock of the Company consists of 19,843,000 shares, consisting of 13,000,000 shares of Common Stock, 534,000 shares of Series A Convertible Preferred Stock, 534,000 shares of Series A-1 Convertible Preferred Stock, 2,100,000 shares of Series B Convertible Preferred -3- Stock, 2,300,000 shares of Series C Convertible Preferred Stock, and 1,375,000 shares of Series D Convertible Preferred Stock. Schedule 3.1(b) sets forth all --------------- of the outstanding shares of Common Stock and outstanding options, warrants, convertible securities, convertible debentures, and rights to acquire, subscribe for, and/or purchase any Common Stock and/or other capital stock of the Company or any securities or debentures convertible into or exchangeable for Common Stock and/or other capital stock of the Company. (c) The Company has reserved for issuance pursuant to this Warrant not less than five thousand (5,000) shares of the Series D Preferred Stock and five thousand (5,000) shares of Common Stock for issuance upon the conversion of the Shares issued pursuant to this Warrant, and the Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued shares of Series D Preferred Stock and shares of Common Stock of the Company such number of shares of Series D Preferred Stock and shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. 3.2 Notice of Certain Events. If the Company proposes at any time ------------------------ (a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of Common Stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Common Stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of Common Stock will be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant ------------------ and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company or if there are no such requirements (or if the subject loan(s) no longer are outstanding), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as amended. The ----------------------------------------------------- Common Stock issuable upon conversion of the Shares shall be deemed "Series D Registrable Securities" or otherwise entitled to registration rights in accordance with the terms of that certain Amended and Restated Registration Rights Agreement dated February 26, 1998, between the Company and the investors named therein (the "Agreement"). By acceptance of the Warrant and execution of that certain Addendum No. 1 to the Amended and Restated Registration Rights Agreement dated as of the date hereof, Holder shall be deemed to be a party to the Agreement, unless Holder otherwise elects not to become or to cease being a party thereto. ARTICLE 4. MISCELLANEOUS. ------------- -4- 4.1 Term; Notice of Expiration. This Warrant is exercisable, in -------------------------- whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than ---------- 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities ------- issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and ------------------------------------------- the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder s notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.3 ------------------ Holder may transfer all or part of this Warrant and/or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) at any time to Silicon Valley Bancshares or The Silicon Valley Bank Foundation, or, to any other transferee that is not a competitor of the Company by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). 4.5 Notices. All notices and other communications from the Company ------- to the Holder, or vice versa, shall be deemed delivered and effective when given personally or sent by electronic facsimile transmission, express overnight courier service, or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, ------ discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties -------------- concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. -5- 4.8 Governing Law. This Warrant shall be governed by and construed ------------- in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to its principles regarding conflicts of law. ATTEST: "COMPANY" AUDIBLE INC. By: /s/ Anthony Nash By: /s/ Patrick C. Barry ---------------------------------- ---------------------- Name: Anthony Nash Name: Patrick C. Barry Title: Controller Title: VP, CFO -6- APPENDIX 1 ---------- NOTICE OF EXERCISE ------------------ 1. The undersigned hereby elects to purchase _____________ shares of the common stock of Audible Inc. pursuant to Section 1.1 of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares in the manner specified in Section 1.2 of the attached Warrant. This conversion is exercised with respect to _____________________ of shares of the common stock of Audible Inc. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: ___________________________________________ (Name) ___________________________________________ ___________________________________________ (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. _______________________________________ (Signature) ____________________ (Date) APPENDIX 2 ---------- Notice that Warrant Is About to Expire -------------------------------------- ______________, ___ (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear : This is to advise you that the Warrant issued to you described below will expire on _________________________, 19___. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. ______________________________________ (Name of Issuer) By: -------------------------------------- Its: -------------------------------------- Schedule 3.1(b) - Capitalization --------------- Outstanding Capital Stock: Outstanding options, warrants, convertible securities, convertible debentures, and rights to acquire, subscribe for, and/or purchase any Common Stock and/or other capital stock of the Company or any securities or debentures convertible into or exchangeable for Common Stock and/or other capital stock of the Company: EX-10.10 15 SECURITY AND LOAN AGREEMENT EXHIBIT 10.10 IMPERIAL BANK MEMBER FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE) THIS SECURITY AND LOAN AGREEMENT (Accounts Receivable) is entered into as of November 20, 1996 (this "Agreement") between THE AUDIBLE WORDS CORPORATION, a Delaware corporation (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. COMMITMENT. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance of $500,000. Loans advanced pursuant to the foregoing commitment shall be referred to as "Loans." If, at any time or for any reason, the outstanding principal amount of the Loans is greater than $500,000, Borrower shall immediately pay to Bank, in cash, the amount of such excess. Any commitment of Bank, pursuant to the terms of this Agreement, to make advances shall expire on the Final Payment Date, subject to Bank's right to renew said commitment in its sole and absolute discretion. Any such renewal of the commitment shall not be binding upon Bank unless it is in writing and signed by an officer of the Bank. Provided that no Event of Default has occurred and is continuing, all or any portion of the Loans advanced by Bank which are repaid by Borrower shall be available for reborrowing in accordance with the terms hereof. 2. LOANS. The amount of each Loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called the "Loan Account") and Bank shall credit the Loan Account with all loan repayments in respect thereof made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on December 31, 1997 (the "Final Payment Date") and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of three-quarters of one percent (.75%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the Loan Account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. LOAN REQUESTS. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in SECTION 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "ACCOUNTS" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. "COLLATERAL" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest hereunder (including, without limitation, the Accounts), or pursuant to the terms of that certain General Security Agreement (Tangible and Intangible Personal Property) dated as of the date hereof, made by Borrower in favor of Bank (the "General Security Agreement") or otherwise. "FINAL PAYMENT DATE" has the meaning set forth in SECTION 2. "LOAN DOCUMENTS" means this Agreement. the Warrant to Purchase Stock, the General Security Agreement, the Agreement to Provide Insurance (Real or Personal Property), the Trademark Security Agreement, the Copyright Security Agreement, each as executed by Borrower in favor of Bank, together with all other documents entered into or delivered pursuant to any of the foregoing. "PERMITTED LIENS" means the following: (1) liens and security interests existing as of this date and disclosed in SCHEDULE 1 attached hereto; (2) liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; (3) liens and security interests (i) upon or in any equipment acquired or held by Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment and in an amount not greater than the purchase price thereof or (ii) existing on such equipment at the time of its acquisition, provided that the lien and security interest is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (4) liens consisting of leases or subleases and licenses and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and any interest or title of a lessor or licensor under any lease or license, as applicable; (5) liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons or entities imposed without action of such parties, provided that the payment thereof is not yet required; (6) liens incurred or deposits made in the ordinary course of Borrower's business in connection with worker's compensation, unemployment insurance, social security and other like laws; (7) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default; -2- (8) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not interfering in any material respect with the ordinary conduct of Borrower's business; (9) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (10) liens that are not prior to Bank's security interest which constitute rights of set-off of a customary nature; (11) liens in favor of Bank and any of its affiliates and/or successors and assigns; (12) any interest or title of a lessor in equipment subject to any capitalized lease; and (13) any liens arising from the filing of any financing statements relating to true leases. "SUBORDINATED DEBT" means indebtedness of Borrower the payment of which is fully subordinated in time and right of payment to the Loans and has been approved in writing by Bank. 5. ASSIGNMENT OF ACCOUNTS. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor, and hereby grants to Bank a continuing security interest in all moneys collected as contemplated by SECTION 6 hereof as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as a Borrower is indebted to Bank or Bank is committed to extend credit to Borrower and there shall exist and be continuing an Event of Default, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, Borrower shall be entitled to use the proceeds of such Accounts in the ordinary course of its business. 6. COLLECTION OF ACCOUNTS. Until Bank exercises its rights to collect the Accounts pursuant to SECTION 15, Borrower will collect with diligence all Borrower's Accounts. Any collection of Accounts by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank. If an Event of Default has occurred, Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts shall be set forth on an itemized schedule, showing the name of -3- the account debtor, the amount of each payment and such other information as Bank may request. 7. RETURNS AND ADJUSTMENTS. Until Bank exercises its rights to collect the Accounts pursuant to SECTION 15, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving repossessions, and material loss or damage of or to merchandise represented by the Accounts. 8. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Bank: (i) That Borrower is duly organized and existing in the State of Delaware and the execution, delivery and performance of each of the Loan Documents are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is bound or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein and to Permitted Liens; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts from time to time, except as permitted in the definition thereof; (v) Any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct; (vi) There is no litigation or other proceeding pending or threatened against or affecting Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority; (vii) The consolidated and consolidating balance sheets of Borrower dated as of September 30, 1996, and the related consolidated and consolidating profit and loss statements for the fiscal year then ended, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with Borrower's request for credit are true and correct, and said balance sheet and profit and loss statement accurately present the financial condition of Borrower as of the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles as applied in the United States of America on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted; (viii) Borrower has no any liability for any delinquent state, local or federal taxes, and, if any such entity has contracted with any government agency, none has any liability for renegotiation of profits; and (ix) Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights, patents and license rights of others. 9. NEGATIVE COVENANTS. Borrower agrees that so long as it is indebted to Bank, neither Borrower, nor any of its subsidiaries will, without prior written consent of Bank: -4- A. Make any substantial change in the character of its business. B. Create, incur, assume or permit to exist any indebtedness for borrowed monies other than loans from Bank except obligations now existing as shown in the financial statement dated September 30, 1996, excluding those being refinanced by Bank, Subordinated Debt, the indebtedness referred to in clause (3)(i) of the definition of Permitted Liens, sale and leaseback transactions to the extent that from and after November 1, 1996 the proceeds thereof shall not exceed $500,000 and bona fide equipment or software leases; or sell or transfer, either with or without recourse, any accounts or notes receivable or any monies due or to become due. C. Create, incur, assume or permit to exist any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by it, other than Permitted Liens and liens in Bank's favor. D. Sell, dispose of or grant a security interest in any of the Collateral other than to Bank (other than the disposing of such Collateral in the ordinary course of Borrower's business or other assets which are obsolete or otherwise considered surplus), or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. E. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted (provided that such loans or advances made in the ordinary course of business are not made to any person or entity which is controlled by or under common control with Borrower) or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. F. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or except in the ordinary and normal course of its business, sell (including without limitation the selling of any property or other asset accompanied by the leasing back of the same) any assets including any fixed assets, any property, or other assets necessary for the continuance of its business as now conducted. G. Declare or pay any dividend or make any other distribution on any of its capital stock now outstanding or hereafter issued or purchase, redeem or retire any of such stock. 10. AFFIRMATIVE COVENANTS. Borrower affirmatively covenants that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, it will: A. Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; B. Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon; -5- C. Permit representatives of Bank to inspect the Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time, provided that Bank shall use its best efforts to not interfere with the conduct of Borrower's business, and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; D. Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; E. Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the. checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; F. Notify Bank of each location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; G. Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require (to the extent customarily maintained by businesses similar to Borrower) and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any uneamed or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; H. In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under SECTION 1 hereof, as applicable, Borrower shall immediately pay to Bank for credit to such Loan Account the amount of such excess; I. Maintain and preserve all rights, franchises and other authority adequate and necessary for the conduct of its business and maintain and preserve its existence in the State of Delaware and any other state(s) in which Borrower conducts its business; J. Maintain public liability, property damage and workers compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to Bank, and certificates naming Bank as loss payee; K. Pay and discharge, before the same becomes delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and any of its other liabilities at any time existing, except to the extent and so long as: (a) the same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse affect upon its financial condition or the loss of any right of redemption from any -6- sale thereunder; and (b) it shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto; L. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times; provided that Bank shall use its best efforts to not interfere with the conduct of Borrower's business. M. Upon Bank's request, and not less frequently than once per calendar quarter, deliver to Bank and Bank's designated counsel executed originals of Patent Security Agreement in the form of EXHIBIT A attached hereto and incorporated herein by this reference, Copyright Security Agreement in the form of EXHIBIT B attached hereto and incorporated herein by this reference and Trademark Security Agreement in the form of Exhibit C attached hereto and incorporated herein by this reference, each with appropriate insertions and schedules sufficient for perfecting Bank's security interest in all patents, patent licenses, trademarks, trademark licenses, copyrights and copyright licenses to which Borrower then has any right, title or interest; and N. Maintain its properties, equipment and facilities in good order and repair. 11. FINANCIAL COVENANTS AND INFORMATION. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles as generally used in the United States of America applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a monthly basis, except as shall be expressly stated to the contrary. Borrower affirmatively covenants that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, it will, on a consolidated basis: A. Beginning with the period ending June 30, 1997, maintain a minimum tangible net worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities, less subordinated debt) of not less than $500,000. B. As soon as it is available, but not later than 20 days after and as of the end of each month, deliver to Bank a financial statement consisting of a balance sheet and profit and loss statement in form satisfactory to Bank, and a Compliance Certificate in the form of EXHIBIT D attached hereto and incorporated herein by this reference, certified by an officer of Borrower. C. As soon as it is available, but not later than 90 days after the end of Borrower's fiscal year, deliver to Bank a report of audit of Borrower's consolidated financial statements together with changes in financial position certified without negative qualification by an independent certified public accountant selected by Borrower but acceptable to Bank. D. Upon the reasonable request of Bank, deliver to Bank current budgets, sales projections, operating plans and other financial exhibits and information in form and substance satisfactory to Bank. E. Upon any officer becoming aware, deliver immediately to Bank written notice of any pending or threatened litigation claiming, or reasonably likely to result in, damages against Borrower -7- in an amount in excess of $50,000. 12. LOAN FEE. In addition to any other amounts due, or to become due, in lieu of a loan fee, Borrower agrees to deliver to Bank (when available) four (4) Audible Words players and docking units. 13. BANKING RELATIONSHIP. Borrower will maintain its primary banking and investment accounts with Bank. 14. DEFAULT AND REMEDIES. The occurrence of any one or more of the following shall constitute an "Event of Default": (i) Default be made in the payment of any obligation by Borrower under any Loan Document; (ii) Subject to clause (i) above, breach be made in any warranty, statement, promise, term or condition, contained herein or in any other Loan Document and the same shall not have been cured to the satisfaction of Bank within 15 days after Borrower shall have become aware thereof, whether by written notice from Bank, or otherwise, (except that no cure period shall exist for breaches in respect of Borrower's obligations under SECTION 9, SUBSECTIONS 10.A, C, D, G, H, I and J, SUBSECTIONS 11.A, B and C of this Agreement, and SECTIONS 1 and 2 of the General Security Agreement; (iii) Any statement, warranty or representation made by Borrower at any time proves false; (iv) Borrower defaults in the repayment of any principal of or the payment of any interest on any indebtedness exceeding in the aggregate principal amount $10,000 or breaches or violates any term or provision of any promissory note, loan agreement, mortgage, indenture or other evidence of such indebtedness pursuant to which amounts outstanding in the aggregate exceed $10,000 if the effect of such breach is to permit the acceleration of such indebtedness, whether or not waived by the note holder or obligee, and such failure shall not have been cured to Bank's satisfaction within fifteen (15) calendar days after Borrower shall become aware thereof, whether by written notice from Bank or otherwise, or there has in fact been an acceleration of such indebtedness; (v) Borrower becomes insolvent or make an assignment for the benefit of creditors; (vi) Any proceeding be commenced by Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute or, any such a proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) days (provided that no Loans will be made prior to the dismissal of such proceeding); (vii) Any money judgment, writ of attachment, gamishment, execution or other legal process be entered against Borrower or issued against any material property of Borrower which is not fully covered by insurance (subject to reasonable deductibles) and remains unvacated, unbonded, unstayed or unpaid or undischarged for more than fifteen (15) days (whether or not consecutive) or in any event later than five (5) days prior to the date of any proposed sale thereunder, or if any assessment for taxes against Borrower other than real property, is made by the Federal or State government or any department thereof; or (viii) Any material adverse change in Borrower's financial condition, prospects or operations which materially impairs the prospect of Borrower's payment or performance of its obligations under the Loan Documents. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in SECTION 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Banic which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner -8- as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at its option. cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expanded therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 15. COLLECTION OF ACCOUNTS BY BANK. After and during the continuance of an Event of Default Bank may, without prior notice to Borrower, collect the Accounts and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 16. RECORDS RETENTION. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 17. NO ORIGINAL ISSUE DISCOUNT. Borrower and Bank hereby acknowledge and agree that the Warrant to Purchase Stock (the "Warrant") transferred to Bank in connection herewith is part of an investment unit within the meaning of Section 1273(c)(2) of the Internal Revenue Code which includes the Loans. Borrower and Bank further agree as between Borrower and Bank, that the fair market value of the Warrant is equal to [US$500] and that, pursuant to Treas. Reg. (S) 1.1273- 2(h), [US$500] of the issue price of the investment unit will be allocable to the Warrant and the balance shall be allocable to the Loans. Borrower and Bank agree to prepare their federal income tax returns in a manner consistent with the foregoing agreement and, pursuant to Treas. Reg. (S) 1.1273. the original issue discount on the Loans shall be considered to be zero. 18. ADDITIONAL PROVISIONS. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. 19. MISCELLANEOUS PROVISIONS. A. No failure or delay on the part of Bank, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof. B. All rights and remedies existing under this Agreement or any other Loan -9- Document are cumulative to, and not exclusive of, any rights or remedies otherwise available. C. All headings and captions in this Agreement and any related documents are for convenience only and shall not have any substantive effect. D. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. BANK: BORROWER: IMPERIAL BANK THE AUDIBLE WORDS CORPORATION, a Delaware corporation By: /s/ Sam Bhaumik By: /s/ Patrick C. Barry ------------------------- --------------------------- Sam Bhaumik Patrick C. Barry Senior Vice President Chief Financial Officer LIST OF EXHIBITS - ------------------ SCHEDULE 1 - List of Liens and Security Interests EXHIBIT A - Patent Security Agreement EXHIBIT B - Copyright Security Agreement EXHIBIT C - Trademark Security Agreement EXHIBIT D - Compliance Certificate -10- EX-10.11 16 WARRANT AGREEMENT EXHIBIT 10.11 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTTHIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: THE AUDIBLE WORDS CORPORATION, a Delaware corporation Number of Shares: 12,500 Class of Stock: Series B Preferred Initial Exercise Price: $2.00 per share Issue Date: November 20, 1996 Expiration Date: November 20, 2001 (subject to Article 4.1) THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and for other good and valuable consideration, IMPERIAL BANCORP ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of THE AUDIBLE WORDS CORPORATION, a Delaware corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1 EXERCISE 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering this Warrant and a duly executed Notice of Exercise in substantially the form attached hereto as APPENDIX 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.5. 1.3 INCREASE IN EXERCISE PRICE. In the event that the Company receives cash proceeds equal to or exceeding $1,000,000 from the issuance and sale of its Convertible Preferred Stock in one or more transactions on or before March 31, 1997, at an average per share price greater than $2.00 per share (on a common stock equivalent basis) and the President or Chief Financial Officer of the Company certifies the same to Holder in writing, then the Initial Exercise Price shall automatically be reset to equal the average exercise price per share applicable to such Convertible Preferred Stock. 1.4 NO FRACTIONAL SHARES. No fractional shares shall be issued upon exercise or conversion of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to the fair market value of a Share (as determined pursuant to Section 1.5) multiplied by such fraction. 1.5 FAIR MARKET VALUE. If the Shares are traded regularly in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.6 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.7 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.8 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY. 1.8.1 "ACQUISITION." For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.8.2 ASSUMPTION OF WARRANT. If upon the closing of any Acquisition the -2- successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. The Company shall use reasonable efforts to cause the surviving corporation to assume the obligations of this Warrant. 1.8.3 NONASSUMPTION. If upon the closing of any Acquisition the successor entity does not assume the obligations of his Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. 1.8.4 PURCHASE RIGHT. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2 ADJUSTMENTS TO THE SHARES 2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for -3- adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time, in the manner set forth on EXHIBIT A attached hereto, in the event of Diluting Issuances (as defined in Exhibit A). 2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. 2.6 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF THE COMPANY 3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Holder as follows: (A) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other -4- securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 INFORMATION RIGHTS. So long as Holder holds this Warrant and/or any of the Shares, upon the request of Holder, the Company shall deliver to Holder (a) promptly after mailing, copies of all communiques to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth in the Registration Rights Agreement dated as of July 25, 1996, as amended by that certain Amendment to Registration Rights Agreement dated as of November 19, 1996, copies of which are attached hereto as EXHIBIT B (collectively, the "Registration Rights Agreement"). ARTICLE 4 MISCELLANEOUS 4.1 TERM: NOTICE OF EXPIRATION. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached hereto as APPENDIX 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 LEGENDS. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with such legends as may be required by the Registration Rights Agreement and a legend in substantially the following form: -5- THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c) of the Securities Act. Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) to not more than three persons who are "Accredited Investors" as such term is defined in Rule 501 of the Securities Act, provided, however, that any such transferee shall have acquired the rights to purchase at least 30% of the Shares issuable hereunder. Holder shall give the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable). Unless the Company is filing financial information with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 NOTICES. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time. 4.6 WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 ATTORNEYS' FEES. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to -6- collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to its principles regarding conflicts of law. COMPANY THE AUDIBLE WORDS CORPORATION, a Delaware corporation By: /s/ Patrick C. Barry ---------------------------------- Patrick C. Barry Chief Financial Officer -7- APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase _________ shares of the Series B Preferred Stock of THE AUDIBLE WORDS CORPORATION pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to ___________ of the Shares covered by the Warrant. [STRIKE PARAGRAPH THAT DOES NOT APPLY.] 2. Please issue a certificate or certificates representing said Shares in the name of the undersigned or in such other name as is specified below: ______________________________________ (Name) ______________________________________ ______________________________________ (Address) 3. The undersigned represents it is acquiring the Shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ___________________ (Date) ______________________________________ (Signature) -8- APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE _________, ___ (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear __________________: This is to advise you that the Warrant issued to you described below will expire on ________________, 2001. Issuer: The Audible Words Corporation Issue Date: November 20, 1996 Class of Security Issuable: Series B Preferred Exercise Price Per Share: Number of Shares Issuable: 12,500 Procedure for Exercise: Delivery of Warrant and duly executed Notice of Exercise Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of the pending expiration of the Warrant. ______________________________________ (Name of Issuer) By:___________________________________ Name:_________________________________ -9- Its:______________________________________ -10- EX-10.12 17 PROMISSORY NOTE 3/28/97, DONALD KATZ EXHIBIT 10.12 NOTE $100,000.00 March 28, 1997 FOR VALUE RECEIVED, Donald Katz promises to pay to Audible, Inc. (the "Lender"), the principal sum of One Hundred Thousand Dollars ($100,000.00), together with interest on the unpaid principal hereof from the date hereof at the rate of 6.0% per annum, compounded annually. Principal and interest shall be due and payable upon the earlier of (i) March 28, 2002 or, (ii) immediately following the closing of an initial public offering of the Common Stock of Audible, Inc., a corporation (the "Company"), as a result of which the Company receives gross proceeds greater than or equal to $15,000,000.00. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is secured by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have no recourse or claim against the undersigned by reason of nonpayment of this Note or otherwise hereunder, and the holder's sole recourse in the event of nonpayment of amounts due hereunder shall be against the collateral securing this Note. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees of the holder hereof shall be paid by the undersigned. /s/ Donald Katz --------------- Donald Katz EX-10.12.1 18 ALLONGE TO NOTE EXHIBIT 10.12.1 ALLONGE TO NOTE THIS ALLONGE TO NOTE dated as of April 20, 1999 amends that certain note dated March 28, 1997 (the "Note"), promised by Donald Katz ("Borrower") to pay principal and interest to Audible, Inc. ("Lender"). Borrower and Lender wish to modify the Note to extend the maturity date of the indebtedness. NOW, THEREFORE, in consideration of the promises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree to delete the following sentence: Principal and interest shall be due and payable upon the earlier of (i) March 28, 2002 or, (ii) immediately following the closing of an initial public offering of the Common Stock of Audible, Inc., a corporation (the "Company"), as a result of which the Company receives gross proceeds greater than or equal to $15,000,000. FURTHERMORE, the parties hereby agree to replace it in its entirety with the following: Principal and interest shall be due and payable upon the earlier of (i) March 28, 2002 or, (ii) one year following the closing of an initial public offering of the Common Stock of Audible, Inc., a corporation (the "Company"), as a result of which the Company receives gross proceeds greater than or equal to $15,000,000. Except as amended hereby, the Note shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Allonge to Note as of the date first written above. "BORROWER" DONALD KATZ By: /s/ Donald Katz _________________________________ Donald Katz "LENDER" AUDIBLE, INC By: /s/ Andrew J. Huffman _________________________________ Andrew J. Huffman, President and Chief Executive Officer EX-10.13 19 SECURITY AGREEMENT EXHIBIT 10.13 SECURITY AGREEMENT This Security Agreement is made as of March 28, 1997 between Audible, Inc. ("Pledgee"), and Donald Katz ("Pledgor"). RECITALS -------- A. Pledgor is, as of the date hereof, borrowing the sum of $100,000.00 from Pledgee as evidenced by his promissory note (the "Note") dated the date hereof. B. Pledgor and Pledgee have agreed that the Note be secured by a pledge of an aggregate of 25,000 shares of the Company's Common Stock under the terms of this Security Agreement. NOW THEREFORE, intending to be legally bound hereby, the parties agree as follows: 1. Creation and Description of Security Interest. In consideration of a --------------------------------------------- loan in the aggregate principal amount of $100,000.00 from Pledgee, Pledgor hereby pledges 25,000 shares of the Company's Common Stock (herein sometimes referred to as the "Collateral" or the "Shares"), duly endorsed in blank or with executed stock powers, and herewith delivers a certificate or certificates evidencing the Shares to Pledgee, who shall hold said certificate or certificates subject to the terms and conditions of this Security Agreement. The Shares (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by Pledgee as security for the repayment of the Note, and any extensions or renewals thereof, and Pledgee shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to make the --------------------------------------- loan evidenced by the Note and enter into this Security Agreement, Pledgor represents and covenants to the Pledgee, and his successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the ----------------------- Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, ------------ defenses and liens, and Pledgor will not encumber the Shares without the prior written consent of Pledgee. c. Further Assurances. Pledgor will do all things necessary or ------------------ desirable, including without limitation, the filing of financing statements, to evidence the pledge of the Shares made hereunder. -1- d. Option Agreement Representations and Warranties. Pledgor is a ----------------------------------------------- party to a Stock Option Agreement of even date herewith with the Pledgee. Each of the representations and warranties made by Pledgor therein is incorporated herein by this reference. 3. Voting Rights. During the term of this pledge and so long as all ------------- payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any ----------------- stock dividend, reclassification, recapitalization, readjustment or other changes are declared or made in the capital structure of the Company, all new, substituted and additional shares and/or other securities issued by reason of any such change shall be delivered to and held by Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor and Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor to a result thereof. 5. Default. Pledgor shall be deemed to be in default of the Note and of ------- this Security Agreement in the event payment of principal or interest on the Note shall be delinquent for a period of 10 days or more following the due date thereof or in the event Pledgor shall have breached any of the representations, warranties or covenants contained herein. In the case of an event of Default, as set forth above, the Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to foreclose upon the Shares in addition to any remedy it may pursue under the New Jersey Commercial Code. 6. Withdrawal or Substitution of Collateral. Pledgor shall not sell, ---------------------------------------- withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 7. Term. The pledge of Shares shall continue until the payment of all ---- indebtedness secured hereby, at which time, to the extent such indebtedness is not satisfied in full, the Shares shall promptly be delivered to Pledgor. 8. Insolvency. Pledgor agrees that if a bankruptcy or insolvency ---------- proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 9. Invalidity of Particular Provisions. Pledgor and Pledgee agree that ------------------------------------ the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. -2- 10. Successors or Assigns. Pledgor and Pledgee agree that all of the --------------------- terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, their respective designees, successors, assigns, heirs, executors and administrators. Pledgor agrees that Pledgee may transfer or assign any or all of his rights hereunder, under the Note and under the Stock Option Agreement, without Pledgor's consent. 11. Governing Law. This Security Agreement shall be interpreted and ------------- governed under the laws of the State of New Jersey without giving effect to conflicts of laws principles thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" /s/ Donald Katz --------------- Donald Katz AUDIBLE, INC. "PLEDGEE" /s/ Patrick C. Barry -------------------- By: Patrick C. Barry ---------------- Its: CFO -3- EX-10.14 20 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.14 EXECUTION COPY -------------- AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Dated as of February 26, 1998 Audible Inc., The Purchasers of the Series D Preferred Stock Named as Investors Herein, and the Other Stockholders Named Herein TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS................................................... 2 1.1 Definitions.......................................................... 2 ARTICLE 2 - REGISTRATION RIGHTS........................................... 5 2.1 Demand Registration.................................................. 5 2.2 Piggy-Back Registration.............................................. 10 2.3 Reduction of Offering................................................ 10 ARTICLE 3 - REGISTRATION PROCEDURES....................................... 11 3.1 Filings; Information................................................. 11 3.2 Registration Expenses................................................ 15 ARTICLE 4 - INDEMNIFICATION AND CONTRIBUTION.............................. 15 4.1 Indemnification by the Company....................................... 15 4.2 Indemnification by Selling Holders................................... 16 4.3 Conduct of Indemnification Proceedings............................... 17 4.4 Contribution......................................................... 18 ARTICLE 5 - OTHER REGISTRATION RIGHTS..................................... 19 5.1 Other Registration Rights............................................ 19 5.2 Future Registration Rights........................................... 19 5.3 Exclusion of Registrable Shares...................................... 19 ARTICLE 6 - MISCELLANEOUS................................................. 20 6.1 Participation in Underwritten Registrations.......................... 20 6.2 Lock-up Agreement.................................................... 20 6.3 Rule 144 and 144A.................................................... 21 6.4 Suspension of Obligation to File..................................... 21 6.5 Amendment and Modification........................................... 21 6.6 Assignability of Rights.............................................. 21 6.7 Binding Effect; Entire Agreement..................................... 22 6.8 Severability......................................................... 22 6.9 Notices.............................................................. 22 6.10 Governing Law....................................................... 23 6.11 Headings............................................................. 23 6.12 Counterparts......................................................... 23 6.13 Further Assurances................................................... 23 6.14 Remedies............................................................. 23 6.15 Supersedes Prior Agreement........................................... 23 6.16 Pronouns............................................................. 24
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of February 26, 1998, by and among each of the persons that signs a signature page annexed hereto (collectively, the "Investors") and Audible Inc., a Delaware corporation (the "Company"). W I T N E S S E T H: - - - - - --- - - - WHEREAS, certain of the Investors and the Company have entered into that certain Series D Preferred Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), whereby such Investors (the "Series D Holders") have purchased an aggregate of 1,350,000 shares (the "Series D Preferred Shares") of Series D Preferred Stock, par value $.01 per share (the "Series D Preferred Stock") of the Company; WHEREAS, the Company desires to grant the Series D Holders registration rights with respect to the shares of Common Stock into which the Series D Preferred Shares are convertible; WHEREAS, the Company and certain of the Investors have previously entered into that certain Amended and Registration Rights Agreement dated as of March 31, 1997 (the "Prior Agreement") pursuant to which a certain Investor (the "Series A Holder") who holds shares of the Series A Convertible Preferred Stock, par value $.01 per share, of the Company (the "Series A Preferred Stock"); certain Investors (the "Series B Holders") who hold shares or warrants to purchase shares of the Series B Preferred Stock, par value $.01 per share, of the Company (the "Series B Preferred Stock"); and certain Investors (the "Series C Holders") who hold shares or warrants to purchase shares of the Series C Convertible Preferred Stock, par value $.01 per share, of the Company (the "Series C Preferred Stock"); were granted registration rights by the Company; WHEREAS, in connection with the execution of the Stock Purchase Agreement, the Series A Holder, the Series B Holders, the Series C Holders, the Series D Holders and the Company wish to amend and restate the Prior Agreement to consolidate the registration rights of the Series A Holder, the Series B Holders and the Series C Holders with those of the Series D Holders and make certain other changes thereto; WHEREAS, the Company anticipates that, subsequent to the date hereof, it will issue a warrant or warrants that permit the holder thereof to purchase up to an aggregate of 25,000 shares of Series D Preferred Stock (the "Series D Warrants"); WHEREAS, upon execution of the Series D Warrants, the holder of shares of Series D Preferred Stock is to be permitted to execute a signature addendum hereto providing such holder with the registration rights set forth herein; and WHEREAS, the Company currently expects to issue the Series D Warrant to Silicon Valley Bank (the "Bank") as part of, and in connection with, certain bank financing to be provided by the Bank. NOW, THEREFORE, in consideration of the premises and mutual covenants and conditions contained herein and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto amend and restate the Prior Agreement in its entirety as follows: ARTICLE 1 --------- DEFINITIONS SECTION 1.1 Definitions. All terms not defined herein or below shall ----------- have the meaning set forth in the Stock Purchase Agreement. "Affiliate" shall have the meaning set forth in Rule 405 promulgated under the Securities Act of 1933, as amended. "Commission" shall mean the United States Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Common Stock" shall have the meaning set forth in the preamble of this Agreement. "Common Stock Warrants" shall mean the warrants, held by the Series C Holders, to purchase up to 450,000 shares of the Common Stock of the Company. "Company" shall have the meaning set forth in the preamble of this Agreement. "Controlling Persons" shall have the meaning set forth in Section 4.1 hereof. "Damages" shall have the meaning set forth in Section 4.1 hereof. "Demand Registration" shall mean a Series A Demand Registration, Series B Demand Registration, Series C Demand Registration or Series D Demand Registration, without distinction, except as the context otherwise requires. "Holder" shall mean any person who now holds or shall hereafter acquire and hold Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 4.3 hereof. -2- "Indemnifying Party" shall have the meaning set forth in Section 4.3 hereof. "Inspectors" shall have the meaning set forth in Section 3.1(h) hereof. "Investors" shall have the meaning set forth in the preamble of this Agreement. "NASD" shall mean the National Association of Securities Dealers, Inc. "Notices" shall have the meaning set forth in Section 6.8 hereof. "Piggy-Back Registration" shall have the meaning set forth in Section 2.2 hereof. "Records" shall have the meaning set forth in Section 3.1(h) hereof. "Registrable Securities" shall mean the Series A Registrable Securities, the Series B Registrable Securities, the Series C and Warrant Registrable Securities and the Series D Registrable Securities, without distinction, except as the context otherwise requires. "Registration Expenses" shall have the meaning set forth in Section 3.2 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Holder" shall mean an Investor who is selling Registrable Securities pursuant to a registration statement under the Securities Act. "Series A Demand Registration" shall have the meaning set forth in Section 2.1(a) hereof. "Series A Preferred Stock" shall have the meaning set forth in the preamble of this Agreement. "Series A Registrable Securities" shall mean the shares of Common Stock into which the Series A Preferred Stock are convertible and any additional shares of Common Stock acquired by a Holder by way of a dividend, stock split or other distribution in respect of the Series A Preferred Stock or the Common Stock issued upon conversion of the Series A Preferred Stock. "Series B Demand Registration" shall have the meaning set forth in Section 2.1(b) hereof. -3- "Series B Preferred Stock" shall have the meaning set forth in the preamble of this Agreement. "Series B Registrable Securities" shall mean the shares of Common Stock into which the Series B Preferred Stock are convertible and any additional shares of Common Stock acquired by a Holder by way of a dividend, stock split or other distribution in respect of the Series B Preferred Stock or the Common Stock issued upon conversion of the Series B Preferred Stock. "Series C and Warrant Demand Registration" shall have the meaning set forth in Section 2.1(c) hereof. "Series C Preferred Stock" shall have the meaning set forth in the preamble of this Agreement. "Series C and Warrant Registrable Securities" shall mean the shares of Common Stock into which the Series C Preferred Stock are convertible and any additional shares of Common Stock acquired by a Holder by way of (i) a dividend, stock split or other distribution in respect of the Series C Preferred Stock, (ii) a dividend, stock split or other distribution in respect of the Common Stock issued upon conversion of the Series C Preferred Stock, (iii) on exercise of its Common Stock Warrants, (iv) a dividend, stock split or other distribution in respect of the Common Stock Warrants and (v) a dividend, stock split or other distribution in respect of the Common Stock issued upon exercise of the Common Stock Warrants. "Series D Demand Registration" shall have the meaning set forth in Section 2.1(d) hereof. "Series D Preferred Stock" shall have the meaning set forth in the preamble of this Agreement. "Series D Registrable Securities" shall mean the shares of Common Stock into which the Series D Preferred Stock are convertible and any additional shares of Common Stock acquired by a Holder by way of (i) a dividend, stock split or other distribution in respect of the Series D Preferred Stock; (ii) a dividend, stock split or other distribution in respect of or the Common Stock issued upon conversion of the Series D Preferred Stock and, (iii) a dividend, stock split or other distribution in respect of the Series D Warrants. "Stockholders' Agreement" shall mean that certain Amended and Restated Stockholders' Agreement, dated as of the date hereof, by and among the Company, the Investors and certain stockholders of the Company. -4- "Stock Purchase Agreement" shall have the meaning set forth in the preamble of this Agreement. "Underwriter" shall mean a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer's market-making activities. "Withdrawal Election" shall have the meaning set forth in Section 2.3(b) hereof. ARTICLE 2 --------- REGISTRATION RIGHTS SECTION 2.1 Demand Registration. ------------------- (a) Request for Registration by Holders of Series A Registrable ----------------------------------------------------------- Securities. At any time and from time to time after March 31, 2000, Holders of - ---------- at least two-thirds (2/3) in interest of the Series A Registrable Securities (for this purpose, treating the Series A Preferred Stock as if it had been converted into Common Stock) may make written requests on the Company for the registration of the Series A Registrable Shares having an anticipated aggregate offering price (net of discounts and commissions) of at least $5,000,000 under the Securities Act. Subject to the penultimate sentence of Section 2.1(e), the Company shall have no obligation to file more than two (2) registration statements under the Securities Act with respect to such requests; provided, -------- however, that if the Series A Registrable Securities may be registered on Form - ------- S-3 (or any successor form with similar "short form" disclosure requirements), the Holders of Series A Registrable Securities shall have unlimited rights to request registration of their shares on Form S-3 (or such successor form), provided, however, that each such registration of Series A Registrable - -------- ------- Securities have an anticipated aggregate offering price (net of discounts and commissions) of at least $500,000. Each such request described in the preceding two sentences shall be hereinafter referred to as a "Series A Demand Registration." Any Series A Demand Registration will specify the number of shares of Series A Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Company shall give written notice of such registration request within ten (10) days after the receipt thereof to all other Holders of Series A Registrable Securities and shall use its best efforts to effect the Series A Demand Registration within thirty (30) days after the giving of such written notice. Within 20 days after receipt of such notice by any such Holder, such Holder may request in writing that Series A Registrable Securities be included in such registration and the Company shall include in the registration statement for such Series A Demand Registration the Series A Registrable Securities of all Holders requested to be so included. Each such request by such other Holders shall specify the number of shares of Series A Registrable Securities proposed to be sold and the intended method of disposition thereof. -5- Whenever the Company shall effect a Series A Demand Registration pursuant to this Section 2.1(a) in connection with an underwritten offering of Series A Registrable Securities, no securities other than the Series A Registrable Securities requested to be included shall be included among the securities covered by such registration unless (i) the managing Underwriter or Underwriters of such offering shall have advised the Holder of Series A Registrable Securities to be covered by such registration in writing that the inclusion of other securities would not adversely affect such offering, in which case, securities to be issued by the Company or securities held by other stockholders of the Company may be included or (ii) all Holders of Series A Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of securities to be issued by the Company or securities held by other stockholders of the Company. Whenever the Company shall effect a Series A Demand Registration pursuant to this Section 2.1(a) other than in connection with an underwritten offering of Series A Registrable Securities, no securities held by stockholders of the Company other than Holders of Series A Registrable Securities may be covered by such registration unless all Holders of Series A Registrable Securities to be covered by such registration shall have consented thereto in writing. (b) Request for Registration by Holders of Series B Registrable ----------------------------------------------------------- Securities. At any time and from time to time after March 31, 2000, Holders of - ---------- at least two-thirds (2/3) in interest of the Series B Registrable Securities (for this purpose, treating the Series B Preferred stock as if it had been converted into Common Stock) may make written requests on the Company for the registration of the Series B Registrable Shares having an anticipated aggregate offering price (net of discounts and commissions) of at least $5,000,000 under the Securities Act. Subject to the penultimate sentence of Section 2.1(e), the Company shall have no obligation to file more than two (2) registration statements under the Securities Act with respect to such requests; provided, -------- however, that if the Series B Registrable Securities may be registered on Form - ------- S-3 (or any successor form with similar "short form" disclosure requirements), the Holders of Series B Registrable Securities shall have unlimited rights to request registration of their shares on Form S-3 (or such successor form), provided, however, that each such registration of Series B Registrable - -------- ------- Securities have an anticipated aggregate offering price (net of discounts and commissions) of at least $500,000. Each such request described in the preceding two sentences shall be hereinafter referred to as a "Series B Demand Registration." Any Series B Demand Registration will specify the number of shares of Series B Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Company shall give written notice of such registration request within ten (10) days after the receipt thereof to all other Holders of Series B Registrable Securities and shall use its best efforts to effect the Series B Demand Registration within thirty (30) days after the giving of such written notice. Within 20 days after receipt of such notice by any such Holder, such Holder may request in writing that Series B Registrable Securities be included in such registration and the Company shall include in the registration statement for such Series B Demand Registration the Series B Registrable Securities of all Holders requested to be so included. Each such request by such other Holders shall specify -6- the number of shares of Series B Registrable Securities proposed to be sold and the intended method of disposition thereof. Whenever the Company shall effect a Series B Demand Registration pursuant to this Section 2.1(b) in connection with an underwritten offering of Series B Registrable Securities, no securities other than the Series B Registrable Securities requested to be included shall be included among the securities covered by such registration unless (i) the managing Underwriter or Underwriters of such offering shall have advised the Holder of Series B Registrable Securities to be covered by such registration in writing that the inclusion of other securities would not adversely affect such offering, in which case, securities to be issued by the Company or securities held by other stockholders of the Company may be included or (ii) all Holders of Series B Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of securities to be issued by the Company or securities held by other stockholders of the Company. Whenever the Company shall effect a Series B Demand Registration pursuant to this Section 2.1(b) other than in connection with an underwritten offering of Series B Registrable Securities, no securities held by stockholders of the Company other than Holders of Series B Registrable Securities may be covered by such registration unless all Holders of Series B Registrable Securities to be covered by such registration shall have consented thereto in writing. (c) Request for Registration by Holders of Series C and Warrant ----------------------------------------------------------- Registrable Securities. At any time and from time to time after March 31, 2000, - ---------------------- Holders of a majority in interest of the Series C and Warrant Registrable Securities (for this purpose, treating the Series C Preferred Stock as if it had been converted into Common Stock) may make written requests on the Company for the registration of the Series C and Warrant Registrable Shares having an anticipated aggregate offering price (net of discounts and commissions) of at least $5,000,000 under the Securities Act. Subject to the penultimate sentence of Section 2.1(e), the Company shall have no obligation to file more than two (2) registration statements under the Securities Act with respect to such requests; provided, however, that if the Series C and Warrant Registrable -------- ------- Securities may be registered on Form S-3 (or any successor form with similar "short form" disclosure requirements), the Holders of Series C and Warrant Registrable Securities shall have unlimited rights to request registration of their shares on Form S-3 (or such successor form), provided, however, that each -------- ------- such registration of Series C and Warrant Registrable Securities have an anticipated aggregate offering price (net of discounts and commissions) of at least $500,000. Each such request described in the preceding two sentences shall be hereinafter referred to as a "Series C and Warrant Demand Registration." Any Series C and Warrant Demand Registration will specify the number of shares of Series C and Warrant Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Company shall give written notice of such registration request within ten (10) days after the receipt thereof to all other Holders of Registrable Securities and shall use its best efforts to effect the Series C and Warrant Demand Registration within thirty (30) days after the giving of such written notice. Within 20 days after receipt of such notice by any such Holder, such Holder may request in writing that some or all of its -7- Series C and Warrant Registrable Securities be included in such registration and the Company shall include in the registration statement for such Series C and Warrant Demand Registration the Series C and Warrant Registrable Securities of all Holders requested to be so included. Each such request by such other Holders shall specify the number of shares of Series C and Warrant Registrable Securities proposed to be sold and the intended method of disposition thereof. Whenever the Company shall effect a Series C and Warrant Demand Registration pursuant to this Section 2.1(c) in connection with an underwritten offering of Series C and Warrant Registrable Securities, no securities other than the Series C and Warrant Registrable Securities requested to be included shall be included among the securities covered by such registration unless (i) the managing Underwriter or Underwriters of such offering shall have advised the Holder of Series C and Warrant Registrable Securities to be covered by such registration in writing that the inclusion of other securities would not adversely affect such offering, in which case, securities to be issued by the Company or securities held by other stockholders of the Company may be included or (ii) all Holders of Series C and Warrant Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of securities to be issued by the Company or securities held by other stockholders of the Company. Whenever the Company shall effect a Series C and Warrant Demand Registration pursuant to this Section 2.1(c) other than in connection with an underwritten offering of Series C and Warrant Registrable Securities, no securities held by stockholders of the Company other than Holders of Series C and Warrant Registrable Securities may be covered by such registration unless all Holders of Series C and Warrant Registrable Securities to be covered by such registration shall have consented thereto in writing. (d) Request for Registration by Holders of Series D Registrable Securities. ----------------------------------------------------------- Securities. At any time and from time to time after the first to occur of (i) - ---------- the first underwritten public offering of the Company's Common Stock or (ii) March 31, 2000, Holders of no less than 40% of the Series D Registrable Securities (for this purpose, treating the Series D Preferred Stock as if it had been converted into Common Stock) may make written requests on the Company for the registration of the Series D Registrable Shares having an anticipated aggregate offering price (net of discounts and commissions) of at least $5,000,000 under the Securities Act. Subject to the penultimate sentence of Section 2.1(e), the Company shall have no obligation to file more than two (2) registration statements under the Securities Act with respect to such requests; provided, however, that if the Series D Registrable Securities may be registered - -------- ------- on Form S-3 (or any successor form with similar "short form" disclosure requirements), the Holders of Series D Registrable Securities shall have unlimited rights to request registration of their shares on Form S-3 (or such successor form); provided, however, that each such registration of Series D -------- ------- Registrable Securities have an anticipated aggregate offering price (net of discounts and commissions) of at least $500,000. Notwithstanding anything to the contrary contained in the preceding sentence, if 12 months following the first underwritten public offering of the Company's Common Stock the Company is ineligible to -8- register its Common Stock on Form S-3, the number of registration statements that the holders of Series D Registrable Securities will be entitled to require of the Company under the second sentence of this Section 2.1(d) shall be increased from two to three. Each such request described in the preceding three sentences shall be hereinafter referred to as a "Series D Demand Registration." Any Series D Demand Registration will specify the number of shares of Series D Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Company shall give written notice of such registration request within ten (10) days after the receipt thereof to all other Holders of Registrable Securities and shall use its best efforts to effect the Series D Demand Registration within thirty (30) days after the giving of such written notice. Within 20 days after receipt of such notice by any such Holder, such Holder may request in writing that some or all of its Series D Registrable Securities be included in such registration and the Company shall include in the registration statement for such Series D Demand Registration the Series D Registrable Securities of all Holders requested to be so included. Each such request by such other Holders shall specify the number of shares of Series D Registrable Securities proposed to be sold and the intended method of disposition thereof. Whenever the Company shall effect a Series D Demand Registration pursuant to this Section 2.1(d) in connection with an underwritten offering of Series D Registrable Securities, no securities other than the Series D Registrable Securities requested to be included shall be included among the securities covered by such registration unless (i) the managing Underwriter or Underwriters of such offering shall have advised the Holder of Series D Registrable Securities to be covered by such registration in writing that the inclusion of other securities would not adversely affect such offering, in which case, securities to be issued by the Company or securities held by other stockholders of the Company may be included or (ii) all Holders of Series D Registrable Securities to be covered by such registration shall have consented in writing to the inclusion of securities to be issued by the Company or securities held by other stockholders of the Company. Whenever the Company shall effect a Series D Demand Registration pursuant to this Section 2.1(d) other than in connection with an underwritten offering of Series D Registrable Securities, no securities held by stockholders of the Company other than Holders of Series D Registrable Securities may be covered by such registration unless all Holders of Series D Registrable Securities to be covered by such registration shall have consented thereto in writing. (e) Effective Registration. A registration will not be deemed to have ---------------------- been effected as a Demand Registration unless it has been declared effective by the Commission and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; provided, however, that -------- ------- if, after it has become effective, the offering of shares of Common Stock pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the Commission or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of the shares of Common Stock pursuant to the registration at any time within one hundred eighty (180) days after the effective date of the registration statement, such registration will be deemed not to -9- have been effected. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected or (ii) the registration requested pursuant to this Section 2.1 does not remain effective for a period of at least one hundred eighty (180) days beyond the effective date thereof or, with respect to an underwritten offering of Registrable Securities, until ninety (90) days after the commencement of the distribution by the Holders of the Registrable Securities included in such registration statement, then the Company shall continue to be obligated to effect such registration pursuant to this Section 2.1. The Holders of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities from a Demand Registration at any time prior to the effective date of such Demand Registration. (f) Selection of Underwriter. If the Selling Holders so elect, the ------------------------ offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. The Selling Holders owning at least two-thirds (2/3) of Registrable Securities to be sold shall select one or more nationally recognized firms of investment bankers reasonably acceptable to the Company to act as the lead managing Underwriter or Underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering. SECTION 2.2 Piggy-Back Registration. If at any time the Company ----------------------- proposes to file a registration statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any of its respective security holders (other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission) or a Demand Registration pursuant to Section 2.1), then the Company shall give prompt written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than 20 days before the anticipated filing date), and such notice shall offer such Holders the opportunity to register such number of Registrable Securities as each such Holder may request (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof) (a "Piggy- Back Registration"). The Company shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Company or any other security holder included therein and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method of distribution thereof. Except as set forth in Section 2.3(b), any Holder shall have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw, provided, however, that in the event of such withdrawal, -------- ------- such Holder shall be responsible for all fees and expenses (including fees and expenses of counsel) incurred by such Holder prior to such withdrawal except as set forth in Section 2.3(b). The Company may withdraw a Piggy-Back Registration at any time prior to the time it becomes effective. -10- No registration effected under this Section 2.2, and no failure to effect a registration under this Section 2.2, shall relieve the Company of its obligation to effect a registration upon the request of Holders pursuant to Section 2.1, and no failure to effect a registration under this Section 2.2 and to complete the sale of Registrable Securities in connection therewith shall relieve the Company of any other obligation under this Agreement (including, without limitation, the Company's obligations under Sections 3.2 and 4.1). SECTION 2.3 Reduction of Offering. --------------------- (a) Piggy-Back Registration. Notwithstanding anything to the contrary ----------------------- contained herein, if the managing Underwriter or Underwriters of any underwritten offering described in Section 2.2 have informed, in writing, the Holders of the Registrable Securities requesting inclusion in such offering that it is their opinion that the total number of shares which the Company, Holders of Registrable Securities and any other Persons desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, then the number of shares to be offered shall be reduced or limited in the following order of priority: (x) first, the securities proposed by the Company to be sold for its own account; - ----- (y) second, the number of shares to be offered by all other holders of ------ securities of the Company other than the Holders of Registrable Securities or other holders who have registration rights to the extent necessary to reduce the total number of shares as recommended by such managing Underwriters; and (z) third, if further reduction or limitation is required, the number of shares to - ----- be offered for the account of the Holders shall be reduced or limited on a pro --- rata basis in proportion to the relative number of Registrable Securities of the - ---- Holders participating in such registration; provided, however, that the -------- ------- reduction for the account of the Holders shall not result in the number of shares of the Holders included in the offering to be less than 25% of the total number of shares offered. (b) Withdrawal Election. If, as a result of the proration provisions ------------------- of this Section 2.3, any Holder shall not be entitled to include at least 50% of the Registrable Securities in a Piggy-Back Registration that such Holder has requested to be included, such Holder may elect to withdraw his, her or its request to include Registrable Securities in such registration (a "Withdrawal Election") without incurring any liability for his, her or its fees and expenses; provided, however, that a Withdrawal Election shall be irrevocable -------- ------- and, after making a Withdrawal Election, a Holder shall no longer have any right to include Registrable Securities in the Piggy-Back Registration as to which such Withdrawal Election was made. ARTICLE 3. ---------- REGISTRATION PROCEDURES SECTION 3.1 Filings; Information. Whenever the Company is required -------------------- to effect or cause the registration of Registrable Securities pursuant to Section 2.1, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in -11- accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) Registration Statements. The Company will prepare and file with ----------------------- the Commission a registration statement (which, in the case of an underwritten public offering, shall be on Form S-3 (unless the Company does not qualify for use of Form S-3 in a registration involving only a secondary offering as provided in the General Instructions to Form S-3 in such registration, in which case such registration statement shall be a Form S-1) or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use best efforts to cause such registration statement to become and remain effective until the completion of the distribution; provided, however, that the Company shall be required to keep -------- ------- any registration statement effective at least ninety (90) days. (b) Amendments and Supplements. The Company will prepare and file -------------------------- with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in Section 3.1(a) and as to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period. (c) Copies For Review. The Company will, as far in advance as ----------------- practical, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish copies of such registration statement as proposed to be filed, together with exhibits thereto, to (i) each Selling Holder, (ii) not more than one counsel representing all Selling Holders, to be selected by a majority-in-interest of such Selling Holders, and (iii) each Underwriter, if any, of the Registrable Securities covered by such registration statement, which documents will be subject to review and approval by the foregoing within five (5) days after delivery, and thereafter as far in advance as practical, furnish to such Selling Holders, counsel and Underwriters, if any, for their review and comment such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents or information as such Selling Holders, counsel or Underwriters may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holders. (d) Stop Orders. After the filing of the registration statement, the ----------- Company will promptly notify each Selling Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. -12- (e) Blue Sky. The Company will use its best efforts to (i) register -------- or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as any Selling Holder reasonably (in light of such Selling Holder's intended plan of distribution) requests, and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Holder to consummate the disposition of the Registrable Securities owned by such Selling Holder; provided, however, that the Company -------- ------- will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (e), (B) subject itself to taxation in any jurisdiction where it would not be subject to taxation but for actions taken pursuant to this Section 3.1 or (C) consent to general service of process in any such jurisdiction. (f) Certain Events. The Company will immediately notify each Selling -------------- Holder of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the Holders of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to each Selling Holder any such supplement or amendment. (g) Agreements. The Company and the Selling Holders will enter into ---------- customary agreements including, if applicable, an underwriting agreement in customary form and which is reasonably satisfactory to the Company (which shall not require the Selling Holder to indemnify the underwriter with respect to misstatements or omissions in the registration statement other than such misstatements or omissions in written material supplied by such Selling Holder expressly for inclusion in the registration statement) and, if requested by the underwriter(s), an agreement appointing one or more (but not more than three) Persons approved by a majority in interest of the Holders whose Registrable Securities are to be included in the registration, to act as attorney-in-fact for the Holder and as escrow agent for the Registrable Securities to be included in the offering in customary form. The Company and the Selling Holders will also take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; and the Selling Holders may, at their option, require that any or all of the representations, warranties and covenants of the Company made to or for the benefit of such Underwriters also be made to and for the benefit of such Selling Holders. (h) Due Diligence. The Company will make available to each Selling ------------- Holder (and their counsel) and each Underwriter, if any, subject to restrictions imposed by the United States federal government or any agency or instrumentality thereof, copies of all correspondence between the Commission and the Company, its counsel or auditors and will -13- also make available for inspection by any Selling Holder, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained to represent any such Selling Holder or Underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the disclosure or release of such Records is requested or required pursuant to oral questions, interrogatories, requests for information or documents or a subpoena or other order from a court of competent jurisdiction or other process; provided, however, that prior to any disclosure or release -------- ------- pursuant to clause (ii), the Inspectors shall provide the Company with prompt notice of any such request or requirement so that the Company may seek an appropriate protective order or waive such Inspectors' obligation not to disclose such Records; and, provided further, however, that if failing the entry ---------------- ------- of a protective order or the waiver by the Company permitting the disclosure or release of such Records, the Inspectors, upon advice of counsel, are compelled to disclose such Records, the Inspectors may disclose that portion of the Records which counsel has advised the Inspectors that the Inspectors are compelled to disclose. Each Selling Holder of such Registrable Securities agrees that information obtained by it solely as a result of such inspections (not including any information obtained from a third party who, insofar as is known to the Selling Holder after reasonable inquiry, is not prohibited from providing such information by a contractual, legal or fiduciary obligation to the Company) shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates unless and until such information is made generally available to the public. Each Selling Holder of such Registrable Securities further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (i) Sales Efforts. In connection with an underwritten offering, the ------------- Company will participate, to the extent reasonably requested by the managing Underwriter for the offering or the Selling Holders, in customary efforts to sell the securities under the offering, including, without limitation, participating in "road shows"; provided, however, that the Company shall not be -------- ------- obligated to participate in more than one such offering in any 12-month period. The Company may require each Selling Holder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration including, without limitation, all such -14- information as may be requested by the Commission or the NASD. The Company may exclude from such registration any Holder who fails to provide such information. Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.1(f) hereof, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Selling Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.1(f) hereof, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies then in such Selling Holder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 3.1(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 3.1(f) hereof to the date when the Company shall make available to the Selling Holders of Registrable Securities covered by such registration statement a prospectus supplemented or amended to conform with the requirements of Section 3.1(f) hereof. SECTION 3.2 Registration Expenses. In connection with the Demand --------------------- Registrations pursuant to Section 2.1 hereof and any Piggy-Back Registrations under Section 2.2 hereof, the Company shall pay the following registration expenses incurred in connection with the registration thereunder (the "Registration Expenses"): (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) processing, duplicating and printing expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested but not the cost of any audit other than a year end audit), (vii) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, (viii) reasonable fees and expenses of one firm of counsel for the Holders to be selected by the Holders of at least 66 2/3% of the Registrable Securities to be included in such registration voting as a single class and (ix) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities. The Company shall have no obligation to pay any other underwriting fees, discounts or commissions attributable to the sale of Registrable Securities, or the cost of any special audit required, such costs to be borne by the Holder or Holders making the request. -15- ARTICLE 4. ---------- INDEMNIFICATION AND CONTRIBUTION SECTION 4.1 Indemnification by the Company. The Company shall, to the ------------------------------ full extent permitted by law, indemnify and hold harmless each Selling Holder, its Affiliates, partners, officers, directors, employees and agents, and each Person, if any, who controls or is under common control with such Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the partners, officers, directors, employees and agents of such controlling Person (collectively, the "Controlling Persons"), from and against any loss, claim, damage, liability, reasonable attorneys' fees, cost or expense and costs and expenses of investigating and defending any such claim, joint or several, and any action in respect thereof (collectively, the "Damages") to which such Selling Holder, its partners, officers, directors, employees and agents, and any such Controlling Person may become subject under the Securities Act or otherwise, insofar as such Damages (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities or any amendment or supplement thereto, or arises out of, or are based upon, any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or any violation by the Company of any federal or state securities laws or any rule or regulation thereof, except insofar as the same are based upon information furnished in writing to the Company by a Selling Holder expressly for use therein, and shall reimburse each Selling Holder, its Affiliates, partners, officers, directors, employees and agents, and each such Controlling Person for any legal and other expenses reasonably incurred by that Selling Holder, its Affiliates, its partners, officers, directors, employees and agents, or any such Controlling Person in investigating or defending or preparing to defend against any such Damages or proceedings; provided, however, -------- ------- that the Company shall not be liable to any Selling Holder to the extent that any such Damages (or action or proceeding in respect thereof) arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) such Selling Holder failed to send or deliver a copy of the final prospectus with or prior to the delivery of written confirmation of the sale by such Selling Holder to the Person asserting the claim from which such Damages arise, and (ii) the final prospectus would have corrected such untrue statement or such omission; provided, further, however, that the Company shall -------- ------- ------- not be liable to any Selling Holder in any such case to the extent that any such Damages arise out of or are based upon an untrue statement or omission in any prospectus if (x) such untrue statement or omission is corrected in an amendment or supplement to such prospectus, and (y) having previously been furnished by or on behalf of the Company with copies of such prospectus as so amended or supplemented, such Selling Holder thereafter fails to deliver such prospectus as so amended or supplemented prior to or concurrently with the sale of a Registrable Security to the Person asserting the claim from which such Damages arise. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each Person -16- who controls such Underwriters on substantially the same basis as that of the indemnification of the Selling Holders provided in this Section 4.1. SECTION 4.2 Indemnification by Selling Holders. Each Selling Holder ---------------------------------- shall, to the full extent permitted by law, severally but not jointly, indemnify and hold harmless the Company, its officers, directors, employees and agents and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the partners, officers, directors, employees and agents of such controlling Person, to the same extent as the foregoing indemnity from the Company to such Selling Holder, but only to the extent the Company's or such Person's Damages are attributable to the information related to such Selling Holder, or its plan of distribution, furnished in writing by such Selling Holder or on such Selling Holder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus and the aggregate amount which may be recovered from any Selling Holder of Registrable Securities pursuant to the indemnification provided for in this Section 4.2 in connection with any registration and sale of Registrable Securities shall be limited to the net proceeds received by such Selling Holder from the sale of such Registrable Securities. In case any action or proceeding shall be brought against the Company or its officers, directors, employees or agents or any such controlling Person or its officers, directors, employees or agents, in respect of which indemnity may be sought against such Selling Holder, such Selling Holder shall have the rights and duties given to the Company, and the Company or its officers, directors, employees or agents, or such controlling Person, or its officers, directors, employees or agents, shall have the rights and duties given to such Selling Holder under the preceding paragraph. Each Selling Holder also agrees to indemnify and hold harmless any Underwriters of the Registrable Securities, their officers and directors and each Person who controls such Underwriters on substantially the same basis as that of the indemnification such Selling Holder provides to the Company provided in this Section 4.2; provided -------- that the aggregate recovery that the Company and any Underwriters can recover - ---- from a Selling Holder pursuant to this Section 4.2 cannot exceed the net proceeds received by such Selling Holder from the sale of such Registrable Securities. The Company shall be entitled to receive indemnities from Underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information so furnished in writing by such Persons specifically for inclusion in any prospectus or registration statement; provided, however, that if the Company does not receive such indemnities, the Company will not be relieved of its duties and obligations hereunder. SECTION 4.3 Conduct of Indemnification Proceedings. Promptly after -------------------------------------- receipt by any person in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the commencement of any action, the Indemnified Party shall, if a claim in respect thereof is to be made against the Person against whom such indemnity may be sought (an "Indemnifying Party"), notify the Indemnifying Party in writing of the claim or the commencement of such action; provided, however, that the -------- ------- -17- failure to notify the Indemnifying Party shall not relieve it from any liability which it may have to an Indemnified Party otherwise than under Section 4.1 or 4.2 and except to the extent of any actual prejudice resulting therefrom. If any such claim or action shall be brought against an Indemnified Party, and it shall notify the Indemnifying Party thereof, the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified Indemnifying Party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Indemnified Party -------- ------- shall have the right to employ separate counsel to represent the Indemnified Party and its controlling Persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, but the fees and expenses of such counsel shall be for the account of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of the Company and such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest between them, it being understood, however, that the Indemnifying Party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all Indemnified Parties, or for fees and expenses that are not reasonable. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding. Whether or not the defense of any claim or action is assumed by the Indemnifying Party, such Indemnifying Party will not be subject to any liability for any settlement made without its consent, which consent will not be unreasonably withheld. SECTION 4.4 Contribution. If the indemnification provided for in ------------ this Article 4 is unavailable to the Indemnified Parties in respect of any Damages referred to herein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages (i) as between the Company and the Selling Holders on the one hand and the Underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Holders on the one hand and the Underwriters on the other from the offering of the Registrable Securities, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company and the Selling Holders on the one hand and of the Underwriters on the -18- other in connection with the statements or omissions which resulted in such Damages, as well as any other relevant equitable considerations, and (ii) as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each Selling Holder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Holders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Holders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Company and the Selling Holders on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Holders or by the Underwriters. The relative fault of the Company on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation (even if the Underwriters were treated as one entity for - --- ---- such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 4.4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public (less underwriting discounts and commissions) exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Each Selling Holder's obligations to contribute pursuant to this Section 4.4 -19- is several in the proportion that the proceeds of the offering received by such Selling Holder bears to the total proceeds of the offering received by all the Selling Holders and not joint. ARTICLE 5. ---------- OTHER REGISTRATION RIGHTS SECTION 5.1 Other Registration Rights. The Company represents and ------------------------- warrants to the Holders that there is not in effect on the date hereof any agreement by the Company pursuant to which any holders of securities of the Company have a right to cause the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction that would conflict in any material respect with any provision of this Agreement. SECTION 5.2 Future Registration Rights. The Company shall not in the -------------------------- future grant to any owner or purchaser of shares of capital stock of the Company registration rights (whether demand or incidental) unless (a) such registration rights are made subordinate to the rights granted hereunder so that each Holder shall have priority to participate in any piggy-back registration with respect to such other shares of capital stock of the Company and (b) if the offering by the Holders is underwritten, such owner or purchaser agrees not to sell any shares of capital stock of the Company during the period commencing ten (10) days prior to any such underwritten offering and ending one hundred eighty (180) days following any such underwritten offering (or for such shorter period of time as is sufficient and appropriate, in the opinion of the managing Underwriter). SECTION 5.3 Exclusion of Registrable Shares. As to any particular ------------------------------- Registrable Securities, once issued such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities has been declared effective by the Commission and such securities have been disposed of pursuant to such effective registration statement, (ii) they shall have been distributed to the public pursuant to the provisions of Rule 144 or (iii) they shall have ceased to be outstanding. ARTICLE 6 --------- MISCELLANEOUS SECTION 6.1 Participation in Underwritten Registrations. No Holder ------------------------------------------- of Registrable Securities shall be required to make any representations or warranties to or agreements with the Company or the Underwriters other than representations, warranties or agreements regarding such Holder and its ownership of the securities being registered on its behalf and such Holder's intended method of distribution and any other representation required by law. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, and -20- (b) completes and executes all customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights. SECTION 6.2 Lock-up Agreement. The Holder agrees in connection with ----------------- any registration of the Company's securities, upon the request of the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, pledge, grant any option for the purchase of or otherwise dispose of any Registrable Securities without the prior written consent of the Company or such underwriters, as the case may be, during the seven (7) days prior to and during the 180-day period beginning on the effective date of such registration, as the Company or the underwriters may specify; provided, however, that if the Company delays the effective date of any - -------- ------- registration statement by more than 14 days, the Investors shall not be precluded from selling Registrable Shares during the seven-day period immediately preceding the effective date of such registration statement; and provided further (i) each member of the Company's Board of Directors and management and each of the Company's stockholders holding two percent (2%) or more of the Company's outstanding capital stock enter into a similar agreement and (ii) that if any such member of the Company's Board of Directors, the Company's management or a 2% stockholder is released in whole or in part from such lock-up prior to its expiration, the Company will notify each Investor of such release and each Investor will be released pro-rata with the released parties. This provision shall apply whether or not any Registrable Securities of the Holder are included in the offering. This provision shall apply to the Company's initial public offering and registrations of the Company's securities with an effective date on or before the first anniversary of the effective date of the Company's initial public offering, and shall be of no further force or effect if the Holder no longer has the right to have Registrable Securities included in any registration pursuant to this Agreement. SECTION 6.3 Rule 144 and 144A. The Company covenants that it will ----------------- file any reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934, as amended and that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. SECTION 6.4 Suspension of Obligation to File. Notwithstanding the -------------------------------- provisions of Section 3.1(a), the Company's obligations to file a registration statement, or cause such registration statement to become and remain effective, shall be suspended for the minimally necessary period, not to exceed one hundred twenty (120) days, if there exists at the time material non-public information relating to the Company that, in the reasonable opinion -21- of the Company's counsel, should not be disclosed. The Company's rights under this Section 6.4 may not be invoked more than once during any single 365-day period. SECTION 6.5 Amendment and Modification. This Agreement may be -------------------------- amended, modified and supplemented, and any of the provisions contained herein may be waived, only by a written instrument signed by (i) Holders of at least a majority in interest of the Series A Registrable Securities, (ii) Holders of at least a majority in interest of the Series B Registrable Securities, (iii) Holders of at least a majority in interest of the Series C and Warrant Registrable Securities and (iv) Holders of at least a majority in interest of the Series D Registrable Securities (for this purpose, treating the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as if they had been converted into Common Stock). Notwithstanding anything to the contrary contained in the preceding sentence, a signature addendum to this Agreement permitting the holder or holders of shares of Series D Preferred Stock issued upon exercise of the Series D Warrants shall not be deemed an amendment to this Agreement. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement. SECTION 6.6 Assignability of Rights. An Investor may assign in whole ----------------------- or in part their rights and obligations pursuant to this Agreement to one or more persons, provided that such person acquires at least 20% of the Registrable Shares originally issued to such Investor. Upon such assignment, the Investors shall have no further obligations with respect to the portions of their respective rights and obligations that have been assigned. Any such assignee shall execute an agreement assuming and agreeing to be bound by this Agreement, insofar as it relates to the rights and obligations assigned. Notwithstanding anything to the contrary contained elsewhere in this Section 6.6, an Investor shall be permitted to assign in whole or in part its rights or obligations pursuant to this Agreement to any entity under common control with such Investor or that is a direct or indirect wholly-owned subsidiary of such Investor or such Investor's parent without obtaining the prior consent of the Company or other Investors, and such assignments shall not be subject to the 20% requirement specified in the first sentence hereof. SECTION 6.7 Binding Effect; Entire Agreement. This Agreement and all -------------------------------- of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and executors, administrators and heirs. This Agreement amends, restates and sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them, including, without limitation, (i) Section 7 of the Series A Preferred Stock Purchase Agreement, dated as of December 11, 1995, by and between the Company and the Series A Holder and (ii) the Prior Agreement. -22- SECTION 6.8 Severability. In the event that any provision of this ------------ Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. SECTION 6.9 Notices. All notices, demands, requests, consents or ------- approvals (collectively, the "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally served or mailed, registered or certified, return receipt requested, postage prepaid (or by a substantially similar method), or delivered by a reputable overnight courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or such other address as such party shall have specified most recently by written notice: (a) If to the Company: Audible Inc. 65 Willowbrook Boulevard Wayne, New Jersey 07470 Attention: Donald Katz Telephone: (201) 890-4070 Telecopy: (201) 890-2442 with copies (which shall not constitute notice) to: Piper & Marbury L.L.P. 1200 Nineteenth St., N.W. Washington, DC 20036 Attention: Nancy A. Spangler, Esq. Telephone: (202) 861-6314 Telecopy: (202) 223-2085 (b) If to a Holder, at the most current address, and with a copy to be sent to each additional address, given by such Holder to the Company in writing to the addresses listed for such Holder on the signature pages to this Agreement. Notice shall be deemed given or delivered on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given or delivered on the third business day following the date mailed or on the next business day following delivery of such notice to a reputable overnight courier service. -23- SECTION 6.10 Governing Law. This agreement shall be governed by and ------------- construed in accordance with the internal law of the State of New York, without giving effect to principles of conflicts of law. SECTION 6.11 Headings. The headings in this Agreement are for -------- convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. SECTION 6.12 Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument. SECTION 6.13 Further Assurances. Each party shall cooperate and take ------------------ such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. SECTION 6.14 Remedies. In the event of a breach or a threatened -------- breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, inducing monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief that a remedy at law would be adequate is waived. SECTION 6.15 Supersedes Prior Agreement This Agreement amends, -------------------------- restates and supersedes in their entirety all of the terms and conditions set forth in the Prior Agreement, and upon execution of this Agreement, the Prior Agreement shall be of no further force or effect. SECTION 6.16 Pronouns. Whenever the context may require, any -------- pronouns used herein shall be deemed also to include the corresponding neuter, masculine or feminine forms. (Signatures on following pages.) -24- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: -------- AUDIBLE INC. By:/s/ Donald Katz ------------------------------------ Name: Doanld Katz Title: President 65 Willowbrook Boulevard Wayne, NJ 07470 INVESTORS: ---------- CPQ HOLDINGS, INC. By: /s/ Robert W. Stearns ------------------------------------ Name: Robert W. Stearns Title: Senior Vice President Address: 20555 SH 249 Houston, Texas 77070 HAMBRECHT & QUIST, CALIFORNIA By: /s/ Lisa Lewis ------------------------------------ Name: Lisa Lewis Title: Controller Attorney-in-fact Address: One Bush Street San Francisco, CA 94104 VENTURE FUND I, L.P. By: /s/ Brad Burnham ------------------------- Name: Brad Burnham Title: General Partner 295 North Maple Avenue Basking Ridge, NJ 07920 -25- AT&T VENTURE FUND II, L.P. By: /s/ Brad Burnham ------------------------------------ Name: Brad Burnham Title: General Partner 295 North Maple Avenue Basking Ridge, NJ 07920 THOMSON U.S. INC. By: /s/ James R. Schurr ------------------------------------ Name: James R. Schurr Title: Vice President Two Mill Road, P.O. Box 4679 Wilmington, DE 19807 INTEL CORPORATION By: /s/ Arvind Sodhani ------------------------------------ Name: Arvind Sodhani Title: Vice President and Treasurer 2200 Mission College Boulevard Santa Clara, CA 95952-8119 APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P. Its General Partner By: PATRICOF & CO. MANAGERS INC., its General Partner By: /s/ Alan Patricof ------------------------------------ Name: Alan Patricof Title: Co. Chairman 445 Park Avenue, 11th Fl. New York, New York 10022 -26- APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Alan Patricof ------------------------------------ Name: Alan Patricof Title: Co. Chairman 445 Park Avenue, 11th Fl. New York, New York 10022 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Alan Patricof ------------------------------------ Name: Alan Patricof Title: Co. Chairman 445 Park Avenue, 11th Fl. New York, New York 10022 KLEINER PERKINS CAUFIELD & BYERS VIII By: PCB VIII ASSOCIATES, its General Partner By: /s/ Kevin R. Compton ------------------------------------ Name: Kevin R. Compton Title: General Partner 2750 Sand Hill Road Menlo Park, CA 94025 -27- KPCB INFORMATION SCIENCES ZAIBATSU FUND II By: KPCB VII ASSOCIATES, its General Partner By: /s/ Kevin R. Compton ----------------------------------- Name: Kevin R. Compton Title: General Partner 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII FOUNDERS FUND By: KPCB VIII Associates Its: General Partner By: /s/ Kevin R. Compton ----------------------------------- Name: Kevin R. Compton Title: General Partner 2750 Sand Hill Road Menlo Park, CA 94025 IRONWOOD CAPITAL L.L.C. By: /s/ Tim Mott ----------------------------------- Name: Title: 2241 Lundy Avenue San Jose, CA 95131 __________________________ Bingham Gordon Address: ________________ __________________________ -28- __________________________ Winthrop Knowlton Address: COMDISCO, INC. By:_______________________ Name: Title: IMPERIAL BANK, INC. By:_______________________ Name: Title: /s/ Dan Rimer -------------------------- Dan Rimer Address:_____________________________ _______________________________ /s/ Kip Sheeline ------------------------------------- Kip Sheeline Address:_____________________________ _______________________________ /s/ Zach Hulsey ------------------------------------- Zach Hulsey Address: 950 Vista Road ----------------------------- Hillsborough, CA 94010 ------------------------------------- /s/ Jammie Carroon ------------------------------------- Jammie Carroon Address: 3674 1st Street ----------------------------- SF CA 94110 ------------------------------- /s/ Rob A. Keller ------------------------------------- Rob Keller Address: 3543 Washington Street ----------------------------- SF, CA 94418 ------------------------------- -29- EX-10.14.1 21 AMENDMENT NO. 1 TO AMENDED AND RESTATED REGIST. EXHIBIT 10.14.1 EXECUTION COPY -------------- AUDIBLE, INC. AMENDMENT NO. 1 TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT -------------------------------------------------- THIS AMENDMENT NO. 1 (the "Amendment") dated as of December 18, 1998 to the Amended and Restated Registration Rights Agreement dated February 26, 1998 (the "Agreement"), by and among Audible, Inc., a Delaware corporation (the "Company"), and the holders of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock listed on the signature pages thereto (such holders, the "Series A Holders", the "Series B Holders", the "Series C Holders" and the "Series D Holders", respectively), is hereby entered into by the Company, the Series A Holders, the Series B Holders, the Series C Holders, the Series D Holders and the New Investors (as defined herein). The undersigned Series A Holders, Series B Holders, Series C Holders and Series D Holders constitute the holders of at least a majority of the Registrable Securities of each such class, as such term is defined in the Agreement. WHEREAS, the Company is issuing and selling to certain of the existing Series D Holders and certain new investors (the "New Investors") (such Series D Holders and the New Investors are herein collectively referred to as the "Investors") an aggregate of up to Three Million (3,000,000) shares (the "New Shares") of Series D Preferred Stock under the terms and conditions set forth in Amendment No. 1, dated as of the date hereof, to the Series D Convertible Preferred Stock Purchase Agreement dated as of February 26, 1998; and WHEREAS, the Company, the Series A Holders, the Series B Holders, the Series C Holders and the existing Series D Holders desire that the Investors be granted registration rights with respect to the New Shares having the same terms and conditions as the registration rights granted to the existing Series D Holders with respect to the shares of Series D Preferred Stock. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The New Shares purchased by the Investors and the shares of Common Stock into which the New Shares may be converted are and shall be "shares of Series D Preferred Stock" and "Series D Registrable Securities," respectively, as such terms are defined in the Agreement. 2. Each New Investor shall be a "Holder", as such term is defined in the Agreement. 3. Amendment No. 1, dated as of the date hereof, to the Amended and Restated Stockholders' Agreement, dated as of February 26, 1998, shall be included in the term "Stockholders' Agreement", as such term is defined in the Agreement. 4. Amendment No. 1, dated as of the date hereof, to the Series D Convertible Preferred Stock Purchase Agreement dated as of February 26, 1998, shall be included in the term "Stock Purchase Agreement", as such term is defined in the Agreement. 5. Wherever the Agreement is itself referred to in the Agreement, or wherever there are references in the Agreement to "hereunder', "hereof', "herein", or words of like import, they shall mean the Agreement, as amended hereby. 6. Each of the Investors hereby agrees to be bound by all the terms and conditions of, and is hereby granted all of the rights of an Investor under, the Agreement as though such Investor had been an original party to the Agreement, and by executing this Amendment, each Investor (in the case of the Series D Holders, to the extent that New Shares are acquired hereunder) becomes a party thereto and is bound thereby. 7. All notices, pursuant to Section 6.9 of the Agreement, addressed to the New Investors shall be addressed as follows; If to Microsoft Corporation: Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Attention: Senior Director, Business Development and Investments Telephone No.: (425) 882-8080 Telecopier No.: (425) 936-7329 with a copy to: Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Attention: General Counsel, Finance & Administration Telephone No.: (425) 882-8080 Telecopier No.: (425) 869-1327 -2- If to any of the CSK Venture Capital entities: CSK Venture Capital Co., Ltd. Kenchikukaikan 7F, 5-26-20 Shiba Minato-ku Tokyo 108-0014 Japan Attention: Kenji Suzuki Telephone No.: 81-(0)3-3457-5588 Telecopier No.: 81-(0)3-3457-7070 with a copy to: Morrison & Foerster's AIG Building, 7th Floor 1-1-3 Marunouchi, Chiyoda-ku Tokyo 100 Japan Attention: Charles Comey Telephone No.: 81-3-3214-6522 Telecopier No.: 81-3-3214-6512 If to New York Life Insurance Company: New York Life Insurance Company Investment Department, Venture Capital Group 51 Madison Avenue New York, NY 10010 Attention: Philip Smith Telephone No.: (212) 576-5101 Telecopier No.: (212) 576-8080 with a copy to: New York Life Insurance Company Office of the General Counsel 51 Madison Avenue New York, NY 10010 Attention: E. Payson Clark Telephone No.: (212) 576-7265 Telecopier No.: (212) 576-8340 -3- If to any of the C. Blair entities: C. Blair Asset Management 5 Greenwich Office Park 4/th/ Floor Greenwich, CT 06831 Attention: Christopher Blair Telephone No.: (203) 552-9797 Telecopier No.: (203) 552-9418 8. The Company anticipates that the New Shares will be issued at one or more closings and the parties hereto acknowledge and agree that additional investors who purchase New Shares on any such subsequent closing will be required, by executing counterparts of this Amendment, to become Investors for all purposes of this Amendment and the Agreement. 9. This Amendment shall in all respects be governed by, and construed and enforced in accordance with, the internal laws of the State of New York, without regard to the conflict of law principles thereof. 10. Any party's failure to enforce any provision or provisions of this Amendment shall not in any way be construed as a waiver of any such provision or provisions, nor shall such failure to enforce prevent that party thereafter from enforcing each and every other provision of this Amendment. The rights granted to the parties herein are cumulative and shall not constitute a waiver of any party's right to assert all other legal remedies available to it under the circumstances. 11. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. 12. Each Investor agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Amendment or the Agreement. 13. The Agreement, as amended by this Amendment, is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. 14. Nothing contained in this Amendment or the Agreement shall diminish the continuing obligations of any financial institution to comply with applicable requirements of law that such financial institution maintain responsibility for the disposition of, and control over, its admitted assets, investments and property, including (without limiting the generality of the foregoing) the provisions of Section 1411(b) and all other applicable provisions of the New York Insurance Law, as amended, and as hereinafter from time to time in effect. (Signatures on following pages.) -4- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written. AUDIBLE, INC. By: /s/ Andrew J. Huffman ----------------------------- Andrew Huffman, President and Chief Executive Officer NEW INVESTORS MICROSOFT CORPORATION /s/ Gregory B. Mattei By: _________________________________ Name: Gregory B. Mattei -------------------------- Title: Vice President Finance, Chief Financial Officer ------------------------- Address: One Microsoft Way Redmond, WA 98052-6399 CSK VENTURE CAPITAL CO., LTD. AS INVESTMENT MANAGER FOR CSK-1(A) INVESTMENT FUND By: /s/ Kinya Nakagome --------------------------------- Name: Kinya Nakagome ------------------------- Title: Managing Director ------------------------- Address: Kenchikukaikan 7F, 5-26-20 Shiba Minato-ku Tokyo 108-0014 Japan CSK VENTURE CAPITAL CO., LTD. AS INVESTMENT MANAGER FOR CSK-1(B) INVESTMENT FUND By: /s/ Kinya Nakagome --------------------------------- Name: Kinya Nakagome ------------------------- Title: Managing Director ------------------------- Address: Kenchikukaikan 7F, 5-26-20 Shiba Minato-ku Tokyo 108-0014 Japan -5- CSK VENTURE CAPITAL CO., LTD. AS INVESTMENT MANAGER FOR CSK-2 INVESTMENT FUND By: /s/ Kinya Nakagome --------------------------------- Name: Kinya Nakagome ------------------------- Title: Managing Director ------------------------- Address: Kenchikukaikan 7F, 5-26-20 Shiba Minato-ku Tokyo 108-0014 Japan NEW YORK LIFE INSURANCE COMPANY By: /s/ Philip A. Smith --------------------------------- Name: Philip A. Smith ------------------------- Title: Director ------------------------- Address: 51 Madison Avenue New York, NY 10010 C. BLAIR FUND, LTD. By: /s/ Christopher Blair --------------------------------- Name: Christopher Blair ------------------------------- Title: General Partner ------------------------------- C. BLAIR PARTNERS, LP By: /s/ Christopher Blair --------------------------------- Name: Christopher Blair ------------------------------- Title: General Partner ------------------------------- C. BLAIR PARTNERS II, LP By: /s/ Christopher Blair --------------------------------- Name: Christopher Blair ------------------------------- Title: General Partner ------------------------------- -6- ORIGINAL INVESTORS CPQ HOLDINGS, INC. By: /s/ Linda Auwers ------------------------------------ Name: Linda Auwers --------------------------- Title: Secretary --------------------------- Address: 20555 SH 249 Houston, Texas 77070 HAMBRECHT & QUIST, CALIFORNIA By: ____________________________________ Name: Lisa Lewis Title: Controller Attorney-in-fact Address: One Bush Street San Francisco, CA 94104 VENTURE FUND I, L.P. By: VENTURE MGMT I, L.P., it's General Partner By: /s/ Brad Burnham ----------------------------- Name: Brad Burnham Title: General Partner Address: 295 North Maple Avenue Basking Ridge, NJ 07920 AT&T VENTURE FUND II, L.P. By: VENTURE MGMT LLC, it's General Partner By: /s/ Brad Burnham ----------------------------- Name: Brad Burnham Title: Manager Address: 295 North Maple Avenue Basking Ridge, NJ 07920 -7- THOMSON U.S. INC. By: /s/ James R. Schurr ------------------------ Name: James R. Schurr Title: Vice President Address: Two Mill Road, P.O. Box 4679 Wilmington, DE 19807 THOMSON FINANCE INVESTMENTS, INC. By: /s/ James R. Schurr ------------------------ Name: James R. Schurr Title: Vice President Address: Two Mill Road, P.O. Box 4679 Wilmington, DE 19807 INTEL CORPORATION By: /s/ Satish Rishi ----------------------- Name: Satish Rishi Title: Assistant Treasurer, International Intel Corporation Address: 2200 Mission College Boulevard Santa Clara, CA 95952-8119 APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P. Its General Partner By: PATRICOF & CO. MANAGERS INC., its General Partner By: /s/ Alan Patricof ----------------------- Name: Alan Patricof Title: Chairman Address: 445 Park Avenue, 11th Fl. New York, New York 10022 -8- APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Alan Patricof ------------------------ Name: Alan Patricof Title: Chairman Address: 445 Park Avenue, 11th Fl. New York, New York 10022 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Alan Patricof ------------------------ Name: Title: Address: 445 Park Avenue, 11th Fl. New York, New York 10022 KLEINER PERKINS CAUFIELD & BYERS VIII By: PCB VIII ASSOCIATES, its General Partner By: /s/ Kevin R. Compton ------------------------ Name: Kevin R. Compton Title: General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025 -9- KPCB INFORMATION SCIENCES ZAIBATSU FUND II By: KPCB VII ASSOCIATES, its General Partner By: /s/ Kevin R. Compton ---------------------- Name: Kevin R. Compton Title: General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VIII FOUNDERS FUND By: KPCB VIII Associates Its: General Partner By: /s/ Kevin R. Compton ---------------------- Name: Kevin R. Compton Title: General Partner Address: 2750 Sand Hill Road Menlo Park, CA 94025 IRONWOOD CAPITAL L.L.C. By: /s/ Timothy Mott ---------------------- Name: Title: Address: 2241 Lundy Avenue San Jose, CA 95131 _______________________________ Bingham Gordon Address: _____________________ _______________________________ _______________________________ Winthrop Knowlton Address: _____________________ _______________________________ -10- COMDISCO, INC. By:____________________________ Name: Title: Address: IMPERIAL BANK, INC. By:____________________________ Name: Title: Address: _______________________________ Dan Rimer Address: _____________________ _______________________________ _______________________________ Kip Sheeline Address: _____________________ _______________________________ _______________________________ Zach Hulsey Address: _____________________ _______________________________ _______________________________ Jammie Corroon Address: _____________________ _______________________________ _______________________________ Rob Keller Address: _____________________ _______________________________ -11- EX-10.15 22 1999 STOCK INCENTIVE PLAN EXHIBIT 10.15 AUDIBLE, INC. 1999 STOCK INCENTIVE PLAN 1. ESTABLISHMENT, PURPOSE AND TYPES OF AWARDS AUDIBLE, INC., a Delaware corporation (the "Company"), hereby establishes the AUDIBLE, INC. 1999 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to promote the long-term growth and profitability of the Company by (i) providing key people with incentives to improve stockholder value and to contribute to the growth and financial success of the Company, and (ii) enabling the Company to attract, retain and reward the best-available persons. The Plan permits the granting of stock options (including incentive stock options qualifying under Code section 422 and nonqualified stock options), stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards, other stock-based awards, or any combination of the foregoing. 2. DEFINITIONS Under this Plan, except where the context otherwise indicates, the following definitions apply: (a) "Affiliate" shall mean any entity, whether now or hereafter existing, which controls, is controlled by, or is under common control with, the Company (including, but not limited to, joint ventures, limited liability companies, and partnerships). For this purpose, "control" shall mean ownership of 50% or more of the total combined voting power or value of all classes of stock or interests of the entity. (b) "Award" shall mean any stock option, stock appreciation right, stock award, phantom stock award, performance award, or other stock-based award. (c) "Board" shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. (e) "Common Stock" shall mean shares of common stock of the Company, par value of one cent ($0.01) per share. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Fair Market Value" shall mean, with respect to a share of the Company's Common Stock for any purpose on a particular date, the value determined by the Administrator in good faith. However, if the Common Stock is registered under Section 12(b) of the Exchange Act, "Fair Market Value" shall mean, as applicable, (i) either the closing price or the average of the high and low sale price on the relevant date, as determined in the Administrator's discretion, quoted on the New York Stock Exchange, the American Stock Exchange, or the Nasdaq National Market; (ii) the last sale price on the relevant date quoted on the Nasdaq SmallCap Market; (iii) the average of the high bid and low asked prices on the relevant date quoted on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Inc. or a comparable service as determined in the Administrator's discretion; or (iv) if the Common Stock is not quoted by any of the above, the average of the closing bid and asked prices on the relevant date furnished by a professional market maker for the Common Stock, or by such other source, selected by the Administrator. If no public trading of the Common Stock occurs on the relevant date, then Fair Market Value shall be determined as of the next preceding date on which trading of the Common Stock does occur. (h) "Grant Agreement" shall mean a written document memorializing the terms and conditions of an Award granted pursuant to the Plan and shall incorporate the terms of the Plan. (i) "Parent" shall mean a corporation, whether now or hereafter existing, within the meaning of the definition of "parent corporation" provided in Code section 424(e), or any successor thereto. (j) "Subsidiary" and "subsidiaries" shall mean only a corporation or corporations, whether now or hereafter existing, within the meaning of the definition of "subsidiary corporation" provided in Code section 424(f), or any successor thereto. 3. ADMINISTRATION (a) Administration of the Plan. The Plan shall be administered by the Board or by such committee or committees as may be appointed by the Board from time to time (the Board, committee or committees hereinafter referred to as the "Administrator"). (b) Powers of the Administrator. The Administrator shall have all the powers vested in it by the terms of the Plan, such powers to include authority, in its sole and absolute discretion, to grant Awards under the Plan, prescribe Grant Agreements evidencing such Awards and establish programs for granting Awards. The Administrator shall have full power and authority to take all other actions necessary to carry out the purpose and intent of the Plan, including, but not limited to, the authority to: (i) determine the eligible persons to whom, and the time or times at which Awards shall be granted; (ii) determine the types of Awards to be granted; (iii) determine the number of shares to be covered by or used for reference purposes for each Award; (iv) impose such terms, limitations, restrictions and conditions upon any such Award as the Administrator shall deem appropriate; (v) modify, amend, extend or renew outstanding Awards, or accept the surrender of outstanding Awards and substitute new Awards (provided however, that, except as provided in Section 7(d) of the Plan, any modification that would materially adversely affect any outstanding Award shall not be made without the consent of the holder); (vi) accelerate or otherwise change the time in which an Award may be exercised or becomes payable and to waive or accelerate the lapse, in whole or in part, of any restriction or condition with respect to such Award, including, but not limited to, any restriction or condition with respect to the vesting or exercisability of an Award following termination of any grantee's employment or other relationship with the Company; and (vii) establish objectives and conditions, if any, for earning Awards and determining whether Awards will be paid after the end of a performance period. The Administrator shall have full power and authority, in its sole and absolute discretion, to administer and interpret the Plan and to adopt and interpret such rules, regulations, agreements, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Administrator deems necessary or advisable. (c) Non-Uniform Determinations. The Administrator's determinations under the Plan (including without limitation, determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the Grant Agreements evidencing such Awards) need not be uniform and may be made by the Administrator selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. -2- (d) Limited Liability. To the maximum extent permitted by law, no member of the Administrator shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder. (e) Indemnification. To the maximum extent permitted by law and by the Company's charter and by-laws, the members of the Administrator shall be indemnified by the Company in respect of all their activities under the Plan. (f) Effect of Administrator's Decision. All actions taken and decisions and determinations made by the Administrator on all matters relating to the Plan pursuant to the powers vested in it hereunder shall be in the Administrator's sole and absolute discretion and shall be conclusive and binding on all parties concerned, including the Company, its stockholders, any participants in the Plan and any other employee, [consultant,] or director of the Company, and their respective successors in interest. 4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS Subject to adjustments as provided in Section 7(d) of the Plan, the shares of Common Stock that may be issued with respect to Awards granted under the Plan shall not exceed an aggregate of ____________ shares of Common Stock. The Company shall reserve such number of shares for Awards under the Plan, subject to adjustments as provided in Section 7(d) of the Plan. If any Award, or portion of an Award, under the Plan expires or terminates unexercised, becomes unexercisable or is forfeited or otherwise terminated, surrendered or canceled as to any shares, or if any shares of Common Stock are surrendered to the Company in connection with any Award (whether or not such surrendered shares were acquired pursuant to any Award), the shares subject to such Award and the surrendered shares shall thereafter be available for further Awards under the Plan; provided, however, that any such shares that are surrendered to the Company in connection with any Award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under Code section 422. Subject to adjustments as provided in Section 7(d) of the Plan, the maximum number of shares of Common Stock subject to Awards of any combination that may be granted during any one fiscal year of the Company to any one individual under this Plan shall be limited to _________. Such per-individual limit shall not be adjusted to effect a restoration of shares of Common Stock with respect to which the related Award is terminated, surrendered or canceled. 5. PARTICIPATION Participation in the Plan shall be open to all [employees, officers, and directors] [employees, officers, directors, and consultants] of the Company, or of any Affiliate of the Company, as may be selected by the Administrator from time to time. 6. AWARDS The Administrator, in its sole discretion, establishes the terms of all Awards granted under the Plan. Awards may be granted individually or in tandem with other types of Awards. All Awards are subject to the terms and conditions provided in the Grant Agreement. (a) Stock Options. The Administrator may from time to time grant to eligible participants Awards of incentive stock options as that term is defined in Code section 422 or nonqualified stock options; provided, however, that Awards of incentive stock options shall be limited to employees of the Company or of any Parent or Subsidiary of the Company. Options intended to qualify as incentive stock options under Code section 422 must have an exercise price at least equal to Fair Market Value on the date of grant, but nonqualified stock -3- options may be granted with an exercise price less than Fair Market Value. No stock option shall be an incentive stock option unless so designated by the Administrator at the time of grant or in the Grant Agreement evidencing such stock option. (b) Stock Appreciation Rights. The Administrator may from time to time grant to eligible participants Awards of Stock Appreciation Rights ("SAR"). An SAR entitles the grantee to receive, subject to the provisions of the Plan and the Grant Agreement, a payment having an aggregate value equal to the product of (i) the excess of (A) the Fair Market Value on the exercise date of one share of Common Stock over (B) the base price per share specified in the Grant Agreement, times (ii) the number of shares specified by the SAR, or portion thereof, which is exercised. Payment by the Company of the amount receivable upon any exercise of an SAR may be made by the delivery of Common Stock or cash, or any combination of Common Stock and cash, as determined in the sole discretion of the Administrator. If upon settlement of the exercise of an SAR a grantee is to receive a portion of such payment in shares of Common Stock, the number of shares shall be determined by dividing such portion by the Fair Market Value of a share of Common Stock on the exercise date. No fractional shares shall be used for such payment and the Administrator shall determine whether cash shall be given in lieu of such fractional shares or whether such fractional shares shall be eliminated. (c) Stock Awards. The Administrator may from time to time grant restricted or unrestricted stock Awards to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law, as it shall determine. A stock Award may be paid in Common Stock, in cash, or in a combination of Common Stock and cash, as determined in the sole discretion of the Administrator. (d) Phantom Stock. The Administrator may from time to time grant Awards to eligible participants denominated in stock-equivalent units ("phantom stock") in such amounts and on such terms and conditions as it shall determine. Phantom stock units granted to a participant shall be credited to a bookkeeping reserve account solely for accounting purposes and shall not require a segregation of any of the Company's assets. An Award of phantom stock may be settled in Common Stock, in cash, or in a combination of Common Stock and cash, as determined in the sole discretion of the Administrator. Except as otherwise provided in the applicable Grant Agreement, the grantee shall not have the rights of a stockholder with respect to any shares of Common Stock represented by a phantom stock unit solely as a result of the grant of a phantom stock unit to the grantee. (e) Performance Awards. The Administrator may, in its discretion, grant performance awards which become payable on account of attainment of one or more performance goals established by the Administrator. Performance awards may be paid by the delivery of Common Stock or cash, or any combination of Common Stock and cash, as determined in the sole discretion of the Administrator. Performance goals established by the Administrator may be based on the Company's or an Affiliate's operating income or one or more other business criteria selected by the Administrator that apply to an individual or group of individuals, a business unit, or the Company or an Affiliate as a whole, over such performance period as the Administrator may designate. (f) Other Stock-Based Awards. The Administrator may from time to time grant other stock-based awards to eligible participants in such amounts, on such terms and conditions, and for such consideration, including no consideration or such minimum consideration as may be required by law, as it shall determine. Other 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 Administrator. -4- 7. MISCELLANEOUS (a) Withholding of Taxes. Grantees and holders of Awards shall pay to the Company or its Affiliate, or make provision satisfactory to the Administrator for payment of, any taxes required to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. The Company or its Affiliate may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the grantee or holder of an Award. In the event that payment to the Company or its Affiliate of such tax obligations is made in shares of Common Stock, such shares shall be valued at Fair Market Value on the applicable date for such purposes. (b) Loans. The Company or its Affiliate may make or guarantee loans to grantees to assist grantees in exercising Awards and satisfying any withholding tax obligations. (c) Transferability. Except as otherwise determined by the Administrator, and in any event in the case of an incentive stock option or a stock appreciation right granted with respect to an incentive stock option, no Award granted under the Plan shall be transferable by a grantee otherwise than by will or the laws of descent and distribution. Unless otherwise determined by the Administrator in accord with the provisions of the immediately preceding sentence, an Award may be exercised during the lifetime of the grantee, only by the grantee or, during the period the grantee is under a legal disability, by the grantee's guardian or legal representative. (d) Adjustments; Business Combinations. In the event of changes in the Common Stock of the Company by reason of any stock dividend, spin-off, split-up, recapitalization, merger, consolidation, business combination or exchange of shares and the like, the Administrator shall, in its discretion, make appropriate adjustments to the maximum number and kind of shares reserved for issuance or with respect to which Awards may be granted under the Plan as provided in Section 4 of the Plan and to the number, kind and price of shares covered by outstanding Awards, and shall, in its discretion and without the consent of holders of Awards, make any other adjustments in outstanding Awards, including but not limited to reducing the number of shares subject to Awards or providing or mandating alternative settlement methods such as settlement of the Awards in cash or in shares of Common Stock or other securities of the Company or of any other entity, or in any other matters which relate to Awards as the Administrator shall, in its sole discretion, determine to be necessary or appropriate. Notwithstanding anything in the Plan to the contrary and without the consent of holders of Awards, the Administrator, in its sole discretion, may make any modifications to any Awards, including but not limited to cancellation, forfeiture, surrender or other termination of the Awards in whole or in part regardless of the vested status of the Award, in order to facilitate any business combination that is authorized by the Board to comply with requirements for treatment as a pooling of interests transaction for accounting purposes under generally accepted accounting principles. The Administrator is authorized to make, in its discretion and without the consent of holders of Awards, adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. (e) Substitution of Awards in Mergers and Acquisitions. Awards may be granted under the Plan from time to time in substitution for Awards held by employees, officers, [consultants] or directors of entities who become or are about to become employees, officers, [consultants] or directors of the Company or an -5- Affiliate as the result of a merger or consolidation of the employing entity with the Company or an Affiliate, or the acquisition by the Company or an Affiliate of the assets or stock of the employing entity. The terms and conditions of any substitute Awards so granted may vary from the terms and conditions set forth herein to the extent that the Administrator deems appropriate at the time of grant to conform the substitute Awards to the provisions of the awards for which they are substituted. (f) Termination, Amendment and Modification of the Plan. The Board may terminate, amend or modify the Plan or any portion thereof at any time. (g) Non-Guarantee of Employment or Service. Nothing in the Plan or in any Grant Agreement thereunder shall confer any right on an individual to continue in the service of the Company or shall interfere in any way with the right of the Company to terminate such service at any time with or without cause or notice. (h) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a grantee or any other person. To the extent that any grantee or other person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company. (i) Governing Law. The validity, construction and effect of the Plan, of Grant Agreements entered into pursuant to the Plan, and of any rules, regulations, determinations or decisions made by the Administrator relating to the Plan or such Grant Agreements, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with applicable federal laws and the laws of the State of Delaware, without regard to its conflict of laws principles. (j) Effective Date; Termination Date. The Plan is effective as of the date on which the Plan is adopted by the Board, subject to approval of the stockholders within twelve months before or after such date. No Award shall be granted under the Plan after the close of business on the day immediately preceding the tenth anniversary of the effective date of the Plan. Subject to other applicable provisions of the Plan, all Awards made under the Plan prior to such termination of the Plan shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. Date Approved by the Board:________________________ Date Approved by the Stockholders:_________________ -6- EX-10.16 23 FORM OF COMMON STOCK WARRANTS EXHIBIT 10.16 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF L933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO. COMMON STOCK PURCHASE WARRANT Warrant No. _____ Number of Shares ____ AUDIBLE, INC. Void after March 31, 2002 1. Issuance. This Warrant is issued to _________________ by Audible, Inc., -------- a Delaware corporation (hereinafter with its successors called the "Company"). 2. Purchase Price; Number of Shares. Subject to the terms and conditions -------------------------------- hereinafter set forth, the registered holder of this Warrant (the "Holder"), commencing on the date hereof, is entitled upon surrender of this Warrant with the subscription form annexed hereto duly executed, at the office of the Company or such other office as the Company shall notify the Holder of in writing, to purchase from the Company at a price per share (the "Purchase Price") of $6.00, ______ fully paid and nonassessable shares of Common Stock, $0.01 par value, of the Company (the "Common Stock"). Until such time as this Warrant is exercised in full or expires, the Purchase Price and the securities issuable upon exercise of this Warrant are subject to adjustment as hereinafter provided. 3. Payment of Purchase Price. The Purchase Price may be paid (i) in cash or ------------------------- by check, (ii) by the surrender by the Holder to the Company of any promissory notes or other obligations issued by the Company, with all such notes and obligations so surrendered being credited against the Purchase Price in an amount equal to the principal amount thereof plus accrued interest to the date of surrender, (iii) through delivery by the Holder to the Company of other securities issued by the Company, with such securities being credited against the Purchase Price in an amount equal to the fair market value thereof, as determined in good faith by the Board of Directors of the Company (the "Board"), or (iv) by any combination of the foregoing. The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of any securities the Holder may wish to deliver to the Company pursuant to clause (iii) above. 4. Net Issue Election. The Holder may elect to receive, without the payment ------------------ by the Holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the net issue election notice annexed hereto duly executed, at the office of the Company. Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) ------- A where X = the number of shares to be issued to the Holder pursuant to this Section 4. Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 4. A = the fair market value of one share of Common Stock, as determined in good faith by the Board, as at the time the net issue election is made pursuant to this Section 4. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 4. The Board shall promptly respond in writing to an inquiry by the Holder as to the fair market value of one share of Common Stock. 5. Partial Exercise. This Warrant may be exercised in part, and the Holder ---------------- shall be entitled to receive a new warrant, which shall be dated as of the date of this Warrant, covering the number of shares in respect of which this Warrant shall not have been exercised. 6. Issuance Date. The person or persons in whose name or names any ------------- certificate representing shares of Common Stock is issued hereunder shall be deemed to have become the holder of record of the shares represented thereby as at the close of business on the date this Warrant is exercised with respect to such shares, whether or not the transfer books of the Company shall be closed. 7. Expiration Date; Automatic Exercise. This Warrant shall expire at the ----------------------------------- close of business on March 31, 2002, and shall be void thereafter. Notwithstanding the foregoing, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of Section 4 hereof, without any further action on behalf of the Holder, immediately prior to the time this Warrant would otherwise expire pursuant to the preceding sentence. 8. Reserved Shares; Valid Issuance. The Company covenants that it will at ------------------------------- all times from and after the date hereof reserve and keep available such number of its authorized shares of Common Stock, free from all preemptive or similar rights therein, as will be sufficient to permit the exercise of this Warrant in full. The Company further covenants that such shares as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 9. Dividends. If after the Original Issue Date (as defined in Section 15 --------- hereof) the Company shall subdivide the Common Stock, by split-up or otherwise, or combine the Common Stock, or issue additional shares of Common Stock in payment of a stock dividend on the Common Stock, the number of shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination, and the Purchase Price shall forthwith be proportionately decreased in the case of a subdivision or stock dividend, or proportionately increased in the case of a combination. 10. Mergers and Reclassifications. If after the Original Issue Date there ----------------------------- shall be any reclassification, capital reorganization or change of the Common Stock (other than as a result of a subdivision, combination or stock dividend provided for in Section 9 hereof), or any consolidation of the Company with, or merger of the Company into, another corporation or other business organization (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the outstanding Common Stock), or any sale or conveyance to another corporation or other business organization of all or substantially all of the assets of the Company, then, as a condition of such reclassification, reorganization, change, consolidation, merger, sale or conveyance, lawful provisions shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall thereafter have the right to purchase, at a total price not to exceed that payable upon the exercise of this Warrant in full, the kind and amount of shares of stock and other securities and property receivable upon such reclassification, reorganization, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased by the Holder immediately prior to such reclassification, reorganization, change, consolidation, merger, sale or conveyance, and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder to the end that the provisions hereof (including without limitation, provisions for the adjustment of the Purchase Price and the number of shares issuable hereunder) shall thereafter be applicable in relation to any shares of stock or other securities and property thereafter deliverable upon exercise hereof. 11. Fractional Shares. In no event shall any fractional share of Common ----------------- Stock be issued upon any exercise of this Warrant. If, upon exercise of this Warrant as an entirety, the Holder would, except as provided in this Section 12, be entitled to receive a fractional share of Common Stock, then the Company shall issue the next higher number of full shares of Common Stock, issuing a full share with respect to such fractional share. 12. Certificate of Adjustment. Whenever the Purchase Price is adjusted, as ------------------------- herein provided, the Company shall promptly deliver to the Holder a certificate of a firm of independent public accountants setting forth the Purchase Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. 13. Notices of Record Date, Etc. In the event of: --------------------------- (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, (b) any reclassification of the capital stock of the Company, capital reorganization of the Company, consolidation or merger involving the Company, or sale or conveyance of all or substantially all of its assets, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which any such reclassification, reorganization, consolidation, merger, sale or conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record in respect of such event are to be determined. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken. 14. Other Warrants. This Warrant is one of a series of warrants -------------- (collectively, the "Warrants") that were originally issued by the Company on March 31, 1997 (the "Original Issue Date") pursuant to a Stock and Warrant Purchase Agreement, dated as of March 31, 1997, among the Company and the other parties thereto. 15. Amendment. The terms of this Warrant may be amended, modified or waived --------- only with the written consent of the Company and the holders of Warrants representing at least two-thirds of the number of shares of Common Stock then issuable upon the exercise of the Warrants. No such amendment, modification or waiver shall be effective as to this Warrant unless the terms of such amendment, modification or waiver shall apply with the same force and effect to all of the other Warrants then outstanding. 16. Warrant Register; Transfers, Etc. --------------------------------- A. The Company will maintain a register containing the names and addresses of the registered holders of the Warrants. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be given by certified mail or delivered to the Holder at its address as shown on the warrant register. B. Subject to compliance with applicable federal and state securities laws, this Warrant may be transferred by the Holder with respect to any or all of the shares purchasable hereunder. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, for transfer of this Warrant as an entirety by the Holder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed, by the Holder for transfer with respect to a portion of the shares of Common Stock purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Holder hereof, and shall issue to such Holder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. C. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall issue a new warrant of like tenor and denomination and deliver the same (i) in exchange and substitution for and upon surrender and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft or destruction of such Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction) and of indemnity reasonably satisfactory to the Company, provided, however, that so long as ______ is the registered holder of this Warrant, no indemnity shall be required other than its written agreement to indemnify the Company against any loss arising from the issuance of such new warrant. 17. No Impairment. The Company will not, by amendment of its Restated ------------- Certificate of Incorporation or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder. 18. Governing Law. The provisions and terms of this Warrant shall be ------------- governed by and construed in accordance with the internal laws of the State of New York. 19. Successors and Assigns. This Warrant shall be binding upon the Company's ---------------------- successors and assigns and shall inure to the benefit of the Holder's successors, legal representatives and permitted assigns. 20. Business Days. If the last or appointed day for the taking of any action ------------- required or the expiration of any right granted herein shall be a Saturday or Sunday or a legal holiday, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday or Sunday or such a legal holiday. Dated: March 31, 1997 AUDIBLE, INC. (Corporate Seal) By:___________________________ Donald Katz Attest: Title: President ______________________________________ Patrick Barry, Vice President Subscription To:____________________ Date:_________________________ The undersigned hereby subscribes for __________ shares of Common Stock covered by this Warrant. The certificate(s) for such shares shall be issued in the name of the undersigned or as otherwise indicated below: ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address Net Issue Election Notice To:____________________ Date:_________________________ The undersigned hereby elects under Section 4 to surrender the right to purchase _______ shares of Common Stock pursuant to this Warrant. The certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. ______________________________ Signature ______________________________ Name for Registration ______________________________ Mailing Address Assignment For value received ____________________________ hereby sells, assigns and transfers unto ______________________________________ _________________________________________________________________ Please print or typewrite name and address of Assignee _________________________________________________________________ the within Warrant, and does hereby irrevocably constitute and appoint _______________________ its attorney to transfer the within Warrant on the books of the within named Company with full power of substitution on the premises. Dated:_______________________ ______________________________ In the Presence of: _____________________________ EX-10.17 24 FORM OF STOCK RESTRICTION AGREEMENT EXHIBIT 10.17 STOCK RESTRICTION AGREEMENT --------------------------- AGREEMENT made this ______ day of __________________________, between Audible Inc., a Delaware corporation (the "Company"), and (the "Employee"). WHEREAS, the Employee wishes to purchase an aggregate of _________________ shares of Common Stock, $.01 par value, of the Company (the "Common Stock"); and WHEREAS, the Company wishes to sell such shares to the Employee. For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows: 1. Purchase of Shares. The Employee hereby subscribes for and, upon ------------------ acceptance hereof, shall purchase, subject to the terms and conditions set forth in this Agreement, ______ shares (the "Shares") of Common Stock, at a purchase price of $______ per share (the "Purchase Price"). In consideration of the receipt by the Employee of the Shares, the Employee shall deliver to the Company the aggregate Purchase Price in cash, by promissory note or by a combination of both. Upon receipt of the aggregate Purchase Price by the Company for the Shares, the Company shall issue to the Employee one certificate in the name of the Employee for that number of shares purchased by the Employee. The Employee agrees that the Shares shall be subject to the Purchase Option (as defined below) set forth in Section 2 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement. 2. Purchase Option. --------------- (a) In the event that the Employee ceases to be employed by the Company for any reason or no reason, with or without cause, prior to the date when all Shares shall have vested hereunder, the Company shall have the right and option (the "Purchase Option") to purchase from the Employee, for a sum of $ per share (the "Option Price"), up to that number of Shares that remains unvested at the time the Employee ceases to be so employed. The Option Price may, at the election of the Company, be paid to the Employee or be used to reduce the indebtedness under a promissory note issued to the Company by the Employee as payment for the Shares. The Shares shall vest as to _____________ Shares at _________________ and on the last day of each month thereafter until all Shares have fully vested, _______________ shares shall vest monthly. (b) In the event that the Employee's employment with the Company is terminated by reason of death or disability, the number of the Shares then subject to the Purchase Option shall be reduced by fifty percent (50%). For this purpose, "disability" shall mean the inability of the Employee, due to a medical reason, to carry out his duties as an employee of the Company for a period of six consecutive months. (c) In the event of a "change in control," as defined below, notwithstanding the foregoing, this option shall vest and be exercisable with respect to an additional number of shares equal to 50% of the shares that remain subject to vesting as of the effective date of the "change in control." The Company shall immediately exercise its Purchase Option with respect to any unvested shares unless (x) the Board of Directors in its sole discretion shall determine otherwise or (y) the acquiring entity shall specifically assume this Agreement. For the purpose of this Agreement, a "change in control" shall be deemed to occur upon the first of the following events: (I) any person becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities and such person has the ability to elect a majority of the members of the Company's Board of Directors, if such ownership is not in place on the date of this Agreement; (II) any person becomes the beneficial owner, directly or indirectly, of securities of the Company sufficient to elect a majority of the members of the Board of Directors of the Company, provided that Optionee's responsibilities as an employee of the Company are materially adversely diminished by such change in control; or (III) the sale of all or substantially all the assets of the Company, or a merger, consolidation, or similar transaction of the Company in which the Company is not the surviving entity or the Company's stockholders immediately prior to such transaction hold less than 50% of the voting securities of the surviving entity. A "change in control" shall not include either of the following events: (I) a transaction, the sole purpose of which is to change the state of the Company's incorporation; or (II) a transaction, the result of which is to sell all or substantially all of the assets of the Company to another entity (the "surviving entity"); provided that the surviving entity is owned directly or indirectly by the Company's stockholders immediately following such transaction in substantially the same proportions as their ownership of the Company's voting capital stock immediately preceding such transaction. (d) For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company. 3. Exercise of Purchase Option and Closing. --------------------------------------- (a) The Company may exercise the Purchase Option by delivering or mailing to the Employee (or his estate), in accordance with Section 17, written notice of exercise within 60 days after the termination of the employment of the Employee with the Company. Such notice shall specify the number of Shares to be purchased. If and to the extent the Purchase Option is not so exercised within such 60-day period, the Purchase Option shall automatically expire and terminate effective upon the expiration of such 60-day period. -2- (b) Within 10 days after his receipt of the Company's notice of the exercise of the Purchase Option pursuant to subsection (a) above, the Employee (or his estate) shall tender to the Company at its principal offices the certificate or certificates representing the Shares which the Company has elected to purchase, duly endorsed in blank by the Employee or with duly endorsed stock powers attached thereto, all in form suitable for the transfer of such Shares to the Company. (c) After the time at which any Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Employee on account of such Shares or permit the Employee to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Shares. (d) The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Employee to the Company or in cash (by check) or both. Such action shall take place promptly upon receipt of the Shares. (e) The Company shall not purchase any fraction of a Share upon exercise of the Purchase Option, and any fraction of a Share resulting from a computation made pursuant to Section 2 of this Agreement shall be rounded to the nearest whole Share (with any one-half Share being rounded upward). 4. Restrictions on Transfer. ------------------------ (a) Except as otherwise provided in subsection (b) below, the Employee shall not, sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively "transfer"), any of the Shares, or any interest therein, unless and until such Shares are no longer subject to the Purchase Option. In addition, Shares which are released from the Purchase Option shall not be transferred in contravention of the Right of First Refusal under Section 6 or the market stand-off provisions of Section 8. (b) Notwithstanding the foregoing, the Employee may transfer Shares to or for the benefit of any spouse, child or grandchild, or to a trust for their benefit, provided that such Shares shall remain subject to this Agreement -------- (including without limitation the restrictions on transfer set forth in this Section 4, the Purchase Option, the Right of First Refusal and the Market Stand- Off) and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement. 5. Effect of Prohibited Transfer. The Company shall not be required (a) ----------------------------- to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (b) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred. -3- 6. Right of First Refusal on Dispositions. -------------------------------------- (a) At any time prior to (i) a Qualifying Public Offering, or (ii) a Change in Control Transaction, each as defined below, if the Employee desires to transfer all or any part of its Shares pursuant to a bona fide offer from a third party (the "Proposed Transferee"), the Employee shall submit a written offer (the "Offer") to sell such Shares (the "Offered Shares") to the Company on the same terms and conditions, including price, or terms as reasonably similar as possible, and in no event less favorable to the Company than those on which the Employee proposes to transfer such Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the Offered Shares proposed to be transferred, the total number of Shares owned by the Employee, the terms and conditions, including price, of the proposed transfer, and any other material facts relating to the proposed transfer. The Offer shall further state that the Company may acquire, in accordance with the provisions of this Agreement, all or any portion of the Offered Shares for the price and upon the other terms and conditions, including deferred payment (if applicable), set forth therein. Should the purchase price specified in the Offer be payable in property other than cash or evidences of indebtedness, the Company shall have the right to pay the purchase price in the form of cash equal in amount to the fair market value of such property. If Employee and the Company (or its assignees) cannot agree on such cash value with the ten (10) days after the Company's receipt of the Offer, the valuation shall be made by an appraiser of recognized standing selected by Employee and the Company. (b) If the Company desires to purchase all or any part of the Offered Shares, the Company shall communicate in writing its election to purchase to the Employee, which communication shall state the number of Offered Shares the Company desires to purchase and shall be given to the Employee in accordance with Section 17 below within 15 days of the date the Offer was made. Such communication shall, when taken in conjunction with the Offer, be deemed to constitute a valid, legally binding and enforceable agreement for the sale and purchase of such Offered Shares. The sale of the Offered Shares to be sold to the Company pursuant to this Section 6 shall be made at the offices of the Company on the 15th day following the date the Offer was made (or if such 15th day is not a business day, then on the next succeeding business day). Such sale shall be effected by the Employee's delivery to the Company of a certificate or certificates evidencing the Offered Shares to be purchased by it, duly endorsed for transfer to the Company, against payment to the Employee of the purchase price therefor by the Company. (c) If the Company does not purchase all of the Offered Shares, the Offered Shares not so purchased may be sold by the Employee at any time within 90 days after the date the Offer was made, subject to the provisions of Section 2. Any such sale shall be to the Proposed Transferee, at not less than the price and upon other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. Any Offered Shares not sold within such 90-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section 6. If Offered Shares are sold pursuant to this Section 6 to any purchaser who is not a party to this Agreement, the Offered Shares so sold shall no longer be subject to this Agreement. -4- (d) A "Qualifying Public Offering" shall mean the closing of the sale of shares of Common Stock, at a price of at least $4.00 per share (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares), in a public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $10,000,000 of gross proceeds to the Company. (e) A "Change in Control Transaction" shall mean a transaction described in Section 2(c). 7. Escrow. For purposes of facilitating the enforcement of the provisions ------ of this Agreement, the Employee agrees to deliver the certificate(s) representing the Shares with a stock power executed by the Employee and by the Employee's spouse (if required for transfer), in blank, to the Secretary of the Company or its designee, to hold said certificate(s) and stock power(s) in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms of this Agreement. The Employee hereby acknowledges that the Secretary of the Company (or its designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupled with an interest and is accordingly irrevocable. The Employee agrees that said escrow holder shall not be liable to any party hereof (or to any other party) for any actions or omission unless such escrow holder is grossly negligent. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. The Secretary of the Company initially shall act as the escrow holder with respect to such Shares. 8. Market Stand-Off. ---------------- (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, Employee shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Company or such underwriters; provided, however, that in no event shall such -------- period exceed one hundred eighty (180) days. The limitations of this Section 8 shall in all events terminate three (3) years after the effective date of the Company's initial public offering. (b) In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 8, to the same extent the Shares are at such time covered by such provisions. -5- (c) In order to enforce the limitations of this Section 8, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. 9. Restrictive Legend. All certificates representing Shares shall have ------------------ affixed thereto a legend in substantially the following form, in addition to any other legends that may be required under federal or state securities laws: "The shares of stock represented by this certificate are subject to restrictions on transfer and an option to purchase set forth in a certain Stock Restriction Agreement between the corporation and the registered owner of this certificate (or his predecessor in interest), and such Agreement is available for inspection without charge at the office of the Treasurer of the corporation." 10. Investment Representations. The Employee represents, warrants and -------------------------- covenants as follows: (a) The Employee is purchasing the Shares for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act of 1933 (the "Securities Act"), or any rule or regulation under the Securities Act. (b) He has had such opportunity as he has deemed adequate to obtain from representatives of the Company such information as is necessary to permit him to evaluate the merits and risks of his investment in the Company. (c) He has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. (d) He can afford a complete loss of the value of the Shares and is able to bear the economic risk of holding such Shares for an indefinite period. (e) He understands that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act; (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least two years and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. -6- (f) A legend substantially in the following form will be placed on the certificate representing the Shares: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." 11. Adjustments for Stock Splits, Stock Dividends, etc. --------------------------------------------------- (a) If from time to time during the term of the Purchase Option there is any stock split-up, stock dividend, stock distribution or other reclassification of the Common Stock of the Company, any and all new, substituted or additional securities to which the Employee is entitled by reason of his ownership of the Shares shall be immediately subject to the Purchase Option, the restrictions on transfer and other provisions of this Agreement in the same manner and to the same extent as the Shares, and the Option Price shall be appropriately adjusted. (b) If the Shares are converted into or exchanged for, or stockholders of the Company receive by reason of any distribution in total or partial liquidation, securities of another corporation, or other property (including cash), pursuant to any merger of the Company or acquisition of its assets, then the rights of the Company under this Agreement shall inure to the benefit of the Company's successor and this Agreement shall apply to the securities or other property received upon such conversion, exchange or distribution in the same manner and to the same extent as the Shares. 12. Withholding Taxes. ----------------- (a) The Employee acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Employee any federal, state or local taxes of any kind required by law to be withheld with respect to the purchase of the Shares by the Employee. (b) If the Employee elects, in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, to recognize ordinary income in the year of acquisition of the Shares, the Company will require at the time of such election an additional payment for withholding tax purposes based on the difference, if any, between the purchase price for such Shares and the fair market value of such Shares as of the day immediately preceding the date of the purchase of such Shares by the Employee. 13. Severability. The invalidity or unenforceability of any provision of ------------ this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law. -7- 14. Waiver. Any provision contained in this Agreement may be waived, ------ either generally or in any particular instance, by the Board of Directors of the Company. The failure of the Company (or its assignees) in any instance to exercise the Purchase Option or First Refusal Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Company and Employee. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 15. Binding Effect. This Agreement shall be binding upon and inure to the -------------- benefit of the Company and the Employee and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in this Agreement. 16. No Rights To Employment. Nothing contained in this Agreement shall be ----------------------- construed as giving the Employee any right to be retained, in any position, as an employee of the Company. 17. Notice. All notices required or permitted hereunder shall be in ------ writing and deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party hereto at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 17. 18. Pronouns. Whenever the context may require, any pronouns used in this -------- Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. 19. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties, and supersedes all prior agreements and understandings, relating to the subject matter of this Agreement. 20. Amendment. This Agreement may be amended or modified only by a --------- written instrument executed by both the Company and the Employee. 21. Governing Law. This Agreement shall be construed, interpreted and ------------- enforced in accordance with the laws of the State of Delaware. 22. Undertaking of Parties. The parties hereto hereby agree to take ---------------------- whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on the parties hereto pursuant to the express provisions of this Agreement. -8- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. AUDIBLE INC. By:________________________________ 65 Willowbrook Blvd, 3rd Floor Wayne, NJ 07470 EMPLOYEE ___________________________________ Name Address: _____________________________ _____________________________ -9- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers unto Audible Inc. (the "Company"), ____________________ shares of Common Stock of the Company standing in the name of ______________________ on the books of the Company represented by Certificate No. __________ herewith and does hereby irrevocably constitute and appoint _________________________ Attorney to transfer the said stock on the books of the Company with full power of substitution in the premises. Dated: ________________________ ____________________________ Signature _________________________________ Spouse Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its repurchase right set forth in the Agreement without requiring additional signatures. -10- EX-10.18 25 FORM OF PROMISSORY NOTE EXHIBIT 10.18 PROMISSORY NOTE --------------- $_____________ [Date] Wayne, New Jersey For value received, the undersigned promises to pay to the order of Audible Inc. (hereinafter "Holder"), at 65 Willowbrook Boulevard Wayne New Jersey 07470, or at such other place as the Holder may from time to time direct, the principal sum of ______ ($______) (the "Principal Sum"), with interest computed annually on the unpaid portion of the Principal Sum at an annual rate of eight percent (8%). All accrued but unpaid Principal Sum and interest shall be due and payable on __________. This Note may be prepaid in whole or in part at any time without penalty. Any such prepayment shall be applied first to accrued interest and then to principal. The rate of interest chargeable under this Note will not exceed applicable legal limits and in the event a payment is made by the undersigned or received by the Holder in excess of the applicable legal limits, such excess payment shall be credited as a payment of principal. The undersigned hereby waives demand, presentment for payment, protest and notice of dishonor, and agrees that at any time and from time to time and with or without consideration, the Holder may without notice to or further consent of the undersigned and without in any manner releasing, lessening, or affecting the obligations of the undersigned: (1) release, surrender, waive, add, substitute, settle, exchange, compromise, modify, extend, or grant indulgences with respect to this Note and the undersigned; and (2) grant any extension or other postponements of the time of payment hereof. The occurrence of any one or more of the following events shall constitute a default hereunder: (1) the failure to make any payment of principal or interest when due on this Note and such failure continuing for more than 10 business days following the receipt of notice from the Holder of such failure and Holder's intent to declare a default; (2) the failure to observe or perform any material obligation on the part of the undersigned pursuant to the terms of this Note; (3) the filing of any insolvency proceedings by or against the undersigned pursuant to any federal or state law where a receiver or trustee is appointed with respect to the undersigned or the assets of the undersigned, or (4) the termination of the undersigned's employment with the Holder. If the undersigned shall be in default under this Note and shall not cure such default (i) within 10 business days after written notice thereof from Holder to the undersigned in the case of a monetary default or (ii) within 30 days after written notice thereof from Holder to the undersigned in the case of any other type of default, then, and in any such event, Holder shall have, in addition to any and all rights, powers, remedies and recourses (collectively, "Remedies") available or permitted to Holder, the right and option to declare the unpaid balance of the Principal Sum hereof, together with all accrued and unpaid interest thereon, immediately due and payable without notice, demand or presentment for payment, and to proceed to invoke all Remedies permitted by law. The Remedies available or permitted to Holder hereunder shall be cumulative and concurrent, and not exclusive; and the exercise of any such Remedy shall not be deemed a waiver of the right to exercise at the same time or at any time thereafter any other such Remedy. No delay or omission on the part of Holder in exercising any Remedy available or permitted to him hereunder upon the occurrence of any event of default shall operate as a waiver or preclude the exercise of such Remedy, or any other such Remedy, during the existence of such event of default or upon the occurrence of any subsequent event of default. In the event of any default on this Note, the undersigned shall pay the Holder any reasonable expenses, costs and attorney's fees which the Holder may incur in connection with the collection of any monies due under this Note or in connection with the enforcement of any rights under this Note or under any other agreement related to the loan evidenced hereby. This Note shall be governed by and interpreted under the laws of the State of Delaware (but not including the choice of law rules thereof). Each payment hereunder shall be applied first to the payment of all interest accrued hereunder as of the date of such payment, and the balance of such payment shall be applied to the principal amount hereof. All notices, demands, requests for modification, consents or approvals under this Note must be in writing and shall be deemed to have been properly given when received by the Holder at its address as above stated, and when hand- delivered or mailed by first class mail, postage prepaid, to the undersigned at the address as it appears below, or at such other place as either party may designate in writing. __________________________ Name ___________________________ ___________________________ (address) -2- EX-10.19 26 OFFICE LEASE EXHIBIT 10.19 OFFICE LEASE JUNE 20, 1997 BY AND BETWEEN PASSAIC INVESTMENT LLC, SIXTY-FIVE WILLOWBROOK INVESTMENT LLC, AND WAYNE INVESTMENT LLC, AS TENANTS-IN-COMMON ("SIXTY-FIVE WILLOWBROOK TENANCY") AS "LANDLORD" AND AUDIBLE, INC. AS "TENANT" WAYNE OFFICE BUILDING 65 WILLOWBROOK BLVD. WAYNE, NEW JERSEY TABLE OF CONTENTS
ARTICLES PAGE 1 - DEFINITIONS 5 2 - DEMISE AND TERM 9 3 - RENT 10 4 - USE OF DEMISED PREMISES 11 5 - PREPARATION OF DEMISED PREMISES 12 6 - TAX AND OPERATING EXPENSE PAYMENTS 13 7 - COMMON AREAS 15 8 - SECURITY 15 9 - SUBORDINATION 16 10 - QUIET ENJOYMENT 17 11 - ASSIGNMENT, SUBLETTING AND MORTGAGING 17 12 - COMPLIANCE WITH LAWS 20 13 - INSURANCE AND INDEMNITY 21 14 - RULES AND REGULATIONS 23 15 - ALTERATIONS 23 16 - LANDLORD'S AND TENANTS PROPERTY 24 17 - REPAIRS AND MAINTENANCE 25 18 - ELECTRIC ENERGY 26 19 - HEAT, VENTILATION AND AIR-CONDITIONING 27 20 - OTHER SERVICES; SERVICE INTERRUPTION 27 21 - ACCESS, CHANGES AND NAME 28
22 - MECHANICS' LIENS AND OTHER LIENS 29 23 - NON-LIABILITY AND INDEMNIFICATION 29 24 - DAMAGE OR DESTRUCTION 30 25 - EMINENT DOMAIN 32 26 - SURRENDER 33 27 - CONDITIONS OF LIMITATION 34 28 - RE-ENTRY BY LANDLORD 35 29 - DAMAGES 35 30 - AFFIRMATIVE WAIVERS 38 31 - NO WAIVERS 39 32 - CURING TENANTS DEFAULTS 39 33 - BROKER 39 34 - NOTICES 39 35 - ESTOPPEL CERTIFICATES 40 36 - ARBITRATION 40 37 - MEMORANDUM OF LEASE 40 39 - MISCELLANEOUS 42 40 - RIGHT OF FIRST REFUSAL 44
-2- EXHIBITS Exhibit A - Demised Premises Exhibit B - Space Drawing Exhibit C - Description of Land Exhibit D - Rules and Regulations Exhibit E - Cleaning Specifications OFFICE LEASE LEASE, dated June 20, 1997, between Passaic Investment LLC, a New Mexico limited liability company, Sixty-Five Willowbrook Investment LLC, a New Mexico limited liability company, and Wayne Investment LLC, a New Mexico limited liability company, as Tenants-in-Common ("Sixty-Five Willowbrook Tenancy") having an office at 2929 Coors Blvd., NW, Suite 310, Albuquerque, New Mexico 87120 ("Landlord"), and Audible, Inc., a Delaware corporation, having an office at 65 Willowbrook Blvd., Wayne, New Jersey ("Tenant"). ARTICLE 1 - DEFINITIONS 1.01. As used in this Lease (including in all Exhibits and any Riders attached hereto, all of which shall be deemed to be part of this Lease) the following words and phrases shall have the meanings indicated: A. Advance Rent: $7,902.50 B. Additional Charges: All amounts that become payable by Tenant to Landlord hereunder other than the Fixed Rent. C. Architect: As determined by Landlord. D. Base Year: The calendar year in which the Lease is executed. E. Broker: Newmark Partners, Inc. F. Building: The building located on the Land and known or to be known as "WAYNE OFFICE BUILDING", 65 Willowbrook Boulevard in Wayne, New Jersey. G. Business Days: All days except Saturdays, Sundays, days observed by the federal or state government as legal holidays and such other holidays as shall be designated as holidays by the applicable building service union employees' service contract or by the applicable operating engineers' contract. H. Business Hours: Generally customary daytime business hours, but not before 8:00 A.M. or after 6:00 P.M., Monday through Friday. I. Calendar Year: Any twelve-month period commencing on a January 1. J. Commencement Date: On or about July 1, 1997. In the event that the Demised Premises are Ready for Occupancy up to fifteen days prior to the Commencement Date, Tenant shall have the right to take possession in order to arrange for installation of furniture and data equipment. K. Common Areas: All areas, spaces and improvements in the Building and on the Land which Landlord makes available from time to time for the common use and benefit of the tenants and occupants of the Building and which are not exclusively available for use by a single tenant or occupant, including, without limitation, parking areas, roads, walkways, sidewalks, landscaped and planted areas, community rooms, if any, the managing agent's office, if any, and public rest rooms, if any. L. Demised Premises: The space that is or will be located on the fourth floor of the Building and that is indicated on the floor plan(s) attached hereto as Exhibit A. The Demised Premises contains or will contain approximately 6,322 square feet of Floor Space. M. Expiration Date: The Expiration Date will be February 23, 2003. However, if the Term is extended by Tenant's effective exercise of Tenant's right, if any, to extend the Term, the "Expiration Date" shall be changed to the last day of the last extended period as to which Tenant shall have effectively exercised its right to extend the Term. For the purposes of this definition, the earlier termination of this Lease shall not affect the "Expiration Date." Fixed Rent: An amount at the annual rate per square foot multiplied by the Floor Space of the Demised Premises.
Annual Rate Rate per sq.ft. 07/01/1997- 06/30/1998 $15.00 07/01/1998- 06/30/1999 $15.50 07/01/1999- 06/30/2000 $16.00 07/01/2000- 06/30/2001 $16.50 07/01/2001- 02/23/2002 $17.00
O. Floor Space: As to the Demised Premises, the sum of the floor area stated in square feet bounded by the exterior faces of the exterior walls, or by the exterior or Common Area face of any wall between the Demised Premises and any portion of the Common Areas, or by the center line of any wall between the Demised Premises and space leased or available to be leased to a tenant or occupant divided by eighty five percent (85%). Any reference to Floor Space of a building shall mean the floor area of all levels or stories of such building, excluding any roof, except such portion thereof (other than cooling towers, elevator penthouses, mechanical rooms, chimneys and staircases, entrances and exits) as is permanently enclosed, and including any interior basement level or mezzanine area not occupied or used by a tenant on a continuing or repetitive basis, and any mechanical room, enclosed or interior truck dock, interior Common Areas, and areas used by Landlord for storage, for housing meters and/or other equipment or for other purposes. Any reference to the Floor Space is intended to refer to the Floor Space of the entire area in question irrespective of the Person(s) who may be the owner(s) of all or any part thereof. P. Guarantors: None. Q. Insurance Requirements: Rules, regulations, orders and other requirements of the applicable board of underwriters and/or the applicable fire insurance rating organization and/or -2- any other similar body performing the same or similar functions and having jurisdiction or cognizance over the Land and Building, whether now or hereafter in force. R. Land: The Land upon which the Building and Common Areas are located. The Land is described on Exhibit C. S. Landlord's Work. Landlord shall provide a turn-key build-out based upon the single line drawing prepared by Aztec Corporation and attached hereto as Exhibit B. Landlord's cost shall be capped at $65.000. T. Legal Requirements: Laws and ordinances of all federal, state, city, town, county, borough and village governments, and rules, regulations, orders and directives of all departments, subdivisions, bureaus, agencies or offices thereof, and of any other governmental, public or quasi-public authorities having jurisdiction over the Land and Building, whether now or hereafter in force, including, but not limited to, those pertaining to environmental matters. U. Mortgage: A mortgage and/or a deed of trust. V. Mortgagee: A holder of a mortgage or a beneficiary of a deed of trust. W. Operating Expenses: The cost and expense (whether or not within the contemplation of the parties) for the repair, replacement, maintenance, policing, insurance and operation of the Building and Land. The "Operating Expenses" shall, include, without limitation, the following: (i) the cost for rent, casualty, liability, boiler and fidelity insurance, (ii) if an independent managing agent is employed by Landlord, the fees payable to such agent (provided the same are competitive with the fees payable to independent managing agents of comparable facilities in Passaic County), and (iii) costs and expenses incurred for legal, accounting and other professional services (including, but not limited to, costs and expenses for in-house or staff legal counsel or outside counsel at rates not to exceed the reasonable and customary charges for any such services as would be imposed in an arms length third party agreement for such services. In all years subsequent to Base Year, if Landlord is itself managing the Building and has not employed an independent third party for such management, Landlord shall be entitled to 25% of the resulting total of all of the foregoing items making up "Operating Expenses" for Landlord's home office administration and overhead cost and expense. All items included in Operating Expenses shall be determined in accordance with generally accepted accounting principles consistently applied. X. Permitted Uses: Executive offices of a character consistent with that of a first class office building. Y. Person: A natural person or persons, a partnership, a corporation, or any other form of business or legal association or entity. Z. Ready for Occupancy: The condition of the Demised Premises when for the first time the Landlord's Work shall have been substantially completed and if Landlord is obligated to obtain same, a temporary, permanent, or continuing Certificate of Occupancy shall have been -3- issued permitting use of the Demised Premises for the Permitted Uses. The Landlord's Work shall be deemed substantially completed notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment or decoration remain to be performed, the noncompletion of which does not materially interfere with Tenant's use of the Demised Premises. AA. Real Estate Taxes: The real estate taxes, assessments and special assessments imposed upon the Building and Land by any federal, state, municipal or other governments or governmental bodies or authorities, and any expenses incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the Building and Land, which expenses shall be allocated to the period of time to which such expenses relate. If at any time during the Term the methods of taxation prevailing on the date hereof shall be altered so that in lieu of, or as an addition to or as a substitute for, the whole or any part of such real estate taxes, assessments and special assessments now imposed on real estate there shall be levied, assessed or imposed (a) a tax, assessment, levy, imposition, license fee or charge wholly or partially as a capital levy or otherwise on the rents received therefrom, or (b) any other such additional or substitute tax, assessment, levy, imposition or charge, then all such taxes, assessments, levies, impositions, fees or charges or the part thereof so measured or based shall be deemed to be included within the term "Real Estate Taxes" for the purposes hereof. BB. Rent: The Fixed Rent and the Additional Charges. CC. Rules and Regulations: The reasonable rules and regulations that may be promulgated by Landlord from time to time, which may be reasonably changed by Landlord from time to time. The Rules and Regulations now in effect are attached hereto as Exhibit D. DD. Security Deposit: $15,805.00 EE. Substitute Premises: As defined in Section 38.01. FF. Successor Landlord: As defined in Section 9.03. GG. Superior Lease: Any lease to which this Lease is, at the time referred to, subject and subordinate. HH. Superior Lessor: The lessor of a Superior Lease or its successor in interest, at the time referred to. II. Superior Mortgage: Any Mortgage to which this Lease is, at the time referred to, subject and subordinate. JJ. Superior Mortgagee: The Mortgagee of a Superior Mortgage at the time referred to. KK. Tenant's Fraction: The Tenant's Fraction shall mean the fraction, the numerator of which shall be the Floor Space of the Demised Premises and the denominator of which shall -4- be the Floor Space of the Building (4.80%). If the size of the Demised Premises or the Building shall be changed from the initial size thereof, due to any taking, any construction or alteration work or otherwise, the Tenant's Fraction shall be changed to the fraction the numerator of which shall be the Floor Space of the Demised Premises and the denominator of which shall be the Floor Space of the Building. In the event Landlord determines that Tenant's utilization of any item of Operating Expenses exceeds the fraction referred to above, Tenant's Fraction with respect to such item shall, at Landlord's option, mean the percentage of any such item (but not less than the fraction referred to above) which Landlord reasonably estimates as Tenant's proportionate share thereof. LL. Tenant's Property: As defined in Section 16.02. MM. Tenant's Work: The facilities, materials and work which may be undertaken by or for the account of Tenant (other than the Landlord's Work) to equip, decorate and furnish the Demised Premises for Tenant's occupancy. NN. Term: The period commencing on the Commencement Date and ending at 11:59 p.m. of the Expiration Date, but in any event the Term shall end on the date when this Lease is earlier terminated. OO. Unavoidable Delays: A delay arising from or as a result of a strike, lockout, or labor difficulty, explosion, sabotage, accident, riot or civil commotion, act of war, fire or other catastrophe, Legal Requirement or an act of the other party and any cause beyond the reasonable control of that party, provided that the party asserting such Unavoidable Delay has exercised its best efforts to minimize such delay. ARTICLE 2 - DEMISE AND TERM 2.01. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Demised Premises, for the Term. 2.02. Subject to the conditions set forth in this section of the Lease, Landlord grants to Tenant an option to extend the term of the Lease for a period of five (5) years (the "Extension Period") in accordance with the following provisions: (a) To exercise this option to extend, Tenant must provide Landlord with written notice of its intent to exercise this option no later than twelve (12) months prior to the date of expiration of the initial term of the Lease. (b) The initial Monthly Rent for the Extension Period during the first year shall be equal to the greater of (i) ninety five percent (95%) of the Prevailing Rent (as hereinafter defined), or (ii) the Monthly Rent for the Demised Premises in effect during the last full calendar month of the initial term of the Lease. Notwithstanding such increase in Monthly Rent, Monthly Rent shall continue to be subject to any and all costs, expenses and adjustments as provided in this Lease. -5- (c) The Monthly Rent for the Extension Period shall continue to be subject to any and all costs, expenses and adjustments as provided in this Lease, all of which shall continue uninterrupted and without modification throughout the Extension Period. (d) "Prevailing Rent" shall mean the base rent that would be received by landlords renting space of quality, size and location comparable to the Demised Premises, in buildings in the business district of Wayne, New Jersey, for a term similar to the Extension Period, and subject to the terms of this Lease, including that the provisions of the Lease related to any and all costs, expenses and adjustments as provided in this Lease, all of which shall continue uninterrupted and without modification throughout the Extension Period. (e) The Prevailing Rent shall be determined by the mutual agreement of Landlord and Tenant within thirty (30) days after the date Landlord receives Tenant's notice of its election to exercise this option. In the event Landlord and Tenant are unable to agree within said thirty (30) day period upon the Prevailing Rent, then the Prevailing Rent shall be determined by a board of three (3) licensed real estate brokers. Landlord and Tenant shall each appoint one (1) broker within ten (10) days after expiration of the thirty (30) day period, or sooner if mutually agreed upon. The two so appointed shall select a third within fifteen (15) days after they both have been appointed. Each broker on said board shall be licensed in the state of New Jersey as a real estate broker, specializing in the field of commercial leasing in the business district of Wayne, New Jersey, having no less than five (5) years experience in such field, and recognized as ethical and reputable within his or her field. Each broker, within fifteen (15) days after the third broker is selected, shall submit his or her determination of Prevailing Rent. Prevailing Rent shall be the mean of the two closest rental rate determination. Landlord and Tenant shall each pay the fee of the broker selected by it and they shall share equally the payment of the fee of the third broker. (f) An addendum setting forth the appropriate terms and conditions upon which the Demised Premises will be leased during the Extension Period shall be executed by Landlord and Tenant within ten (10) days after the determination of the Prevailing Rent. (g) All terms and provisions of the Lease shall remain in full force and effect during the Extension Period, except that Tenant shall have no further option to extend the term of the Lease. (h) This section (2.02) of the Lease shall become null and void and of no force and effect if Tenant assigns this Lease or subleases any portion of the Demised Premises, or if Tenant is in default under this Lease either on the date Tenant notifies Landlord of its intent to exercise this option or at any time thereafter up to and including the date upon which the Extension Period is to commence. (i) It is agreed and understood the space currently occupied by Tenant is under a Sublease agreement. Landlord agrees to incorporate the renewal provisions contained in this Lease to include the space currently under the sublease, presuming the proper releases of existing options granted to Sublessor (Painewebber) are released by Painewebber for the benefit of Tenant. Landlord and Tenant will use best efforts to obtain such releases. -6- ARTICLE 3 - RENT 3.01. Tenant shall pay the Fixed Rent in equal monthly installments due in advance on the first day of each and every calendar month during the Term and payable by the fifth business day thereafter (except that Tenant shall pay, upon the execution and delivery of this Lease by Tenant, the Advance Rent, to be applied against the first installment or installments of Fixed Rent becoming due under this Lease). If the Commencement Date occurs on a day other than the first day of a calendar month, the Fixed Rent for the partial calendar month at the commencement of the Term shall be prorated. 3.02. The Rent shall be paid in lawful money of the United States to Landlord at its office, or such other place, or Landlord's agent, as Landlord shall designate by notice to Tenant. Tenant shall pay the Rent promptly when due without notice or demand therefor and without any abatement, deduction or setoff for any reason whatsoever, except as may be expressly provided in this Lease. If Tenant makes any payment to Landlord by check, same shall be by check of Tenant and Landlord shall not be required to accept the check of any other Person, and any check received by Landlord shall be deemed received subject to collection. If any cheek is mailed by Tenant, Tenant shall post such check in sufficient time prior to the date when payment is due so that such check will be received by Landlord on or before the date when payment is due. Tenant shall assume the risk of lateness or failure of delivery of the mails, and no lateness or failure of the mails will excuse Tenant from its obligation to have made the payment in question when required under this Lease. 3.03. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law provided. 3.04. If Tenant is in arrears in payment of Rent, Tenant waives Tenant's right, if any, to designate the items to which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to such items as Landlord sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items to which any such payments shall be credited. 3.05. In the event that any installment of Rent due hereunder shall be overdue past five (5) business days, a "Late Charge" equal to four percent (4%) of any outstanding balance ("Late Payment Rate") for Rent so overdue may be charged by Landlord for each month or part thereof that the same remains overdue. In the event that any check tendered by Tenant to Landlord is returned for insufficient funds, Tenant shall pay to Landlord, in addition to the charge imposed by the preceding sentence, a fee of $25.00. Any such Late Charges if not previously paid shall, at the option of the Landlord, be added to and become part of the next succeeding Rent payment to be made hereunder. -7- ARTICLE 4 - USE OF DEMISED PREMISES 4.01. Tenant shall use and occupy the Demised Premises for the Permitted Uses, and Tenant shall not use or permit or suffer the use of the Demised Premises or any part thereof for any other purpose. 4.02. Subject to Landlord's obligations setforth in Section 1.01(z) here in above. If any governmental license or permit, including a Certificate of Occupancy, shall be required for the proper and lawful conduct of Tenant's business in the Demised Premises or any part thereof, Tenant shall duly procure and thereafter maintain such license or permit and submit the same to Landlord for inspection. Tenant shall at all times comply with the terms and conditions of each such license or permit. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy the Demised Premises, or do or permit anything to be done in the Demised Premises, in any manner which (a) violates the Certificate of Occupancy for the Demised Premises or for the Building; (b) causes or is liable to cause injury to the Building or any equipment, facilities or systems therein; (c) constitutes a violation of the Legal Requirements or Insurance Requirements; (d) impairs or tends to impair the character, reputation or appearance of the Building as a first-class office building; (e) impairs or tends to impair the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) annoys or inconveniences or tends to annoy or inconvenience other tenants or occupants of the Building. ARTICLE 5 - PREPARATION OF DEMISED PREMISES 5.0l.(a) The Demised Premises shall be completed and prepared for Tenant's occupancy in the manner described in, and subject to the provisions of Landlord's Work defined in attachment. Tenant shall occupy the Demised Premises promptly after the same are Ready for Occupancy and possession thereof is delivered to Tenant by Landlord giving to Tenant a notice of such effect. Except as expressly provided to the contrary in this Lease, the taking of possession by Tenant of the Demised Premises shall be conclusive evidence as against Tenant that the Demised Premises and the Building were in good and satisfactory condition at the time such possession was taken. 5.01.(b) Tenant shall, within three (3) business days of the date hereof, provide Landlord with all reasonable information Landlord needs to prepare working drawings for the construction of Landlord's Work. Such information shall include, but not be limited to layout of the Demised Premises, electrical, mechanical, plumbing & structural requirements, materials & finishes. Within ten (10) days of Landlord's receipt of all necessary information, Landlord shall deliver working drawings to Tenant. Tenant shall, within two (2) business days of its receipt of working drawings, review and approve the working drawings by giving Landlord written notice thereof. If Tenant does not respond within said two (2) business day period, the working drawings shall be deemed approved. If Tenant disapproves of the working drawings, it shall specify in detail the reasons for its disapproval. If Tenant makes changes in the working drawings, the provisions -8- of Section 5.02 shall apply. Within 5 days after the working drawings are approved or deemed approved, Landlord shall submit to Tenant prices for the construction of any items in excess of Landlords' Work. Tenant shall, within three (3) business days of its receipt of prices, review and approve the prices by giving Landlord written notice thereof. If Tenant does not respond within said three (3) business day period, the prices shall be deemed approved. If Tenant disapproves of any prices, the provisions of Section 5.02 shall apply. 5.01.(c) Landlord has received approvals from Painewebber for the removal of the "Common Wall" between Tenant's existing space and the Demised Premises described herein. Tenant shall be under no obligation to reconstruct this "Common Wall" at the end of this lease or extension period term. 5.02. If the substantial completion of the Landlord's Work shall be delayed due to (a) any act or omission of Tenant or any of its employees, agents or contractors (including, without limitation, f ii any delays due to changes in or additions to the Landlord's Work, or (ii] any delays by Tenant in the submission of plans, drawings, specifications or other information or in approving any working drawings or estimates or in giving any authorizations or approvals), or (b) any additional time needed for the completion of the Landlord's Work by the inclusion in the Landlord's Work of any items specified by Tenant that require long lead time for delivery or installation, then the Demised Premises shall be deemed Ready for Occupancy on the date when they would have been ready but for such delay(s). The Demised Premises shall be conclusively presumed to be in satisfactory condition on the Commencement Date except for the minor or insubstantial details of which Tenant gives Landlord notice within thirty (30) days after the Commencement Date specifying such details with reasonable particularity. 5.03. If Landlord is unable to give possession of the Demised Premises on the Commencement Date because of the holding-over or retention of possession by any tenant, undertenant or occupant, Landlord shall not be subject to any liability for failure to give possession, the validity of this Lease shall not be impaired under such circumstances, and the Term shall not be extended, but the Rent shall be abated if Tenant is not responsible for the inability to obtain possession. 5.04. Landlord reserves the right, at any time and from time to time, to increase, reduce or change the number, type, size, location, elevation, nature and use of any of the Common Areas and the Building and any other buildings and other improvements on the Land, including, without limitation, the right to move and/or remove same, provided same shall not unreasonably block or interfere with Tenant's means of ingress or egress to and from the Demised Premises and provided that such changes are consistent with a Class B office building. ARTICLE 6 - TAX AND OPERATING EXPENSE PAYMENTS -9- 6.01. Tenant shall pay to Landlord, as hereinafter provided, Tenant's Fraction of the Real Estate Taxes. Tenant's Fraction of the Real Estate Taxes shall be the Real Estate Taxes in respect of the Building for the period in question, less the Real Estate Taxes attributable to the Base Year, multiplied by the Tenant's Fraction, plus the Real Estate Taxes in respect of the Land for the period in question, less the Real Estate Taxes attributable to the Base Year, multiplied by the Tenant's Fraction. If any portion of the Building shall be exempt from all or any part of the Real Estate Taxes, then for the period of time when such exemption is in effect, the Floor Space on such exempt portion shall be excluded when making the above computations in respect of the part of the Real Estate Taxes for which such portion shall be exempt. Landlord shall estimate the annual amount of Tenant's Fraction of the Real Estate Taxes (which estimate may be changed by Landlord at any time and from time to time), and Tenant shall pay to Landlord 1/12th of the amount so estimated on the first day of each month in advance. Tenant shall also pay to Landlord on demand from time to time the amount which, together with said monthly installments, will be sufficient in Landlord's estimation to pay Tenant's Fraction of any Real Estate Taxes thirty (30) days prior to the date when such Real Estate Taxes shall first become due. When the amount of any item comprising Real Estate Taxes is finally determined for a real estate fiscal tax year, Landlord shall submit to Tenant a statement in reasonable detail of the same, and the figures used for computing Tenant's Fraction of the same, and if Tenant's Fraction so stated is more or less than the amount theretofore paid by Tenant for such item based on Landlord's estimate, Tenant shall pay to Landlord the deficiency within ten (10) business days after submission of such statement, or Landlord shall, at its sole election, either refund to Tenant the excess or apply same to future installments of Real Estate Taxes due hereunder. Any Real Estate Taxes for a real estate fiscal tax year, a part of which is included within the Term and a part of which is not so included, shall be apportioned on the basis of the number of days in the real estate fiscal tax year included in the Term, and the real estate fiscal tax year for any improvement assessment will be deemed to be the one-year period commencing on the date when such assessment is due, except that if any improvement assessment is payable in installments, the real estate fiscal tax year for each installment will be deemed to be the one-year period commencing on the date when such installment is due. The above computations shall be made by Landlord in accordance with generally accepted accounting principles, and the Floor Space referred to will be based upon the average of the Floor Space in existence on the first day of each month during the period in question. In addition to the foregoing, Tenant shall be responsible for any increase in Real Estate Taxes attributable to assessments for improvements installed by or for the account of Tenant at the Demised Premises. If the Demised Premises are not separately assessed, the amount of any such increase shall be determined by reference to the records of the tax assessor. 6.02. Tenant shall pay to Landlord, as hereinafter provided, Tenant's Fraction of the Operating Expenses. Tenant's Fraction of the Operating Expenses shall be the Operating Expenses for the period in question, less the Operating Expenses for the Base Year, multiplied by Tenant's Fraction. Landlord shall estimate Tenant's annual Fraction of the Operating Expenses (which estimate may be reasonably changed by Landlord from time to time), and Tenant shall pay to Landlord 1/12th of the amount so estimated on the first day of each month in advance. If at any time Landlord changes its estimate of Tenant's Fraction of the Operating Expenses for the then current Calendar Year or partial Calendar Year, Landlord shall give notice to Tenant of such change and within ten (10) business days after such notice Landlord and -10- Tenant shall adjust for any overpayment or underpayment during the prior months of the then current Calendar Year or partial Calendar Year. After the end of each Calendar Year, including any partial Calendar Year at the beginning of the Term, and after the end of the Term, Landlord shall submit to Tenant a statement in reasonable detail stating Tenant's Fraction of the Operating Expenses for such Calendar Year, or partial Calendar Year in the event the Term shall begin on a date other than a January 1st and/or end on a date other than a December 31st, as the case may be, and stating the Operating Expenses for the period in question and the figures used for computing Tenant's Fraction, and if Tenant's Fraction so stated for such period is more or less than the amount paid for such period, Tenant shall pay to Landlord the deficiency within ten (10) business days after submission of such statement, or Landlord shall, at its sole election, either refund to Tenant the excess or apply same to future installments of Operating Expenses due hereunder. All computations shall be made in accordance with generally accepted accounting principles. 6.03. Each such statement given by Landlord pursuant to Section 6.01 or Section 6.02 shall be conclusive and binding upon Tenant unless within thirty (30) days after the receipt of such statement Tenant shall notify Landlord that it disputes the correctness of the statement, specifying the particular respects in which the statement is claimed to be incorrect. If such dispute is not settled by agreement, either party may submit the dispute to arbitration as provided in Article 36. Pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall, within ten (10) business days after receipt of such statement, pay the Additional Charges in accordance with Landlord's statement, without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall forthwith pay to Tenant the amount of Tenant's overpayment resulting from compliance with Landlord's statement. ARTICLE 7 - COMMON AREAS 7.01. Subject to the provisions of Section 5.04, Landlord will operate, manage, equip, light, repair and maintain, or cause to be operated, managed, equipped, lighted, repaired and maintained, the Common Areas for their intended purposes. Landlord reserves the right, at any time and from time to time, to construct within the Common Areas kiosks, fountains, aquariums, planters, pools and sculptures, and to install vending machines, telephone booths, benches and the like, provided same shall not unreasonably block or interfere with Tenant's means of ingress or egress to and from the Demised Premises and provided the same shall not be inconsistent with the operation of the building as a Class B of the building. 7.02. Tenant and its subtenants and concessionaires, and their respective officers, employees, agents, customers and invitees, shall have the non- exclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant such right, but subject to the Rules and Regulations, to use the Common Areas. Landlord reserves the right, at any time and from time to time, to close temporarily all or any portions of the Common Areas when in Landlord's reasonable judgment any such closing is necessary or desirable (a) to make repairs or changes or to effect construction, (b) to prevent the acquisition of public rights in such areas, (c) to discourage unauthorized parking, or (d) to protect or preserve natural persons or -11- property. Landlord may do such other acts in and to the Common Areas as in its judgment may be desirable to improve or maintain same. 7.03. Tenant agrees that it, any subtenant or licensee and their respective officers, employees, contractors and agents will park their automobiles and other vehicles only where and as permitted by Landlord. Tenant will, if and when so requested by Landlord, furnish Landlord with the license numbers of any vehicles of Tenant, any subtenant or licensee and their respective officers, employees and agents. ARTICLE 8 - SECURITY 8.01. Tenant has deposited with Landlord the Security Deposit as security for the full and faithful payment and performance by Tenant of Tenant's obligations under this Lease. If Tenant defaults in the full and prompt payment and performance of any of its obligations under this Lease, including, without limitation, the payment of Rent, Landlord may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any Rent or any other sums as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of Tenant's obligations under this Lease, including, without limitation, any damages or deficiency in the reletting of the Demised Premises, whether such damages or deficiency accrue before or after summary proceedings or other re-entry by Landlord. If Landlord shall so use, apply or retain the whole or any part of the security, Tenant shall upon demand immediately deposit with Landlord a sum equal to the amount so used, applied and retained, as security as aforesaid. If Tenant shall fully and faithfully pay and perform all of Tenant's obligations under this Lease, the Security Deposit or any balance thereof to which Tenant is entitled shall be returned or paid over to Tenant after the date on which this Lease s II expire or sooner end or terminate, and after delivery to Landlord of entire possession of the Demised Premises. In the event of any sale or leasing of the Land, Landlord shall have the right to transfer the security to which Tenant is entitled to the vendee or lessee and upon receipt of written acknowledgement by Tenant from such vendee or lessee of the assumption of Landlord's obligations under the Lease, including acknowledgement of the receipt of Security Deposits. Landlord shall thereupon be released by Tenant from all liability for the return or payment thereof, and Tenant shall look solely to the new landlord for the return or payment of the same; and the provisions hereof shall apply to every transfer or assignment made of the same to a new landlord. Tenant shall not assign or encumber or attempt to assign or encumber the monies deposited herein as security, and neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. ARTICLE 9 - SUBORDINATION 9.01. This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground leases and underlying leases of the Land and/or the Building now or hereafter existing and to all Mortgages which may now or hereafter affect the Land and/or building and/or any of such leases, whether or not such Mortgages or leases shall also cover -12- other lands and/or buildings, to each and every advance made or hereafter to be made under such Mortgages, and to all renewals, modifications, replacements and extensions of such leases and such Mortgages and spreaders and consolidations of such Mortgages. The provisions of this Section 9.01 shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the Mortgagee of any such Mortgage or any of their respective successors in interest may reasonably request to evidence such subordination; and if Tenant fails to execute, acknowledge or deliver any such instruments within 10 business days after request therefor, Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest to execute and deliver any such instruments for and on behalf of Tenant. 9.02. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to Landlord and each Superior Mortgagee and each Superior Lessor whose name and address shall previously have been furnished to Tenant, and (b) until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Superior Mortgagee or Superior Lessor shall have become entitled under such Superior Mortgage or Superior Lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Superior Mortgagee or Superior Lessor shall with due diligence give Tenant notice of intention to, and commence and continue to, remedy such act or omission. 9.03. If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord's rights ("Successor Landlord") and upon such Successor Landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease except that the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease; (b) be subject to any offset, not expressly provided for in this Lease, which theretofore shall have accrued to Tenant against Landlord; (c) be liable for the return of any Security Deposit, in whole or in part, to the extent that same is not paid over to the Successor Landlord; or (d) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Fixed Rent or Additional Charges, unless such modification or prepayment shall have been expressly approved in writing by the Superior Lessor of the Superior Lease or the Mortgagee of the Superior Mortgage through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease. 9.04. If any then present or prospective Superior Mortgagee shall require any modification(s) of this Lease, Tenant shall promptly execute and deliver to Landlord such -13- instruments effecting such modification(s) as Landlord shall request, provided that such modification(s) do not adversely affect in any material respect any of Tenant's rights under this Lease. ARTICLE 10 - QUIET ENJOYMENT 10.01. So long as Tenant pays all of the Rent and performs all of Tenant's other obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Demised remises without hindrance, ejection or molestation by Landlord or any person lawfully claiming through or under Landlord, subject, nevertheless, to the provisions of this Lease. ARTICLE 11 - ASSIGNMENT, SUBLETTING AND MORTGAGING 11.01. Tenant shall not, whether voluntarily, involuntarily, or by operation of law or otherwise, (a) assign or otherwise transfer this Lease, or offer or advertise to do so, (b) sublet the Demised Premises or any part thereof, or offer or advertise to do so, or allow the same to be used, occupied or utilized by anyone other than Tenant, or (c) mortgage, pledge, encumber or otherwise hypothecate this Lease in any manner whatsoever, without in each instance obtaining the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. 11.02. If at anytime (a) the original Tenant named herein, (b) the then Tenant, (c) any Guarantor, or (d) any Person owning a majority of the voting stock of, or directly or indirectly controlling, the then Tenant shall be a corporation or partnership, any transfer of voting stock or partnership interest resulting in the person(s) who shall have owned a majority of such corporation's shares of voting stock or the general partners' interest in such partnership, as the case may be, immediately before such transfer, ceasing to own a majority of such shares of voting stock or general partner's interest, as the case may be, except as the result of transfers by inheritance, shall be deemed to be an assignment of this Lease as to which Landlord's consent shall have been required, and in any such event Tenant shall notify Landlord. The provisions of this Section 11.02 shall not be applicable to any corporation all the outstanding voting stock of which is listed on a national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) or is traded in the over-the-counter market with quotations reported by the National Association of Securities Dealers through its automated system for reporting quotations and shall not apply to transactions with a corporation into or with which the then Tenant is merged or consolidated or to which substantially all of the then Tenant's assets are transferred or to any corporation which controls or is controlled by the then Tenant or is under common control with the then Tenant, provided that in any of such events (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of(l) the net worth of Tenant immediately prior to such merger, consolidation or transfer, or (2) the net worth of the original Tenant on the date of this Lease, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least 10 days prior to the effective date of any such transaction. For the purposes of this Section, the words "voting stock" shall refer to shares of stock regularly entitled to vote for the election of directors of the corporation. Landlord shall have the right at any time and from time to time during the Term to -14- the stock record books of the corporation to which the provisions of this Section 11.02 apply, and Tenant will produce the same on request of Landlord. 11.03 If this Lease is assigned, whether or not in violation of this Lease, Landlord may collect rent from the assignee. If the Demised Premises or any part thereof are sublet or used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant, and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to the Rent, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 11.01 or Section 11.02, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord to any assignment, mortgaging, subletting or use or occupancy by others shall not in any way be considered to relieve Tenant from obtaining the express written consent of Landlord to any other or further assignment, mortgaging or subletting or use or occupancy by others not expressly permitted by this Article 11. References in this Lease to use or occupancy by others (that is, anyone other than Tenant) shall not be construed as limited to subtenants and those claiming under or through subtenants but shall be construed as including also licensees and others claiming under or through Tenant, immediately or remotely. 11.04. Any permitted assignment or transfer, whether made with Landlord's consent pursuant to Section 11.01 or without Landlord's consent if permitted by Section 11.02, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee shall assume Tenant's obligations under this Lease and whereby the assignee shall agree that all of the provisions in this Article 11 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect to all future assignments and transfers. Notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of Rent by Landlord from an assignee, transferee, or any other party, the original Tenant and any other person)s) who at any time was or were Tenant shall remain fully liable for the payment of the Rent and for Tenant's other obligations under this Lease. 11.05. The liability of the original named Tenant and any other Person(s) (including but not limited to any Guarantor) who at any time are or become responsible for Tenant's obligations under this Lease shall not be discharged, released or impaired by any agreement extending the time of, or modifying any of the terms or obligations under this Lease, or by any waiver or failure of Landlord to enforce, any of this Lease. 11.06. The listing of any name other than that of Tenant, whether on the doors of the Demised Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Demised Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Demised Premises or to the use or occupancy thereof by others. Notwithstanding anything contained in this Lease to the contrary, Landlord shall have the absolute right to withhold its consent to an assignment or subletting to a Person who is otherwise a tenant or occupant of the Building, or of a building -15- owned or managed by Landlord or its affiliated entities. 11.07. Without limiting any of the provisions of Article 27, if pursuant to the Federal Bankruptcy Code (or any similar law hereafter enacted having the same general purpose), Tenant is permitted to assign this Lease notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal to the sum of one (1) year's Fixed Rent plus an amount equal to the Additional Charges for the Calendar Year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of Tenant's obligations under this Lease, to be held and applied in the manner specified for security in Section 8.01. 11.08. If Tenant shall propose to assign or in any manner transfer this Lease or any interest therein, or sublet the Demised Premises or any part or parts thereof, or grant any concession or license or otherwise permit occupancy of all or any part of the Demised Premises by any person, Tenant shall give notice thereof to Landlord, together with a copy of the proposed instrument that is to accomplish same and such financial and other information pertaining to the proposed assignee, transferee, subtenant, concessionaire or licensee as Landlord shall reasonably require. If Tenant does not consummate the subject transaction within 60 days after the last day on which Landlord might have so terminated this Lease as a result of such transaction, Tenant shall again be required to comply with the provisions of this Section 11.08 in connection with any such transaction as if the notice by Tenant referred to above in this Section 11.08 had not been given. Notwithstanding anything contained in this Lease to the contrary, Landlord shall not be obligated to entertain or consider any request by Tenant to consent to any proposed assignment of this Lease or sublet of all or any part of the Demised Premises unless each request by Tenant is accompanied by a non-refundable fee payable to Landlord in the amount of One Thousand Dollars ($1,000.00) to cover Landlord's administrative, legal, and other costs and expenses incurred in processing each of Tenant's requests. Neither Tenant's payment nor Landlord's acceptance of the foregoing fee shall be construed to impose any obligation whatsoever upon Landlord to consent to Tenant's request. ARTICLE 12 - COMPLIANCE WITH LAWS 12.01. Tenant shall comply with all Legal Requirements which shall, in respect of the Demised Premises or the use and occupation thereof, or the abatement of any nuisance in, on or about the Demised Premises, impose any violation, order or duty on Landlord or Tenant; and Tenant shall pay all the reasonable costs and expenses, plus all fines, penalties and damages which may be imposed upon Landlord or any Superior Lessor by reason of or arising out of Tenant's failure to fully and promptly comply with and observe the provisions of this Section 12.01. However, Tenant need not comply with any such law or requirement of any public authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Demised Premises, in accordance with Section 12.02. 12.02. Tenant may contest, by appropriate proceedings prosecuted diligently and in good -16- faith, the validity, or applicability to the Demised Premises, of any Legal Requirement, provided that (a) Landlord shall not be subject to criminal penalty or to prosecution for a crime, and neither the Demised Premises nor any part thereof shall be subject to being condemned or vacated, by reason of non- compliance or otherwise by reason of such contest; (b) before the commencement of such contest, Tenant shall furnish to Landlord either (i) the bond of a surety company satisfactory to Landlord, which bond shall be, as to its provisions and form, satisfactory to Landlord, and shall be in an amount at least equal to 125% of the cost of such compliance (as estimated by a reputable contractor designated by Landlord) and shall indemnify Landlord against the cost thereof and against all liability for damages, interest, penalties and expenses (including reasonable attorneys' fees and expenses), resulting from or incurred in connection with such contest or non-compliance, or (ii) other security in place of such bond satisfactory to Landlord, (c) such non-compliance or contest shall not constitute or result in any violation of any Superior Lease or Superior Mortgage, or if any such Superior Lease and/or Superior Mortgage shall permit such non-compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord advised as to the status of such proceedings. Without limiting the application of the above, Landlord shall be deemed subject to prosecution for a crime if Landlord, or its managing agent, or any officer, director, partner, shareholder or employee of Landlord or its managing agent, as an individual, is charged with a crime of any kind or degree whatsoever, whether by service of a summons or otherwise, unless such charge is withdrawn before Landlord or its managing agent, or such officer, director, partner, shareholder or employee of Landlord or its managing agent (as the case may be) is required to plead or answer thereto. Notwithstanding anything contained in this Lease to the contrary, Tenant shall not file any Real Estate Tax Appeal with respect to the Land, Building or the Demised Premises. ARTICLE 13 - INSURANCE AND INDEMNITY 13.01. Landlord shall maintain or cause to be maintained All Risk insurance in respect of the Building and other improvements on the Land normally covered by such insurance (except for the property Tenant is required to cover with insurance under Section 13.02 and similar property of other tenants and occupants of the Building or buildings and other improvements which are on land neither owned by nor leased to Landlord) for the benefit of Landlord, any Superior Lessors, any Superior Mortgagees and any other parties Landlord may at any time and from time to time designate, as their interests may appear, but not for the benefit of Tenant, and shall maintain rent insurance as required by any Superior Lessor or any Superior Mortgagee. The All Risk insurance will be in the amounts required by any Superior Lessor or any Superior Mortgagee but not less than the amount sufficient to avoid the effect of the co-insurance provisions of the applicable policy or policies. Landlord may also maintain any other forms and types of insurance which Landlord shall deem reasonable in respect of the Building and Land. Landlord shall have the right to provide any insurance maintained or caused to be maintained by it under blanket policies. 13.02. Tenant shall maintain the following insurance: (a) comprehensive general public liability insurance in respect of the Demised Premises and the conduct and operation of business -17- therein, having not less than a $2,000,000.00 combined single limit per occurrence for bodily injury or death to any one person and for bodily injury or death to any number of persons in any one occurrence, and for property damage, including water damage and sprinkler leakage legal liability (coverage to include but not be limited to (i) premises operation, completed operations, broad form contractual liability and product liability, (ii) comprehensive automobile, truck and vehicle liability insurance covering all owned, hired and non-owned vehicles used by the contractor(s) in connection with their work and any loading of such vehicles, with limits as stated above and (iii) worker's compensation, employers liability and occupational disease insurance as required by statutes, but in any event not less than $500,000.00 for Coverage B covering all damages and injuries arising from each accident or occupational disease); and (b) All Risk insurance in respect of Tenant's stock in trade, fixtures, furniture, furnishings, removable floor coverings, equipment, signs and all other property of Tenant in the Demised Premises in any amounts required by any Superior Lessor or any Superior Mortgagee but not less than eighty percent (80%) of the full insurable value of the property covered and not less than the amount sufficient to avoid the effect of the co-insurance provisions of the applicable policy or policies, and (c) such other insurance as is required for compliance with the Insurance Requirements. Landlord may at any time and from time to time require that the limits for the comprehensive general public liability insurance to be maintained by Tenant be increased to the limits that new tenants in the Building are required by Landlord to maintain. Tenant shall deliver to Landlord and any additional named insured(s) certificates for such fully paid-for policies upon execution hereof. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insured(s) certificates therefor at least thirty (30) days before the expiration of any existing policy. All such policies shall be issued by companies of recognized responsibility, having a Bests Key Rating Guide of not less than A, Class VII, licensed to do business in New Jersey, and all such policies shall contain a provision whereby the Landlord and any additional insured(s) are given at least thirty (30) days' prior written notice of such cancellation. The certificates of insurance to be delivered to Landlord by Tenant shall name Landlord as an additional insured and, at Landlord's request, shall also name any Superior Lessors or Superior Mortgagees as additional insureds, and the following phrase must be typed on the certificate of insurance: "Passaic Investment LLC, a New Mexico limited liability company, Sixty-Five Willowbrook Investment LLC, a New Mexico limited liability company, and Wayne Investment LLC, a New Mexico limited liability company, as Tenants-in-Common , and its respective subsidiaries, affiliates, associates, joint ventures, and partnerships, are hereby named as additional insureds as their interests may appear (and if Landlord has so requested, Tenant shall include any Superior Lessors and Superior Mortgagees as additional insured(s)). It is intended for this insurance to be primary and non- contributing." Tenant shall give Landlord at least thirty (30) days' prior written notice that any such policy is being canceled or replaced. 13.03. Tenant shall not do, permit or suffer to be done any act, matter, thing or failure to act in respect of the Demised Premises or use or occupy the Demised Premises or conduct or operate Tenant's business in any manner objectionable to any insurance company or companies whereby the fire insurance or any other insurance then in effect in respect of the Land and Building or any part thereof shall become void or suspended or whereby any premiums in respect of insurance maintained by Landlord shall be higher than those which would normally have been in effect for the occupancy contemplated under the Permitted Uses. In case of a -18- breach of the provisions of this Section 13.03, in addition to all other rights and remedies of Landlord hereunder, Tenant shall (a) indemnify Landlord and the Superior Lessors and hold Landlord and the Superior Lessors harmless from and against any loss which would have been covered by insurance which shall have become void or suspended because of such breach by Tenant and (b) pay to Landlord any and all increases of premiums on any insurance, including, without limitation, rent insurance, resulting from any such breach. 13.04. Tenant shall indemnify and hold harmless Landlord and all Superior Lessors and its and their respective partners, joint venturers, directors, officers, agents, servants and employees from and against any and all claims arising from or in connection with (a) the conduct or management of the Demised Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord) in the Demised Premises during the Term or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises; (b) any negligent act, omission or negligence of Tenant or any of its subtenants or licensees or its or their partners, joint venturers, directors, officers, agents, employees or contractors; (c) any accident, injury or damage whatever (unless caused solely by Landlord's negligence) occurring in the Demised Premises; and (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; together with all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorneys' fees and expenses. In case any action or proceeding is brought against Landlord and/or any Superior Lessor and/or its or their partners, joint venturers, directors, officers, agents and/or employees by reason of any such claim, Tenant, upon notice from Landlord or such Superior Lessor, shall resist and defend such action or proceeding by counsel reasonably satisfactory to Landlord. 13.05. Neither Landlord nor any Superior Lessor shall be liable or responsible for, and Tenant hereby releases Landlord and each Superior Lessor from, all liability and responsibility to Tenant and any person claiming by, through or under Tenant, by way of subrogation or otherwise, for any injury, loss or damage to any person or property in or around the Demised Premises or to Tenant's business irrespective of the cause of such injury, loss or damage, and Tenant shall require its insurers to include in all of Tenant's insurance policies which could give rise to a right of subrogation against Landlord or any Superior Lessor a clause or endorsement whereby the insurer waives any rights of subrogation against Landlord and such Superior Lessors or permits the insured, prior to any loss, to agree with a third party to waive any claim it may have against said third party without invalidating the coverage under the insurance policy. ARTICLE 14- RULES AND REGULATIONS 14.01. Tenant and its employees and agents shall faithfully observe and comply with the Rules and Regulations and such reasonable changes therein (whether by modification, elimination or addition) as Landlord at any time or times hereafter may make and communicate to Tenant, which in Landlord's judgment, shall be necessary for the reputation, safety, care or appearance of the Land and Building, or the preservation of good order therein, or the operation or maintenance of the Building or its equipment and fixtures, or the Common Areas, and which -19- do not unreasonably affect the conduct of Tenant's business in the Demised Premises; provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations, the provisions of this Lease shall control. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations against any other tenant or any employees or agents of any other tenant, and Landlord shall not be liable to Tenant for violation of the Rules and Regulations by any other tenant or its employees, agents, invitees or licensees. ARTICLE 15 - ALTERATIONS 15.01. Tenant shall not make any alterations or additions to the Demised Premises, or make any holes or cuts in the walls, ceilings, roofs, or floors thereof, or change the exterior color or architectural treatment of the Demised Premises, without on each occasion first obtaining the consent of Landlord, which shall not be unreasonably withheld or delayed. Tenant shall be allowed to make alterations of less than $1,000.00 (One Thousand Dollars) in total cost (excluding structural and mechanical alterations) without the consent of Landlord. Tenant shall submit to Landlord plans and specifications for such work at the time Landlord's consent is sought. Tenant shall pay to Landlord upon demand the reasonable cost and expense of Landlord in (a) reviewing said plans and specifications and (b) inspecting the alterations to determine whether the same are being performed in accordance with the approved plans and specifications and all Legal Requirements and Insurance Requirements, including, without limitation, the fees of any architect or engineer employed by Landlord for such purpose. Before proceeding with any permitted alteration which will cost more than $50,000 (exclusive of the costs of decorating work and items constituting Tenant's Property), as estimated by a reputable contractor designated by Landlord, Tenant shall obtain and deliver to Landlord either (i) a performance bond and a labor and materials payment bond (issued by a corporate surety licensed to do business in New Jersey), each in an amount equal to 125% of such estimated cost and in form satisfactory to Landlord, or (ii) such other security as shall be satisfactory to Landlord. Tenant shall fully and promptly comply with and observe the Rules and Regulations then in force in respect of the making of alterations. Any review or approval by Landlord of any plans and/or specifications with respect to any alterations is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant in respect of the adequacy, correctness or efficiency thereof or otherwise. 15.02. Tenant shall obtain all necessary governmental permits and certificates for the commencement and prosecution of permitted alterations and for final approval thereof upon completion, and shall cause alterations to be performed in compliance therewith and with all applicable Legal Requirements and Insurance Requirements. Alterations shall be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the better of (a) the original installations of the Building, or (b) the then standards for the Building established by Landlord. Alterations shall be performed by contractors first approved by Landlord; provided, however, that any alterations in or to the mechanical, electrical, sanitary, heating, ventilating, air conditioning or other systems of the Building shall be performed only by the contractor(s) designated by Landlord. Alterations shall be made in such manner as not to unreasonably interfere with or delay and as not to impose any -20- additional expense upon Landlord in the construction, maintenance, repair or operation of the Building; and if any such additional expense shall be incurred by Landlord as a result of Tenant's making of any alterations, Tenant shall pay any such additional expense upon demand. Throughout the making of alterations, Tenant shall carry, or cause to be carried, worker's compensation insurance in statutory limits and general liability insurance, with completed operation endorsement, for any occurrence in or about the Building, under which Landlord and its managing agent and any Superior Lessor whose name and address shall previously have been furnished to Tenant shall be named as parties insured, in such limits as Landlord may reasonably require, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with reasonably satisfactory evidence that such insurance is in effect at or before the commencement of alterations and, on request, at reasonable intervals thereafter during the making of alterations. ARTICLE 16 - LANDLORD'S AND TENANTS PROPERTY 16.01. All fixtures, equipment, improvements and appurtenances attached to or built into the Demised Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall be deemed to be the property of Landlord and shall not be removed by Tenant, except as provided in Section 16.02. Further, any carpeting or other personal property in the Demised Premises on the Commencement Date, unless installed and paid for by Tenant, shall be and shall remain Landlord's property and shall not be removed by Tenant. 16.02. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the Demised Premises, which are installed in the Demised Premises by or for the account of Tenant without expense to Landlord and can be removed without structural damage to the Building and all furniture, furnishings, and other movable personal property owned by Tenant and located in the Demised Premises (collectively, "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of the Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Demised Premises, the Building or the Common Areas resulting from the installation and/or removal thereof, reasonable wear and tear accented. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant shall not be deemed to have been installed by or for the account of Tenant without expense to Landlord, shall not be considered as the Tenant's Property and shall be deemed the property of Landlord. 16.03. At or before the Expiration Date or the date of any earlier termination of this Lease, or within fifteen (15) days after such an earlier termination date, Tenant shall remove from the Demised Premises all of the Tenant's Property (except such items thereof as Landlord shall have expressly permitted to remain, which property shall become the property of Landlord if not removed), and Tenant shall repair any damage to the Demised Premises, the Building and the Common Areas resulting from any installation and/or-removal of the Tenant's Property, reasonable wear and tear accepted. Any items of the Tenant's Property which shall remain in the Demised Premises after the Expiration Date or after a period of fifteen (15) days following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and -21- in such case such items may be retained by Landlord as its property or disposed of by Landlord, without accountability, in such manner as Landlord shall determine at Tenant's Expense. ARTICLE 17 - REPAIRS AND MAINTENANCE 17.01. Tenant shall, throughout the Term, take good care of the Demised Premises, the fixtures and appurtenances therein. Tenant shall be responsible for all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, in and to the Demised Premises, and the Building (including the facilities and systems thereof) and the Common Areas the need for which arises out of (a) the performance or existence of the Tenant's Work or alterations, (b) the installation, use or operation of the Tenant's Property in the Demised Premises, (c) the moving of the Tenant's Property in or out of the Building, or (d) the act, omission, misuse or neglect of Tenant or any of its subtenants or its or their employees, agents, contractors or invitees. Tenant shall promptly replace or repair to reasonable satisfaction of Landlord all scratched, damaged or broken doors and glass in and about the Demised Premises and shall be responsible for all repairs, maintenance and replacement of wall and floor coverings in the Demised Premises and for the repair and maintenance of all sanitary and electrical fixtures and equipment therein. Tenant shall promptly make all repairs in or to the Demised Premises for which Tenant is responsible, and any repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating, ventilating, air-conditioning or other systems of the Building shall be performed only by contractor(s) designated by Landlord. Any other repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible shall be performed by Landlord at Tenant's expense; but Landlord may, at its option, before commencing any such work or at any time thereafter, require Tenant to furnish to Landlord such security, in form (including, without limitation, a bond issued by a corporate surety licensed to do business in New Jersey) and amount, as Landlord shall deem necessary to assure the payment for such work by Tenant. Tenant shall not permit or suffer the overloading of the floors of the Demised Premises beyond eighty (80) pounds per square foot. 17.02. So long as Tenant is not in default under this Lease, Landlord shall be responsible for all repairs and maintenance in and to the Building (including the facilities and systems thereof), except for those repairs and maintenance for which Tenant is responsible pursuant to any of the provisions of this Lease. 17.03. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant, nor shall Tenant's covenants and obligations under this Lease be reduced or abated in any manner whatsoever, by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's doing any repairs, maintenance, or changes which Landlord is required or permitted by this Lease, or required by Law, to make in or to any portion of the Building. ARTICLE 18 - ELECTRIC ENERGY 18.01. Tenant shall purchase the electric energy required by it in the Demised Premises -22- at its own expense on a direct-metered basis from the public utility servicing the Building, and Landlord shall permit the risers, conduits and feeders in the Building, to the extent available, suitable and safely capable, to be used for the purpose of transmitting such electric energy to the Demised Premises. Landlord shall not be liable for any failure, inadequacy or defect in the character or supply of electric current furnished to the Demised Premises. If Landlord is permitted by law to provide electric energy to the Demised Premises by re-registering meters or otherwise and to collect any charges for electric energy, Landlord shall have the right to do so, in which event Tenant shall pay to Landlord upon receipt of bills therefor charges for electric energy provided the rates for such electric energy shall not be more than the rates Tenant would be charged for electric energy if furnished directly to Tenant by the public utility which would otherwise have furnished electric energy. Until such separate metering of the electric usage of the Demised Premises is accomplished, Tenant shall pay Landlord One Dollar and Twenty-five Cents ($1.25) per square foot of Floor Space for electric service. 18.02. Tenant's use of electric energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electric service, Tenant shall not, without Landlord's prior consent in each instance (which shall not be unreasonably withheld or delayed), connect any fixtures, appliances or equipment to the Building's electric distribution system or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant to Landlord on demand. ARTICLE 19 - HEAT, VENTILATION AND AIR-CONDITIONING 19.01. So long as Tenant is not in default under this Lease, Landlord shall maintain and operate the heating, ventilating and air-conditioning systems ("HVAC") serving the Demised Premises, and shall furnish HVAC in the Demised Premises as may be reasonably required (except as otherwise provided in this Lease and except for any special requirements of Tenant arising from its particular use of the Demised Premises) for reasonably comfortable occupancy of the Demised Premises, during Business Hours on Business Days within the limits prescribed by the Legal Requirements. If Tenant shall require HVAC at any other time, Landlord shall furnish such service for such times upon not less than six (6) hours advance notice from Tenant, and Tenant shall pay to Landlord upon demand Landlord's then established charges therefor. 19.02. The performance by Landlord of its obligation under Section 19.01 in respect of HVAC is conditioned on the connected electric load within the Demised Premises not exceeding three and one-half (3 1/2) watts per usable square foot in the Demised Premises and the occupancy of the Demised Premises not exceeding one (1) person for each one hundred and fifty (150) usable square feet. Use of the Demised Premises, or any part thereof in a manner exceeding the HVAC design conditions (including occupancy and connected electrical load), or rearrangement of partitioning which interferes with normal operation of the HVAC in the Demised Premises, or the use of computer or data processing machines or other machines or -23- equipment, may require changes in the HVAC systems servicing the Demised Premises, in order to provide comfortable occupancy. Such changes, so occasioned, shall be made by Tenant, at its expense, as alterations in accordance with the provisions of Article 15, but only to the extent permitted and upon the conditions set forth in Article 15. Tenant shall have the right, with Landlord consent not unreasonably withheld or delayed, to place a "plenum" or "closet unit" HVAC within the leased space. All costs and approvals will be paid by Tenant. Any and all ducting, shafting or placing of HVAC shall not interfere with the building system currently provided by Landlord. Any HVAC electric usage will be billed directly to Tenant on a direct meter basis or an amount agreed to by Landlord and Tenant. Tenant will be obligated to insure that electrical configuration will support the additional unit. ARTICLE 20 - OTHER SERVICES; SERVICE INTERRUPTION 20.01. Landlord shall provide elevator service to the Demised Premises during Business Hours on Business Days, and Landlord shall have at least one (1) elevator subject to call at all other times. The use of the elevators shall be subject to the Rules and Regulations. 20.02. Landlord shall cause the Demised Premises, including the exterior and the interior of the windows thereof, to be cleaned in a manner standard to the Building and in accordance with the standards set forth in Exhibit E. Tenant shall pay to Landlord on demand the costs incurred by Landlord for (a) extra cleaning work in the Demised Premises required because of (i) misuse or neglect on the part of Tenant or its subtenants or its or their employees or visitors, (ii) use of portions of the Demised Premises for preparation, serving, consumption of food or beverages, training rooms, data processing or reproducing operations, private lavatories or toilets or other special purposes requiring greater or more difficult cleaning work than office areas, (iii) interior glass partitions or unusual quantity of interior glass surfaces, and (iv) non-building standard materials or finishes installed by Tenant or at its request, and (b) removal from the Demised Premises and the Building of any refuse and rubbish of Tenant in excess of that ordinarily accumulated in business office occupancy or at times other than Landlord's standard cleaning times, and (c) the use of the Demised Premises by Tenant other than during Business Hours on Business Days. 20.03. Landlord, its cleaning contractor and their employees shall have access to the Demised Premises after 5:30 P.M. and before 8:00 A.M. and shall have the right to use, without charge therefor, all light, power and water in the Demised Premises reasonably required to clean the Demised Premises as required under Section 20.02. 20.04. Landlord shall furnish adequate hot and cold water to the Demised Premises for drinking, lavatory and cleaning purposes. If Tenant uses water for any other purpose Landlord may install and maintain, at Tenant's expense, meters to measure Tenant's consumption of cold water and/or hot water for such other purpose. Tenant shall reimburse Landlord for the quantities of cold water and hot water shown on such meters on demand. ARTICLE 21 - ACCESS, CHANGES AND NAME -24- 21.01. Except for the space within the inside surfaces of all walls, hung ceilings, floors, windows and doors bounding the Demised Premises, all of the Building, including, without limitation, exterior Building walls, core corridor wails and doors and any core corridor entrance, any terraces or roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities and the use thereof, as well as access thereto through the Demised Premises for the purpose of operating, maintenance, decoration and repair, are reserved to Landlord. Landlord also reserves the right, to install, erect, use and maintain pipes, ducts and conduits in and through the Demised Premises, provided such are properly enclosed. 21.02. Landlord and its agents shall have the right to enter and/or pass through the Demised Premises at any time or times (a) to examine the Demised Premises and to show them to actual and prospective Superior Lessors, Superior Mortgagees, or prospective purchasers of the Building, and (b) to make such repairs, alterations, additions and improvements in or to the Demised Premises and/or in or to the Building or its facilities and equipment as Landlord is required or desires to make. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be required in connection therewith, without any liability to Tenant and without any reduction of Tenant's obligations hereunder. During the period of fifteen (15) months prior to the Expiration Date, Landlord and its agents may exhibit the Demised Premises to prospective tenants. 21.03. If at any time any windows of the Demised Premises are temporarily darkened or obstructed by reason of any repairs, improvements, maintenance and/or cleaning in or about the Building, or if any part of the Building or the Common Areas, other than the Demised Premises, is temporarily or permanently closed or inoperable, the same shall not be deemed a constructive eviction and shall not result in any reduction or diminution of Tenant's obligations under this Lease. 21.04. If, during the last month of the Term, Tenant has removed all or substantially all of the Tenant's Property from the Demised Premises, Landlord may, without notice to Tenant, immediately enter the Demised Premises and alter, renovate and decorate the same, without liability to Tenant and without reducing or otherwise affecting Tenant's obligations hereunder. 21.05. Landlord reserves the right, at any time and from time to time, to make such changes, alterations, additions and improvements in or to the Building and the fixtures and equipment thereof as Landlord shall deem necessary or desirable. 21.06. Landlord may adopt any name for the Building. Landlord reserves the right to change the name and/or address of the Building at any time. ARTICLE 22 - MECHANICS' LIENS AND OTHER LIENS 22.01. Nothing contained in this Lease shall be deemed, construed or interpreted to imply any consent or agreement on the part of Landlord to subject Landlord's interest or estate to -25- any liability under any mechanic's or other lien law. If any mechanic's or other lien or any notice of intention to file a lien is filed against the Land, or any part thereof; or the Demised Premises, or any part thereof, for any work, labor, service or materials claimed to have been performed or furnished for or on behalf of Tenant or anyone holding any part of the Demised Premises through or under Tenant, Tenant shall cause the same to be canceled and discharged of record by payment, bond or order of a court of competent jurisdiction within fifteen (15) days after notice by Landlord to Tenant. ARTICLE 23 - NON-LIABILITY AND INDEMNIFICATION 23.01. Neither Landlord nor any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be liable to Tenant for any loss, injury or damage to Tenant or to any other Person, or to its or their property, irrespective of the cause of such injury, damage or loss, unless caused by or resulting from the willful misconduct or negligence of Landlord, its agents, servants or employees in the operation or maintenance of the Land or Building without contributory' negligence on the part of Tenant or any of its subtenants or licensees or its or their employees, agents or contractors. Further, neither Landlord nor any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be liable (a) for any such damage caused by other tenants or Persons in, upon or about the Land or Building, or caused by operations in construction of any private, public or quasi-public work; or (b) even if negligent, for consequential damages arising out of any loss of use of the Demised Premises or any equipment or facilities therein by Tenant or any Person claiming through or under Tenant. 23.02. Tenant shall indemnify and hold harmless Landlord and all Superior Lessors and its and their respective partners, joint venturers, directors, officers, agents, servants and employees from and against any and all claims arising from or in connection with (a) the conduct or management of the Demised Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord) in the Demised Premises during the Term or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises; (b) any act, omission or negligence of Tenant or any of its subtenants or licensees or its or their partners, joint venturers, directors, officers, agents, employees or contractors; (c) any accident, injury or damage whatever (unless caused solely by Landlord's willful misconduct or negligence) occurring in the Demised Premises; and (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; together with all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys' fees and expenses. In case of any action or proceeding is brought against Landlord and/or any Superior Lessor and/or its or their partners, joint venturers, directors, officers, agents and/or employees by reason of any such claim, Tenant, upon notice from Landlord or such Superior Lessor, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). 23.03. Notwithstanding any provision to the contrary, Tenant shall look solely to the estate and property of Landlord in and to the Land and Building (or the proceeds received by Landlord on a sale of such estate and property but not the proceeds of any financing or -26- refinancing thereof) in the event of any claim against Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas, and Tenant agrees that the liability of Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas shall be limited to such estate and property of Landlord (or sale proceeds). No other properties or assets of Landlord or any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgment (or other judicial process) or for the satisfaction of any other remedy of Tenant arising out of; or in connection with, this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas and if Tenant shall acquire a lien on or interest in any other properties or assets by judgment or otherwise, Tenant shall promptly release such lien on or interest in such other properties and assets by executing, acknowledging and delivering to Landlord an instrument to that effect prepared by Landlord's attorneys. Tenant hereby waives the right of specific performance and any other remedy allowed in equity if specific performance or such other remedy could result in any liability of Landlord for the payment of money to Tenant, or to any court or governmental authority (by way of fines or otherwise) for Landlord's failure or refusal to observe a judicial decree or determination, or to any third party. ARTICLE 24 - DAMAGE OR DESTRUCTION 24.01. If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other casualty (and if this Lease shall not be terminated as in this Article 24 hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the Demised Premises (except for the Tenant's Property) with reasonable dispatch after notice to it of the damage or destruction and the collection of the insurance proceeds attributable to such damage. 24.02. Subject to the provisions of Section 24.05, if all or part of the Demised Premises shall be damaged or destroyed or rendered completely or partially untenantable on account of fire or other casualty, the Rent shall be abated or reduced, as the case may be, in the proportion that the untenantable area of the Demised Premises bears to the total area of the Demised Premises, for the period from the date of the damage or destruction to (a) the date the damage to the Demised Premises shall be substantially repaired, or (b) if the Building and not the Demised Premises is so damaged or destroyed, the date on which the Demised Premises shall be made tenantable; provided, however, should Tenant reoccupy a portion of the Demised Premises during the period the repair or restoration work is taking place and prior to the date that the Demised Premises are substantially repaired or made tenantable the Rent allocable to such reoccupied portion, based upon the proportion which the area of the reoccupied portion of the Demised Premises bears to the total area of the Demised Premises, shall be payable by Tenant from the date of such occupancy. 24.03. If (a) the Building or the Demised Premises shall be totally damaged or destroyed by fire or other casualty, or (b) the Building shall be so damaged or destroyed by fire or other casualty (whether or not the Demised Premises are damaged or destroyed) that its repair or -27- restoration requires the expenditure, as estimated by a reputable contractor or architect designated by Landlord, of more than twenty percent (20%) (or ten percent [10%] if such casualty occurs during the last two [2] years of the Term) of the full insurable value of the Building immediately prior to the casualty, or (c) the Building shall be damaged or destroyed by fire or other casualty (whether or not the Demised Premises are damaged or destroyed) and either the loss shall not be covered by Landlord's insurance or the net insurance proceeds (after deducting all expenses in connection with obtaining such proceeds) shall, in the estimation of a reputable contractor or architect designated by Landlord be insufficient to pay for the repair or restoration work, then in either such case Landlord may terminate this Lease by giving Tenant notice to such effect within ninety (90) days after the date of the fire or other casualty. In the event the Demised Premises are damaged or destroyed to such an extent that such are untenantable, Landlord shall use reasonable efforts to relocate Tenant to other, reasonably suitable space within the Property during the period of repair or restoration, in which case Tenant will pay rent for such space in accordance with the terms of the Lease. If, (i.) in the estimation of a reputable contractor or architect reasonably approved by Landlord, the Demised Premises are damaged or destroyed to such an extent that Tenant may not reasonably expect to occupy the Demised Premises within one-hundred eighty (180) days after the date of the fire or other casualty; and (ii.) Landlord is unable to relocate Tenant to other, reasonably suitable space within the Property, Tenant may terminate this Lease by giving Landlord notice to such effect within sixty (60) days after the date of the fire or other casualty. 24.04. Tenant shall not be entitled to terminate this Lease and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building pursuant to this Article 24. Landlord shall use its best efforts to make such repair or restoration promptly and in such manner as not unreasonably to interfere with Tenant's use and occupancy of the Demised Premises, but Landlord shall not be required to do such repair or restoration work except during Business Hours on Business Days. 24.05. Notwithstanding any of the foregoing provisions of this Article 24, if by reason of some act or omission on the part of Tenant or any of its subtenants or its or their partners, directors, officers, servants, employees, agents or contractors, either (a) Landlord or any Superior Lessor or any Superior Mortgagee shall be unable to collect all of the insurance proceeds (including, without limitation, rent insurance proceeds) applicable to damage or destruction of the Demised Premises or the Building by fire or other casualty, or (b)the Demised Premises or the Building shall be damaged or destroyed or rendered completely or partially untenantable on account of fire or other casualty, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement or reduction of the Rent. Further, nothing contained in this Article 24 shall relieve Tenant from any liability that may exist as a result of any damage or destruction by fire or other casualty. 24.06. Landlord will not carry insurance of any kind on the Tenant's Property, and, except as provided by law or by reason of Landlord's breach of any of its obligations hereunder, shall not be obligated to repair any damage to or replace the Tenant's Property. 24.07. The provisions of this Article 24 shall be deemed an express agreement governing -28- any case of damage or destruction of the Demised Premises and/or Building by fire or other casualty, and any law providing for such a contingency in the absence of an express agreement, now or hereafter in force, shall have no application in such case. ARTICLE 25 - EMINENT DOMAIN 25.01 If the whole of the Demised Premises shall be taken by any public or quasi-public authority under the power of condemnation, eminent domain or expropriation, or in the event of conveyance of the whole of the Demised Premises in lieu thereof, this Lease shall terminate as of the day possession shall be taken by such authority. If 25% or less of the Floor Space of the Demised Premises shall be so taken or conveyed, this Lease shall terminate only in respect of the part so taken or conveyed as of the day possession shall be taken by such authority. If more than 25% of the Floor Space of the Demised Premises shall be so taken or conveyed, this Lease shall terminate only in respect of the part so taken or conveyed as of the day possession shall be taken by such authority, but either party shall have the right to terminate this Lease upon notice given to the other party within 30 days after such taking possession. If more than 25% of the Floor Space of the Building shall be so taken or conveyed, Landlord may, by notice to Tenant, terminate this Lease as of the day possession shall be taken. If so much of the parking facilities shall be so taken or conveyed that the number of parking spaces necessary, in Landlord's judgment, for the continued operation of the Building shall not be available, Landlord shall, by notice to Tenant, terminate this Lease as of the day possession shall be taken. If this Lease shall continue in effect as to any portion of the Demised Premises not so taken or conveyed, the Rent shall be computed as of the day possession shall be taken on the basis of the remaining Floor Space of the Demised Premises. Except as specifically provided herein, in the event of any such taking or conveyance there shall be no reduction in Rent. If this Lease shall continue in effect, Landlord shall, at its expense, but shall be obligated only to the extent of the net award or other compensation (after deducting all expenses in connection with obtaining same) available to Landlord for the improvements taken or conveyed (excluding any award or other compensation for land or for the unexpired portion of the term of any Superior Lease), make all necessary alterations so as to constitute the remaining Building a complete architectural and tenantable unit, except for the Tenant's Property, and Tenant shall make all alterations or replacements to the Tenant's Property and decorations in the Demised Premises. All awards and compensation for any taking or conveyance, whether for the whole or a part of the Land or Building, the Demised Premised or otherwise, shall be the property of Landlord, and Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such awards and compensation, including, without limitation, any award or compensation for the value of the unexpired portion of the Term. Tenant shall be entitled to claim, prove and receive in the condemnation proceeding such award or compensation as may be allowed for the Tenant's Property and for loss of business, good will, and depreciation or injury to and cost of removal of the Tenant's Property, but only if such award or compensation shall be made by the condemning authority in addition to, and shall not result in a reduction of, the award or compensation made by it to Landlord. 25.02. If the temporary use or occupancy of all or any part of the Demised Premises shall be taken during the Term, Tenant shall be entitled, except as hereinafter set forth, to receive that -29- portion of the award or payment for such taking which represents compensation for the use and occupancy of the Demised Premises, for the taking of the Tenant's Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Demised Premises. This Lease shall be and remain unaffected by such taking and Tenant shall continue to be responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay the Rent in full when due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award or payment which represents compensation for the use and occupancy of the Demised Premises (or a part thereof) shall be divided between Landlord and Tenant so that Tenant shall receive (except as otherwise provided below) so much thereof as represents compensation for the period up to and including the Expiration Date and Landlord shall receive so much thereof as represents compensation for the period after the Expiration Date. All monies to be paid to Tenant as, or as part of, an award or payment for temporary use and occupancy for a period beyond the date to which the Rent has been paid shall be received, held and applied by the first Superior Mortgagee (or if there is no Superior Mortgagee, by Landlord as a trust fund) for payment of the Rent becoming due hereunder. ARTICLE 26 - SURRENDER 26.01. On the Expiration Date, or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Demised Premises, Tenant shall quit and surrender the Demised Premises to Landlord "broom-clean" and in good order, condition and repair, except for ordinary wear and tear and such damage or destruction as Landlord is required to repair or restore under this Lease, and Tenant shall remove all of Tenant's Property therefrom except as otherwise expressly provided in this Lease. 26.02. If Tenant remains in possession of the Demised Premises after rue expiration of the Term, Tenant shall be deemed to be occupying the Demised Premises at the sufferance of Landlord subject to all of the provisions of this Lease, except that the monthly Fixed Rent shall be 150% the Fixed Rent in effect during the last month of the Term. 26.03. No act or thing done by Landlord or its agents shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord. ARTICLE 27 - CONDITIONS OF LIMITATION 27.01. This Lease is subject to the limitation that whenever Tenant or any Guarantor (a) shall make an assignment for the benefit of creditors, or (b) shall commence a voluntary case or have entered against it an order for relief under any chapter of the Federal Bankruptcy Code (Title II of the United States Code) or any similar order or decree under any federal or state law, now in existence, or hereafter enacted having the same general purpose, and such order or decree shall have not been stayed or vacated within 30 days after entry, or (c) shall cause, suffer, permit or consent to the appointment of a receiver, trustee, administrator, conservator, sequestrator, -30- liquidator or similar official in any federal, state or foreign judicial or nonjudicial proceeding, to hold, administer and/or liquidate all or substantially all of its assets, and such appointment shall not have been revoked, terminated, stayed or vacated and such official discharged of his duties within 30 days of his appointment, then Landlord, at any time after the occurrence of any such event, may give Tenant a notice of intention to end the Term at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period, whether or not the Term shall theretofore have commenced, this Lease shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable for damages as provided in Article 29. 27.02. This Lease is subject to the further limitations that: (a) if Tenant shall default in the payment of any Rent, or (b) if Tenant shall, whether by action or inaction, be in default of any of its obligations under this Lease (other than a default in the payment of Rent) and such default shall continue and not be remedied within fifteen (15) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a default which cannot with due diligence be cured within a period of fifteen (15) days and the continuance of which for the period required for cure will not subject Landlord or any Superior Lessor to prosecution for a crime (as more particularly described in the last sentence of Section 12.02) or termination of any Superior Lease or foreclosure of any Superior Mortgage, if Tenant shall not, (i) within said fifteen (15) day period advise Landlord of Tenant's intention to take all steps necessary to remedy such default, (ii) duly commence within said fifteen (15) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the default, and (iii) complete such remedy within a reasonable time after the date of said notice by Landlord, or (c) if any event shall occur or any contingency shall arise whereby this Lease would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 11, or (d) if Tenant shall vacate or abandon the Demised Premises, or (e) if there shall be any default by Tenant (or any person which, directly or indirectly, controls, is controlled by, or is under common control with Tenant) under any other lease with Landlord (or any person which, directly or indirectly, controls, is controlled by, or is under common control with Landlord) which shall not be remedied within the applicable grace period, if any, provided therefor under such other lease, then in any of said cases Landlord may give to Tenant a notice of intention to end the Term at the expiration of five (5) business days from the date of the service of such notice of intention, and upon the expiration of said five (5) business days, whether or not the Term shall theretofore have commenced, this Lease shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable for damages as provided in Article 29. ARTICLE 28 - RE-ENTRY BY LANDLORD 28.01. If Tenant shall default in the payment of any Rent, or if this Lease shall terminate as provided in Article 27, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any Person therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises. -31- The word re-enter," as used herein, is not restricted to its technical legal meaning. If this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of this Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceedings or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the Rent payable up to the time of such termination of this Lease, or of such recovery of possession of the Demised Premises by Landlord, as the ease may be, and shall also pay to Landlord damages as provided in Article 29. 28.02. In the vent of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies to which Landlord may lawfully be entitled at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 28.03. If this Lease shall terminate under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of this Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all monies, if any, paid by Tenant to Landlord, whether as Advance Rent, security or otherwise, but such monies shall be credited by Landlord against any Rent due from Tenant at the time of such termination or re- entry or, at Landlord's option, against any damages payable by Tenant under Article 29 or pursuant to law. ARTICLE 29 - DAMAGES 29.01. If this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay as Additional Charges to Landlord, at the election of Landlord, either or any combination of: (a) a sum which at the time of such termination of this Lease or at the time of any such reentry by Landlord, as the case may be, represents the then value of the excess, if any, of (i) the aggregate amount of the Rent which would have been payable by Tenant (conclusively presuming the average monthly Additional Charges to be the same as were the average monthly Additional Charges payable for the year, or if less than 365 days have then elapsed since the Commencement Date, the partial year, immediately preceding such termination or re-entry) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, over (ii) the aggregate rental value of the Demised Premises for the same period, or (b) sums equal to the Fixed Rent and the Additional Charges which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the -32- Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of reletting, including, without limitation, altering and preparing the Demised Premises for new tenants, brokers' commissions, legal fees, and all other expenses properly chargeable against the Demised Premises and the rental therefrom, it being understood that any such reletting may be for a period shorter or longer than the period ending on the Expiration Date; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this subsection (b) to a credit in respect of any rents from a reletting, except to the extent that such net rents are actually received by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting; or (c) a sum which at the time of such termination of this Lease or at the time of any such reentry by Landlord, as the case may be, represents the aggregate amount of the Rent which would have been payable by Tenant (conclusively presuming the average monthly Additional Charges to be the same as were the average monthly Additional Charges payable for the year, or if less than 365 days have then elapsed since the Commencement Date, the partial year, immediately preceding such termination or re-entry) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date; provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Demised Premises and in securing possession thereof as well as the expenses of reletting, including, without limitation, altering and preparing the Demised Premises for new tenants, brokers' commissions, legal fees, and all other expenses properly chargeable against the Demised Premises and the rental therefrom, it being understood that any such reletting may be for a period shorter or longer than the period ending on the Expiration Date; but in no event shall Landlord have to account to Tenant for any rents in excess of the total damages recovered by Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this subdivision (c) to a credit in respect of any rents from a reletting, except to the extent that such net rents are actually received by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting. If the Demised Premises or any part thereof be relet by Landlord before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so relet during the term of the reletting. Landlord shall not be liable in -33- any way whatsoever for its failure or refusal to relet the Demised Premises or any part thereof, or if the Demised Premises or any part thereof are relet, for its failure to collect the rent under such reletting, and no such refusal or failure to relet or failure to collect rent shall release or affect Tenant's liability for damages or otherwise under this Lease. 29.02. Suit or suits for the recovery of such damages or, any installments thereof, may be brought by Landlord at any time and from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Article 27, or under any provision of law, or had Landlord not re-entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as damages by reason of the termination of this Lease or re-entry of the Demised Premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time, whether or not such amount be greater than, equal to, or less than any of the sums referred to in Section 29.01. 29.03. In addition, if this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of Article 28, Tenant covenants that: (a) the Demised Premises then shall be in the same condition as that in which Tenant has agreed to surrender the same to Landlord at the Expiration Date; (b) Tenant shall have performed prior to any such termination any obligation of Tenant contained in this Lease for the making of any alteration or for restoring or rebuilding the Demised Premises or the Building, or any part thereof; and (c) for the breach of any covenant of Tenant set forth above in this Section 29.03, Landlord shall be entitled immediately, without notice or other action by Landlord, to recover, and Tenant shall pay, as and for liquidated damages therefor, the cost of performing such covenant (as estimated by an independent contractor selected by Landlord). 29.04. In addition to any other remedies Landlord may have under this Lease, and without reducing or adversely affecting any of Landlord's rights and remedies under this Article 29, if any Rent or damages payable hereunder by Tenant to Landlord are not paid within five (5) business days of demand therefor, the same shall bear interest at the Late Payment Rate or the maximum rate permitted by law, whichever is less, from the due date thereof until paid, and the amounts of such interest shall be Additional Charges hereunder. 29.05. In addition to any remedies which Landlord may have under this Lease, if there shall be a default hereunder by Tenant which shall not have been remedied within the applicable grace period, Landlord shall not be obligated to furnish to Tenant or the Demised Premises any HVAC services outside of Business Hours or Business Days, or any extra or additional cleaning services; and the discontinuance of any one or more such services shall be without liability by Landlord to Tenant and shall not reduce, diminish or otherwise affect any of Tenant's covenants and obligations under this Lease. -34- ARTICLE 30 - AFFIRMATIVE WAIVERS 30.01. Tenant, on behalf of itself and any and all persons claiming through or under Tenant, does hereby waive and surrender all right and privilege which it, they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease after being dispossessed or ejected from the Demised Premises by process of law or under the terms of this Lease or after the termination of this Lease as provided in this Lease. 30.02. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, and Tenant's use or occupancy of the Demised Premises and use of the Common Area, including, without limitation, any claim of injury or damage, and any emergency and other statutory remedy with respect thereto. Tenant shall not interpose any counterclaim of any kind in any action or proceeding commenced by Landlord to recover possession of the Demised Premises. ARTICLE 31 - NO WAIVERS 31.01. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of Fixed Rent or Additional Charges with knowledge of breach by Tenant of any obligation of this Lease shall not be deemed a waiver of such breach. ARTICLE 32 - CURING TENANTS DEFAULTS 32.01. If Tenant shall default in the performance of any of Tenant's obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice in a case of emergency, and in any other case only if such default continues after the expiration of fifteen (15) days from the date Landlord gives Tenant notice of the default. Tenant shall be allowed a reasonable time to cure any default beyond said fifteen (15) days for those issues not curable beyond the reasonable control of Tenant within fifteen (15) days. In addition Tenant will use best efforts to cure and Tenant will keep Landlord aware in writing of all progress in any circumstance of default not curable within fifteen (15) days. As long as Tenant diligently pursues cure than Tenant may have sixty (60) days to cure. Bills for any expenses incurred by Landlord in connection with any such performance by it for the account of Tenant, and bills for all costs, expenses and disbursements of every kind and nature whatsoever, including reasonable attorneys' fees and expenses, involved in collecting or endeavoring to collect the Rent or any part thereof or enforcing or endeavoring to enforce any rights against Tenant or Tenant's -35- obligations hereunder, under or in connection with this Lease or pursuant to law, including any such reasonable cost, expense and disbursement involved in instituting and prosecuting summary proceedings or in recovering possession of the Demised Premises after default by Tenant or upon the expiration of the Term or sooner termination of this Lease, and interest on all sums advanced by Landlord under this Article at the Late Payment Rate or the maximum rate permitted by law, whichever is less, may be sent by Landlord to Tenant monthly, or immediately, at Landlord's option, and such amounts shall be due and payable in accordance with the terms of such bills. ARTICLE 33 - BROKER 33.01. Tenant and Landlord mutually represents that no broker except the Broker was instrumental in bringing about or consummating this Lease and that Tenant had no conversations or negotiations with any broker except the Broker concerning the leasing of the Demised Premises. Tenant and Landlord agrees to indemnify and hold harmless each other against and from any claims for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, attorneys' fees and expenses, arising out of any conversations or negotiations had by Tenant with any broker other than the Broker. Landlord shall pay any brokerage commissions due the Broker pursuant to a separate agreement between Landlord and the Broker. ARTICLE 34 - NOTICES 34.01. Any notice, statement, demand, consent, approval or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this Lease or pursuant to any applicable Legal Requirement, shall be in writing and shall be deemed to have been properly given, rendered or made only if hand delivered or sent by United States registered or certified mail, return receipt requested, addressed to the other party at the address hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give notice to the contrary, shall be the Building) as to Landlord, to the attention of General Counsel with a concurrent notice to the attention of Controller, and shall be deemed to have been given, rendered or made on the second day after the day so mailed, unless mailed outside the State of New Jersey, in which case it shall be deemed to have been given, rendered or made on the third business day after the day so mailed. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands, consents, approvals or other communications intended for it. In addition, upon and to the extent requested by Landlord, copies of notices shall be sent to the Superior Mortgagee. ARTICLE 35 - ESTOPPEL CERTIFICATES 35.01. Each party shall, at any time and from time to time, as requested by the other party, upon not less than ten (10) days' prior notice, execute and deliver to the requesting party a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the -36- modifications), certifying the dates to which the Fixed Rent and Additional Charges have been paid, stating whether or not, to the best knowledge of the party giving the statement, the requesting party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the party giving the statement shall have knowledge, and stating whether or not, to the best knowledge of the party giving the statement, any event has occurred which with the giving of notice or passage of time, or both, would constitute such a default of the requesting party, and, if so, specifying each such event; any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the party requesting the certificate and by others with whom such party may be dealing, regardless of independent investigation. Tenant also shall include in any such statement such other information concerning this Lease as Landlord may reasonably request. ARTICLE 36 - ARBITRATION 36.01. Landlord may at any time request arbitration, and Tenant may at any time request arbitration, of any matter in dispute but only where arbitration is expressly provided for in this Lease. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in said notice the nature of the dispute, and said dispute shall be determined in Newark, New Jersey, by a single arbitrator, in accordance with the rules then obtaining of the American Arbitration Association (or any organization which is the successor thereto). The award in such arbitration may be enforced on the application of either party by the order or judgment of a court of competent jurisdiction. The fees and expenses of any arbitration shall be borne by the parties equally, but each party shall bear thc expense of its own attorneys and experts and the additional expenses of presenting its own proof. If Tenant gives notice requesting arbitration as provided in this Article, Tenant shall simultaneously serve a duplicate of the notice on each Superior Mortgagee and Superior Lessor whose name and address shall previously have been furnished to Tenant, and such Superior Mortgagees and Superior Lessor shall have the right to participate in such arbitration. ARTICLE 37 - MEMORANDUM OF LEASE 37.01. Tenant shall not record this Lease. However, at the request of Landlord, Tenant shall promptly execute, acknowledge and deliver to Landlord a memorandum of lease in respect of this Lease sufficient for recording. Such memorandum shall not be deemed to change or otherwise affect any of the obligations or provisions of this Lease. Whichever party records such memorandum of Lease shall pay all recording costs and expenses, including any taxes that are due upon such recording. ARTICLE 39 - MISCELLANEOUS 39.01. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth -37- in this Lease or in any other written agreement(s) which may be made between the parties concurrently with the execution and delivery of this Lease. All understandings and agreements heretofore had between the parties are merged in this Lease and any other written agreement(s) made concurrently herewith, which alone fully and completely express the agreement of the parties and which are entered into after full investigation. Neither party has relied upon any statement or representation not embodied in this Lease or in any other written agreement(s) made concurrently herewith. The submission of this Lease to Tenant does not constitute by Landlord a reservation of, or an option to Tenant for, the Demised Premises, or an offer to lease on the terms set forth herein and this Lease shall become effective as a lease agreement only upon execution and delivery thereof by Landlord and Tenant. 39.02. No agreement shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, termination or effectuation of abandonment is sought. 39.03. If Tenant shall at any time request Landlord to sublet or let the Demised Premises for Tenant's account, Landlord or its agent is authorized to receive keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases Landlord of any liability for loss or damage to any of the Tenant's Property in connection with such subletting or letting. 39.04. Except as otherwise expressly provided in this Lease, the obligations under this Lease shall bind and benefit the successors and assigns of the parties hereto with the same effect as if mentioned in each instance where a party is named or referred to; provided, however, that (a) no violation of the provisions of Article 11 shall operate to vest any rights ii any successor or assignee of Tenant and (b) the provisions of this Section 39.04 shall not be construed as modifying the conditions of limitation contained in Article 27. 39.05. Except for Tenant's obligations to pay Rent, the time for Landlord or Tenant, as the case may be, to perform any of its respective obligations hereunder shall be extended if and to the extent that the performance thereof shall be prevented due to any Unavoidable Delay. Except as expressly provided to the contrary, the obligations of Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord have any liability whatsoever to Tenant, (a) because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease due to any of the matters set forth in the first sentence of this Section 39.05, or (b) because of any failure or defect in the supply, quality or character of electricity, water or any other utility or service furnished to the Demised Premises for any reason beyond Landlord's reasonable control. 39.06. Any liability for payments hereunder (including, without limitation, Additional Charges) shall survive the expiration of the Term or earlier termination of this Lease. 39.07. If Tenant shall request Landlord's consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord -38- of its consent; Tenant's sole remedy shall be an action for specific performance or injunction, and such remedy shall be available only in those cases where Landlord has expressly agreed in writing not to unreasonably withhold or delay its consent or where as a matter of law Landlord may not unreasonably withhold its consent. 39.08. If an excavation shall be made upon land adjacent to or under the Building, or shall be authorized to be made, Tenant shall afford to the Person causing or authorized to cause such excavation, license to enter the Demised Premises for the purpose of performing such work as said Person shall reasonably deem necessary or desirable to preserve and protect the Building from injury or damage and to support the same by proper foundations, without any claim for damages or liability against Landlord and without reducing or otherwise affecting Tenant's obligations under this Lease. 39.09. Tenant shall not exercise its rights under Article 15 or any other provision of this Lease in a manner which would violate Landlord's union contracts or create any work stoppage, picketing, labor disruption or dispute or any interference with the business of Landlord or any tenant or occupant of the Building. 39.10. Tenant shall give prompt notice to Landlord of(a) any occurrence in or about the Demised Premises for which Landlord might be liable, (b) any fire or other casualty in the Demised Premises, (c) any damage to or defect in the Demised Premises, including the fixtures and equipment thereof, for the repair of which Landlord might be responsible, and (d) any damage to or defect in any part of the Building's sanitary, electrical, heating, ventilating, air- conditioning, elevator or other systems located in or passing through the Demised Premises or any part thereof. 39.11. This Lease shall be governed by and construed in accordance with the laws of the State of New Jersey. Tenant hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Lease may be brought in the Courts of the State of New Jersey, or the Federal District Court for the District of New Jersey, as Landlord may elect. By execution and delivery of this Lease, Tenant hereby irrevocably accepts and submits generally and unconditionally for itself and with respect to its properties, to the jurisdiction of any such court in any such action or proceeding, and hereby waives in the case of any such action or proceeding brought in the courts of the State of New Jersey, or Federal District Court for the District of New Jersey, any defenses based on jurisdiction, venue or forum non conveniens. If any provision of this Lease shall be invalid or unenforceable, the remainder of this Lease shall not be affected and shall be enforced to the extent permitted by law. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. Each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not -39- dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. Tenant specifically agrees to pay all of Landlord's costs, charges and expenses, including attorneys' fees, incurred in connection with any document review requested by Tenant and upon submission of bills therefor. In the event Landlord permits Tenant to examine Landlord's books and records with respect to any Additional Charge imposed under this Lease, such examination shall be conducted at Tenant's sole cost and expense and shall be conditioned upon Tenant retaining an independent accounting firm for such purposes which shall not be compensated on any type of contingent fee basis with respect to such examination. Wherever in this Lease or by law Landlord is authorized to charge or recover costs and expenses for legal services or attorneys' fees, same shall include, without limitation, the costs and expenses for in-house or staff legal counsel or outside counsel at rates not to exceed the-reasonable and customary charges for any such services as would be imposed in an arms length third party agreement for such services. 39.12. Within thirty (30) days of each anniversary date of this Lease, Tenant shall annually furnish to Landlord a copy of its then current audited financial statement which shall be employed by Landlord for purposes of financing the Premises and not distributed otherwise without prior authorization of Tenant. Any material adverse change of Tenant's financial condition shall be furnished to Landlord in writing forthwith and without request by Landlord for same. 39.13. Tenant shall be allotted four (4) unreserved parking spaces per 1,000 square rentable square feet. ARTICLE 40 - RIGHT OF FIRST REFUSAL Tenant will be granted a right of first refusal on all available office space on the floor they currently occupy. All terms and conditions will reflect an amount agreeable between Landlord and Tenant at the time additional space is occupied. Tenant's notification by Landlord will be upon Landlord receiving a bona-fide offer, in writing. Tenant's decision to proceed upon the terms received by Landlord will be accepted or rejected by Tenant within three (3) business days after receipt of notice to Tenant. -40- IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. landlord SIXTY-FIVE WILLOWBROOK TENANCY by: Passaic Investment LLC Managing Tenant James M. Long, Managing Member Tenant Audible, Inc. BY: _______________________________ Name: [Corporate Seal] Title: President -41- IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. LANDLORD SIXTY-FIVE WILLOWBROOK TENANCY by: Passaic Investment LLC Managing Tenant /s/ Christopher R. Smith ---------------------------------- Christopher R. Smith, President American Property Global Partners TENANT Audible, Inc. BY: /s/ Patrick C. Barry --------------------------- Name: Patrick C. Barry [Corporate Seal] Title: CFO, VP -42- EX-10.20 27 SUBLEASE AGREEMENT EXHIBIT 10.20 --------------------------- SUBLEASE --------------------------- PAINEWEBBER INCORPORATED, Sublessor to AUDIBLE WORDS, INC., Sublessee Premises: A portion of the Third (3rd) Floor, 65 Willowbrook Boulevard Wayne, New Jersey dated as of July 19, 1996 SCHEDULE 1 TO SUBLEASE DEFINED TERMS For purposes of this Sublease, the following terms shall have the following meanings: EXECUTION DATE: July 19, 1996. SUBLESSOR: PaineWebber Incorporated. SUBLESSEE: Audible Words, Inc. LESSOR: Hartz Mountain Industries, Inc. SUBLESSOR'S ADDRESS FOR RENT: PaineWebber Incorporated 1000 Harbor Boulevard - 5th Floor Weehawken, NJ 07087 Attn.: Real Estate Finance SUBLESSOR'S ADDRESS FOR NOTICES: PaineWebber Incorporated 1000 Harbor Boulevard - 5th Floor Weehawken, NJ 07087 Attn.: Real Estate Finance With a copy of all default notices to: PaineWebber Incorporated 1200 Harbor Boulevard - 10th Floor Weehawken, NJ 07087 Attn.: Managing Attorney - Real Estate MASTER LEASE: Lease, dated March 31, 1993, between Lessor, as landlord, and Sublessor, as tenant. BUILDING: The Building (as defined in the Master Lease), and commonly known as 65 Willowbrook Boulevard, Wayne, New Jersey. MASTER PREMISES: The Demised Premises (as defined in the Master Lease), consisting of approximately 7,947 square feet of net rentable area on the third (3rd) floor of the Building. -2- PREMISES: The Master Premises, consisting of approximately 7,947 square feet of net rentable area on the third (3rd) floor of the Building and more particularly described on the floor plan attached hereto as Exhibit B. COMMENCEMENT DATE: The later to occur of (a) the date that Sublessor receives the consent of Lessor under Section 16 of this Sublease and (b) July 19, 1996. EXPIRATION DATE: February 27, 2003. FIXED RENT: (a) Eighty Seven Thousand Four Hundred Seventeen and 00/100 Dollars ($87,417.00) per annum, payable in equal monthly installments of Seven Thousand Two Hundred Eighty Four and 75/100 ($7,284.75), in advance, on the first calendar day of each calendar month during the period commencing on the Commencement Date and continuing through the day before the third (3rd) anniversary of the Commencement Date; and (b) One Hundred Eleven Thousand Two Hundred Fifty Eight and 00/100 ($111,258.00) per annum, payable in equal monthly installments of Nine Thousand Two Hundred Seventy One and 50/100 ($9,271.50), in advance, on the first calendar day of each month during the period commencing on the third (3rd) anniversary of the Commencement Date and continuing through the Expiration Date. SECURITY DEPOSIT: Zero and 00/100 Dollars ($0.00). FIRST MONTH'S RENT: Seven Thousand Two Hundred Eighty Four and 75/100 ($7,284.75). SUBLESSEE'S PRO RATA SHARE: One Hundred Percent (100%). -3- SUBLESSOR'S BROKER: The Garibaldi Group. SUBLESSEE'S BROKER: Newmark Partners, Inc. EXCLUDED PROVISIONS: 1.01(C), (E), (J), (L), CM), (N), (P) (S), (Z), (DD), (EE), and (NN); 2.01; 3.01; the first sentence of 3.02; 5.01; the second sentence of 11.01; 33.01; 34; R2; R3; R4; R8; and Exhibit "C" (Workletter). SUBLEASE This SUBLEASE is dated as of the Execution Date (as defined in Schedule 1 to this Sublease) between Sublessor (as defined in Schedule I to this Sublease) and Sublessee (as defined in Schedule 1 to this Sublease) 1. MASTER LEASE ------------ 1.1. Sublessor is the tenant under the Master Lease (as defined in Schedule 1 to this Sublease) wherein Lessor (as defined in Schedule 1 to this Sublease) leased to Sublessor the Master Premises (as defined in Schedule 1 to this Sublease) of the Building (as defined in Schedule 1 to this Sublease). A copy of the Master Lease is attached hereto as Exhibit "A". ----------- 2. PREMISES -------- 2.1 Sublessor hereby subleases to Sublessee, and Sublessee hereby takes and hires from Sublessor, on the terms and conditions set forth in this Sublease, the Premises (as defined in Schedule 1 to this Sublease). 2.2 From and after the receipt of the consent of Lessor, as required by the terms of this Sublease, all personal property then existing in the Premises shall be and become the property of Sublessee. At such time, upon the request of Sublessee, Sublessor will execute and deliver to Sublessee a bill of sale. It is acknowledged by the parties hereto that no portion of the consideration for this Sublease is allocable to said personal property. Sublessee acknowledges that such personal property is being taken "as is", "where is", and "with all faults" as of the date hereof without any representation or warranty whatsoever as to its -4- condition, fitness for any particular purpose, merchantability or any other warranty, express or implied. Sublessor has only limited knowledge of the condition of the personal property. Sublessee is hereby acquiring such personal property based solely upon Sublessee's own independent investigations and inspections of such personal property and not in reliance on any information provided by Sublessor or any of its agents or contractors. Sublessor has made no agreement to alter, repair or improve any of such personal property. Sublessor specifically disclaims any warranty, guaranty or representation, oral or written, past or present, express or implied, concerning such personal property. 3. SUBLESSOR'S REPRESENTATIONS AND WARRANTIES ------------------------------------------ 3.1 Sublessor represents and warrants to Sublessee that the following are true and correct as of the date hereof: (i) except as indicated herein, the Master Lease is unmodified and in full force and effect, and Sublessor's leasehold estate with respect to the Premises has not been assigned, mortgaged, pledged, encumbered, or otherwise transferred or sublet, in whole or in part; (ii) the Master Lease evidences the entire written agreement with respect to the Premises between Sublessor and Lessor; (iii) all rent and additional rent billed to date and payable by Sublessor, as "Tenant" under the Master Lease, has been paid, and Sublessor, as "Tenant" under the Master Lease, will continue to make all payments as they become due and payable under the Master Lease, provided Sublessee is not in default hereunder; (iv) Sublessor has received no written notice from Lessor of default by Sublessor under the Master Lease which remains uncured; and (v) Sublessor, to the best of Sublessor's knowledge, is not in default under the Master Lease. The aforesaid representations and warranties shall be deemed repeated at and as of the Commencement Date (as defined in Schedule 1 to this Sublease) except to the extent that Sublessor has notified Sublessee in writing that any such representation or warranty is no longer true and correct, specifying in said notice in reasonable detail the reason said representation or warranty is no longer true and correct, -5- and, if such incorrect representation or warranty is material and adverse to Sublessee, in Sublessee's reasonable discretion, Sublessee shall have the right to terminate this Sublease by giving notice to Sublessor to such effect at any time within five (5) days following the Commencement Date. Time shall be of the essence with respect to the obligations of Sublessee hereunder. 4. TERM ---- 4.1 The Term of this Sublease shall, subject to the last sentence of this Paragraph, commence on the Commencement Date and shall continue, unless otherwise sooner terminated in accordance with provisions of this Sublease or at law, until the Expiration Date (as defined in Schedule 1 to this Sublease). If for any reason outside of Sublessor's reasonable control Sublessor does not deliver possession of the Premises ("Possession") to Sublessee on the ---------- Commencement Date, Sublessor shall not be subject to any liability for such failure and the validity of this Sublease shall not be impaired, but rent shall abate until delivery of Possession. 5. RENT ---- 5.1 Rent. Sublessee shall pay Fixed Rent (as defined in Schedule 1 to this ---- Sublease) to Sublessor without deduction, abatement, setoff, notice, or demand, at Sublessor's Address for Rent (as defined in Schedule 1 to this Sublease) or at such other place as Sublessor shall designate from time to time by notice to Sublessee, in lawful money of the United States of America. Sublessee shall pay to Sublessor, as rent for the first month of the Term, upon the execution of this Sublease, the First Month's Rent (as defined in Schedule 1 to this Sublease) in respect of the Fixed Rent. If the Term begins or ends on a day other than the first or last day of a month, the rent for the partial months shall be prorated on a per diem basis. 5.2 In addition to Fixed Rent and any other sums which Sublessee may be obligated to pay pursuant to any other provision of this Sublease, Sublessee shall pay to Sublessor as additional rent hereunder (i) Sublessee's pro--rata share of the increase payable by Sublessor in the Tenant's Fraction of the Real Estate Taxes and Tenant's Fraction of the Operating Expenses (as such terms are defined in Sections 6.01 and 6.02, respectively, of the Master Lease) pursuant to Section 6 of the Master Lease over the Tenant's Fraction of the Real Estate Taxes and Tenant's Fraction of the Operating Expenses for the 1996 Calendar Year (as defined in the Master Lease) and (ii) Tenant Surcharges (as hereinafter defined). For purposes of -6- this Sublease, the amounts payable by Sublessee pursuant to subsections (i) and (ii) above are hereinafter referred to as "Additional Rent". For purposes of ---------------- this Sublease, "Subleasee's pro rata share" shall mean the amount set forth in Schedule 1 to this Sublease, which represents the percentage obtained by dividing the rentable area of the Premises by the rentable area currently included in the definition of Master Premises. If the rentable area of the Master Premises increases or decreases (as the case may be), Sublessee's pro rata share shall be adjusted effective as of the effective date of change in the size of the Master Premises. 5.3 Notwithstanding anything to the contrary contained herein, provided Sublessee shall not have defaulted under any of the terms and conditions of this Sublease, the Fixed Rent payable by Sublessee as set forth in Paragraph 5.1 above shall be abated during the period commencing on the Commencement Date and continuing through the date that is fifteen (15) days after the Commencement Date. Nothing contained in this Paragraph 5.3 shall reduce or otherwise abate any Additional Rent, Tenant Surcharges, or other rent payable by Tenant hereunder during such period. 6. SECURITY DEPOSIT. ---------------- 6.1 Upon execution of this Sublease, Sublessee shall deposit with Sublessor an amount in cash equal to the Security Deposit (as defined in Schedule 1 to this Sublease) as partial consideration for this Sublease and as security for the faithful performance and observance by Sublessee of the terms, provisions, covenants and conditions of this Sublease. It is agreed that in the event Sublessee defaults beyond any applicable notice and grace period provided herein for the cure thereof in respect of any of the terms, provisions, covenants and conditions of this Sublease, including, but not limited to, the payment of Fixed Rent and Additional Rent, Sublessor may, upon written notice to Sublessee, use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any Fixed Rent and Additional Rent or any other sum as to which Sublessee is in default or for any sum which Sublessor may expend or may be required to expend by reason of Sublessee's default in respect of any of the terms, provisions, covenants and conditions of this Sublease, including, but not limited to, any damages or deficiency accrued before or after summary proceedings or other re-entry by Sublessor. In the event that Sublessee shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Sublease, the security shall be returned to Sublessee after the Expiration Date and after delivery of entire possession of the Premises to Sublessor. In the event of an assignment of Sublessor's interest in the Master Lease, Sublessor shall have the right to transfer the security to the -7- assignee and, provided such assignee acknowledges, in writing, receipt of and liability to Sublessee for such security, Sublessor shall thereupon be released by Sublessee from all liability for the return of such security; and Sublessee agrees to look solely to such assignee for the return of said security; and it is agreed that the provisions hereof shall apply to every assignment made of the security to any such assignee. Sublessor further covenants that it will not assign or encumber or attempt to assign or encumber the moneys deposited herein as security and that neither Sublessor nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In the event Sublessor applies or retains any portion or all of the security deposited, Sublessee shall forthwith restore the amount so applied or retained so that at all times the amount deposited shall be the amount set forth above. 7. ELECTRICITY. ----------- 7.1 Sublessor shall not furnish electricity to the Premises. Sublessee shall diligently obtain electric energy directly from the public utility furnishing electric service to the Building. The costs for such service shall be paid by Sublessee directly to such public utility. Such electricity may be furnished to Sublessee by means of the existing electrical facilities serving the Premises to the extent the same are available, suitable and safe for such purposes as determined by Sublessor. All meters and all additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electricity and which are in addition to that which exists in the Premises on the Commencement Date shall be installed and, at the expiration or sooner termination of this Sublease, removed by Sublessee at Sublessee's sole cost and expense. Sublessor shall not in anywise be liable or responsible to Sublessee for any loss or damage or expense which Sublessee may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Sublessee's requirements except for actual damages suffered by Sublessee by reason of any such failure, inadequacy or defect caused by the negligence or wilful misconduct of Sublessor. 7.2 Sublessee covenants and agrees that at all times its use of electric current shall not exceed the capacity of the then existing feeders to the Building or the risers or wiring installation. Sublessee shall not make or perform, or permit the making or performing of, any alterations to wiring installations or other electrical facilities in-or serving the Premises (any such work, "Electrical Work"), other than that required for Sublessee' s initial --------------- occupancy of the Premises, without the prior written consent of -8- Sublessor in each instance. In the event that Lessor does not consent to such Electrical Work, Sublessor may arbitrarily and unreasonably withhold, condition or delay its consent in Sublessor's sole and absolute discretion. In the event that Lessor consents to such Electrical Work, Sublessor may not unreasonably withhold, condition or delay its consent (it being specifically agreed that Sublessor may, among other things, condition such consent to provide that Sublessee indemnify Sublessor against any loss, cost or expense with respect to restoring the Premises upon the termination of this Sublease and to provide that Sublessee pay any expenses reasonably incurred by Sublessor with respect to reviewing such Electrical Work) Should Sublessor grant any such consent, all additional risers or other equipment required therefor shall be installed by Sublessee at its sole cost and expense. In no event shall Sublessee use or install any fixtures, equipment or machines the use of which in conjunction with other fixtures, equipment and machines in the Premises would result in an overload of the electrical circuits servicing the Premises. 8. USE OF PREMISES --------------- 8.1 The Premises shall be used and occupied for general business office purposes only and for no other use or purpose. Nothing set forth herein shall permit Tenant to use and occupy the Premises otherwise than to the extent permitted pursuant to the terms of the Master Lease. 9. ASSIGNMENT AND SUBLETTING ------------------------- 9.1 In addition to satisfying the requirements of the Master Lease, Sublessee shall not, without the prior written consent of the Sublessor (which Sublessor may not unreasonably withhold, condition or delay if Lessor consents to such proposed assignment, mortgage, pledge, encumbrance, transfer or sublet, it being specifically agreed that Sublessor may, among other things, condition such consent to provide that Sublessee may not assign, sublet or transfer its interest in this Sublease or in the Premises to any competitor of Sublessor) by operation of law or otherwise, assign, mortgage, pledge, encumber or in any manner transfer this Sublease, or any part thereof or any interest of Sublessee hereunder or sublet or permit the Premises or any part thereof to be used or occupied by others. 10. TENANT SURCHARGES ----------------- 10.1 "Tenant Surcharges" shall mean any and all amounts (other than Fixed ----------------- Rent and Sublessee's pro rata share of Annual Expenses increases) which, by the terms of the Master Lease, become due and -9- payable by Sublessor to Lessor as additional rent under the Master Lease or otherwise -and which would not have become due and payable but for the acts, requests for services, and/or failures to act of Sublessee, its agents, officers, representatives, employees, servants, contractors, invitees, licensees or visitors under this Sublease, including, but not limited to: (i) any increases in Lessor's fire, rent or other insurance premiums, as provided in the Master Lease, resulting from any act or omission of Sublessee and not of Sublessor, (ii) any additional charges to Sublessor on account of Sublessee's request for heating, ventilation or air conditioning after hours, and (iii) any additional charges to Sublessor on account of Sublessee's use of cleaning and freight elevator services after hours or in excess of normal usage as provided in the Master Lease. 10.2 After receipt by Sublessor of any statement or written demand from Lessor which includes demand for payment of any amounts payable hereunder as Tenant Surcharges, Sublessor shall deliver to Sublessee a copy of such statement or demand, together with Sublessor's statement of the amount of such Tenant Surcharges. Sublessee shall pay to Sublessor the amount of such Tenant Surcharges within ten (10) days after Sublessee's receipt of such statement or demand; provided, however, that in any instance in which Sublessee shall receive any such statement or demand directly from Lessor, provided Sublessee delivers a copy of such statement or demand to Sublessor as soon as reasonably practicable after such receipt, Sublessee may pay the amount of the same directly to Lessor. Sublessor agrees that if Sublessee pays the amount due directly to Lessor, in accordance with the preceding sentence, any obligation of Sublessee to pay the same to Sublessor shall be satisfied by the payment to Lessor. The amount of Tenant Surcharges payable hereunder by Sublessee shall at all times be equal to the amounts payable by Sublessor under the Master Lease which would not have become due and payable but for the acts, requests for services, and/or failures to act of Sublessee, its agents, officers, representatives, employees, servants, contractors, invitees, licensees or visitors, as provided in Paragraph 10.1 above. 10.3 If amounts billed to Sublessor by Lessor include amounts payable by Sublessee hereunder as Tenant Surcharges together with other charges of a similar nature which are not attributable to the acts, requests for services and/or failure to act of Sublessee, its agents, officers, representatives, employees, servants, contractors, invitees, licensees or visitors, then the amount payable hereunder by Sublessee as Tenant Surcharges shall be determined as follows: (i) if such amounts are billed by Lessor on a per square foot basis, then the amount payable by Sublessee shall be equal -10- to the product of (a) the dollar amount per square foot charged and (b) the amount of square footage of the Premises covered by the statement or demand from Lessor; and (ii) if such amounts are billed by Lessor on anything other than a per square foot basis, then the amount payable by Sublessee shall be equal to the product of (a) the amount of the charge made by Lessor and (b) a fraction, the numerator of which is the square footage of the Premises covered by Lessor's statement or demand, and the denominator of which is the total square footage covered by such statement or demand. 10.4 Payments shall be made pursuant to this Paragraph 10 notwithstanding the fact that the statement to be provided by Sublessor is furnished to Sublessee after the expiration of the term of this Sublease and notwithstanding the fact that by its terms this Sublease shall have expired or have been canceled or terminated. 10.5 Sublessee shall pay the Additional Rent as and when such rent is payable by Sublessor under the terms of the Master Lease. In that regard, within a reasonable time after the receipt by Sublessor of any projected additional rent statement from Lessor or any change in the additional rent payable on account of Annual Expenses increases pursuant to Section 6 of the Master Lease, Sublessor will furnish Sublessee with a copy of such statement and copies of any additional materials relating to the Premises and received by Sublessor in connection with such charge. Upon submission of such statement, all subsequent installments of Additional Rent hereunder shall include 1/12th of the annual amount of the Additional Rent as shown on such statement; provided, however, that, to the same extent that Sublessor shall be required to pay Lessor any retroactive or other lump sum payments with respect to any such Additional Rent, Sublessee shall pay to Sublessor the amount thereof within fifteen (15) days (or less if the Master Lease stipulates a shorter period for payment by Sublessor to Lessor of the amount in question) after receipt by Sublessee of a statement from Sublessor setting forth the amount of the same; and provided further, that if any such payment shall be for a period which is in part prior to the Commencement Date, Sublessee shall pay only that portion thereof which shall be attributable to the period occurring on or after the Commencement Date. 10.6 If Sublessor shall receive from Lessor any refund of any amounts for which Sublessee shall have paid Additional Rent to Sublessor or Lessor under the provisions of this Paragraph 10, Sublessor shall retain out of such refund the costs and expenses, if any, of obtaining such refund, including but not limited to -11- reasonable attorneys' fees, and shall then pay to Sublessee, within ten (10) days of receipt of such refund by Sublessor, the pro rata portion of the remainder of such refund which is equitably attributable to amounts paid by Sublessee as Additional Rent hereunder. Sublessor agrees to notify Sublessee in advance that Sublessor intends to expend money in order to claim a refund from Lessor. 10.7 Sublessee agrees it shall indemnify and save Sublessor harmless against all costs, claims, loss or liability resulting from delay by Sublessee in surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. The parties recognize and agree that the damage to Sublessor resulting from any failure by Sublessee timely to surrender the Premises will be substantial, will exceed the amount of monthly rent theretofore payable hereunder, and will be impossible of accurate measurement. Sublessee therefore agrees that if possession of the Premises is not surrendered to Sublessor on the date of the expiration or sooner termination of the term of this Sublease, then Sublessee will pay Sublessor as liquidated damages for each month and for each portion of any month during which Sublessee holds over in the Premises after expiration or termination of the term of this Sublease, a sum equal to two (2) times the average rent and additional rent which was payable per month by Sublessor under the Master Lease during the last six months of the term hereof for the entire Master Premises. 10.8 If Sublessee shall fail to pay all or any part of any installment of Fixed Rent or Additional Rent for more than five (5) days after Sublessor's notice that the same is due and payable, Sublessee shall pay as additional rent hereunder to Sublessor a late charge of four (4) cents for each dollar of the amount of such Fixed Rent or Additional Rent which shall not have been paid to Sublessor within such five (5) days after becoming due and payable. The late charge payable pursuant hereto shall be (i) payable on demand and (ii) without prejudice to any of Sublessor's rights and remedies hereunder at law or in equity for nonpayment or late payment of rent or other sum and in addition to any such rights and remedies. No failure by Sublessor to insist upon the strict performance by Sublessee of Sublessee's obligations to pay late charges as provided herein shall constitute a waiver by Sublessor of its right to enforce the provisions hereof in any instance thereafter occurring. The provisions of this paragraph shall not be construed in any way to extend the grace periods or notice periods provided for elsewhere in this Sublease. 10.9 The provisions of this Paragraph 10 shall survive the -12- expiration or any earlier cancellation or termination of this Sublease. 11. OTHER PROVISIONS OF SUBLEASE ---------------------------- 11.1 All applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessor were the Landlord thereunder (except that for purposes of the insurance to be provided and indemnities given by Sublessee, both Lessor and Sublessor shall be included); Sublessee, the Tenant thereunder; the Premises, the Demised Premises thereunder; the Fixed Rent, the Fixed Rent thereunder; and this Sublease, the Lease. thereunder, except for the Excluded Provisions (as defined in Schedule 1 to this Sublease) In connection with the incorporation of the Master Lease, the term "Landlord" shall, with respect to those provisions which, by their terms, reside exclusively with Lessor (including, but not limited to, the provision of services and the promulgation of Building-wide rules and standards), be deemed to mean "Lessor" and otherwise shall be deemed, for the purposes of this Sublease, to mean "Sublessor shall use its best efforts, without, however, incurring any liabilities or expenses not otherwise provided for in the Master Lease or this Sublease, to ensure that Lessor" whenever such a modification is required so that an incorporated provision reflects the agreement of the parties hereto as expressed in this Paragraph 11. Sublessee assumes and agrees to perform the Sublessor's obligations under the Master Lease to the extent incorporated herein during the Term and to the extent such obligations are applicable to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee to the extent and in the amount rent is paid to Sublessor in accordance with Paragraph 5 of this Sublease. Sublessee shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor shall exercise due diligence in attempting to cause Lessor to perform its obligations under the Master Lease for the benefit of Sublessee. In the event Sublessor shall commit any breach of the Master Lease, including but not limited to the payment of any rent or other charges provided for in the Master Lease, Sublessee shall have the right but not the obligation to make such payments directly to Lessor, or cure any other breach of the Master Lease in the name, place and stead of Sublessor, and Sublessee shall deduct such payments from any amounts due under this Sublease. Except as may otherwise be specifically provided herein, if the -13- Master Lease terminates, this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease, provided, however, that if the Master Lease terminates as a result of a default or breach by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the non-defaulting party for the damage suffered as a result of such termination, except that Sublessor shall be permitted to agree with Lessor to terminate the Master Lease without liability to Sublessee provided Lessor is prepared to enter into a direct lease with Sublessee on the same economic terms as contained in this Sublease. Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Premises or the Building or project of which the Premises are a part or otherwise, the exercise of such right by Sublessor shall not constitute a default or breach hereunder, and Sublessee agrees that Sublessor shall be free to exercise any such rights as may be available to Sublessor without first obtaining any approval from, or consulting with, Sublessee. Sublessee acknowledges and agrees that Sublessor shall not be responsible or liable in any manner for making any repairs or otherwise complying with any of Lessor's obligations or providing any of the services and/or utilities required to be provided by Lessor under the Master Lease to the Premises and Sublessee agrees to look solely to Lessor for the making of repairs, complying with such obligations or providing any such services and/or utilities and in connection therewith Sublessor shall reasonably cooperate with Sublessee in Sublessee's efforts to have the same made, complied with or provided. If Lessor shall default in any of its obligations to Sublessor with respect to the Premises, Sublessor shall be obligated to take such steps (other than instituting any lawsuit) which, in Sublessor's reasonable judgment, may be reasonably necessary, considering the nature of Lessor's default and Sublessee shall be entitled to participate with Sublessor in the enforcement of Sublessor's rights against Lessor. If, after written request from Sublessee, Sublessor shall fail or refuse to take such action for the enforcement of Sublessor's rights against Lessor with respect to the Premises within a reasonable period of time considering the nature of Lessor's default, Sublessee's sole remedy with respect to Sublessor shall be to take, and Sublessee shall have the right to take, such action (inclding the institution of a lawsuit against Lessor) in its own name, and for that purpose and only to such extent, all of the rights of Sublessor under the Master Lease hereby are conferred upon and assigned to Sublessee and Sublessee hereby is subrogated to such rights to the extent that the same shall apply to the Premises. If any such action against Lessor in Sublessee's name shall be barred by -14- reason of lack of privity, non-assignability or otherwise, Sublessee may take such action in Sublessor's name (provided Sublessee has obtained the prior written consent of Sublessor, which consent shall not be unreasonably withheld or delayed), and Sublessee hereby agrees that Sublessee shall indemnify and hold Sublessor harmless from and against all liability, loss, damage or expense, including, without limitation, reasonable attorneys' fees, which Sublessor shall suffer or incur by reason of such action. The failure of Lessor to make such repairs, comply with such obligations or provide any such services and/or utilities shall not result in any claim or right of action of Sublessee against Sublessor or entitle Sublessee to withhold or otherwise reduce any rent or other payments to be made to Sublessor pursuant to the terms of this Sublease. 12. BROKER ------ 12.1 Sublessee and Sublessor each warrant and represent to the other party that it has had no dealings or negotiations with any broker or agent other than Sublessor's Broker (as defined in Schedule 1 to this Sublease) and Sublessee's Broker (as defined in Schedule 1 to this Sublease) in connection with this sublease transaction and each covenants and agrees to indemnify and save the other party harmless from and against any and all loss, damage, cost and expense, including reasonable attorneys' fees, that may be incurred by the other party as a result of any claims made against the other party by any broker or agent, other than Sublessor's Broker and Sublessee's Broker, claimed to have arisen from any conversation, correspondence, or other dealings between such party and any other broker or agent in connection with this Sublease transaction or the Premises. Sublessor shall be responsible for the payment of all commissions to Sublessor's Broker and Sublessee's Broker in accordance with a separate agreement between Sublessor and such brokers. 13. ATTORNEYS' FEES --------------- 13.1. If Sublessor or Sublessee shall commence an action against the other arising out of or in connection with this Sublease, the prevailing party shall be entitled to recover its costs of suit and reasonable attorneys' fees. 14. NOTICES ------- 14.1 All notices and demands which may be or are required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by Sublessor to Sublessee shall be sent by United States certified mail/return receipt requested, postage prepaid, addressed to Sublessee at the Premises, or to such -15- other place as Sublessee may from time to time designate in a notice to Sublessor. All notices and demands by the Sublessee to Sublessor shall be sent by United States certified mail/return receipt requested, postage prepaid, addressed to Sublessor at Sublessor's Address for Notices (as defined in Schedule 1 to this Sublease) and to such other person or place as the Sublessor may from time to time designate in a notice to the Sublessee. Wherever in the Master Lease, Sublessor is required or permitted to provide notices or to receive notices in connection with the commission of a default, Sublessee will have five (5) days less time to give such notice or to cure such default under the terms hereof. Sublessor agrees that it will promptly deliver to Sublessee a copy of any default notice that Sublessor receives from Lessor. 15. SUBLESSOR'S CONSENT ------------------- 15.1 Sublessor and Sublessee covenant and agree that wherever Lessor's consent or approval is required under the terms of the Master Lease, Sublessee must obtain both Lessor's and Sublessor's consent or approval (as the case may be) to such act and it shall be a condition precedent to Sublessor's obligation to consider consenting to or approving such act that Sublessee first obtain Lessor's consent or approval (as the case may be) . In the event that the Lessor does not give its consent or approval (as the case may be) to such act, Sublessee acknowledges and agrees that Sublessor may arbitrarily and unreasonably withhold, condition or delay its consent to such act but in the event that Lessor gives its consent or approval (as the case may be) to such act, Sublessor shall (except as otherwise specifically set out in this Sublease to the contrary) not unreasonably withhold its consent to such act. Sublessee agrees that its sole remedies in cases where Sublessor's reasonableness in exercising its judgment or withholding or delaying its consent or approval is applicable pursuant to a specific provision of this Sublease shall be those in the nature of any injunction, declaratory judgment, or specific performance, the rights to money damages or other remedies being hereby specifically waived. 16. CONSENT BY LESSOR ----------------- 16.1 This Sublease shall be of no force or effect unless Sublessor receives a written consent to this Sublease, in form and substance satisfactory to Sublessor in all respects, from Lessor within thirty (30) days after execution hereof by both Sublessor and Sublessee. In connection therewith, Sublessee shall, (a) upon the request of Sublessor, promptly furnish to Sublessor all information -16- pertaining to the Sublessee requested by Lessor pursuant to the terms of the Master Lease, and (b) reasonably cooperate with Sublessor in its efforts to obtain written consent to this Sublease from Lessor. Sublessor shall have no obligation to pay any fee or charge of any nature whatsoever not specifically required to be paid under the Master Lease in connection with or as a condition to obtaining Lessor's consent, and Sublessor shall suffer and incur no liability to Sublessee for its failure to obtain such consent of Lessor. 17. DEFINITION OF SUBLESSOR ----------------------- 17.1 The term "Sublessor" as used in this Sublease insofar as covenants or obligations on the part of Sublessor are concerned shall be limited to mean and include only the owner or owners at the time in question of the "Tenant's" interest in the Master Lease and landlord's interest in this Sublease, and in the event of any transfer or transfers of the "Tenant's" interest in the Master Lease or landlord's interest in this Sublease, Sublessor herein named (and in the case of any subsequent transfer or conveyance, the then transferor of the "Tenant's" interest in the Master Lease) shall be automatically freed and relieved from and after the date of such transfer of all personal liability as respects the performance of any covenants or obligations on the part of Sublessor contained in this Sublease thereafter to be performed; provided, however, that any sums received by Sublessor which are payable to Sublessee shall be retained by Sublessor for payment of any such sums to Sublessee, and provided further, that any other funds in the hands of such Sublessor or the then transferor at the time of such transfer in which Sublessee has an interest shall be turned over to the new owner and holders of the tenant's interest in the Master Lease and any amount then due and payable by Sublessee to Sublessor, or the then transferor or under any provision of this Sublease, shall be so paid. 18. CONDITION OF PREMISES --------------------- 18.1 Sublessee represents that it has made a thorough inspection of the Premises and is fully familiar with the condition of every part thereof. Sublessee agrees to accept possession of the Premises "As Is" in its condition on the date hereof, free, however, of any furniture or furnishings of Sublessor which are not being leased to Sublessee pursuant hereto subject, nevertheless, to ordinary wear and tear occurring prior to the Commencement Date, and Sublessor shall not be required to make any alterations, decorations, installations, additions, repairs or improvements of any kind whatsoever to prepare the Premises for Sublessee's occupancy, except that Sublessor shall deliver the Premises `broom-clean'. -17- 18.2 During the term of this Sublease, Sublessee shall not make or suffer to be made any alterations, additions, or improvements to the Premises or any part thereof without complying with the provisions of the Master Lease and without obtaining the prior written consent of the Sublessor. In the event that Lessor does not consent to such alterations, additions or improvements, Sublessor may arbitrarily and unreasonably withhold, condition or delay its consent in Sublessor's sole and absolute discretion. In the event that Lessor consents to such alterations, additions or improvements, Sublessor may not unreasonably withhold, condition or delay its consent (it being specifically agreed that Sublessor may, among other things, condition such consent to provide that Sublessee indemnify Sublessor against any loss, cost or expense with respect to restoring the Premises upon the termination of this Sublease and to provide that Sublessee pay any expenses reasonably incurred by Sublessor with respect to reviewing such alterations, additions or improvements). 19. CASUALTY OR CONDEMNATION ------------------------ 19.1 If the Premises or the Building shall be partially or totally damaged by fire or other cause, the consequences thereof shall be determined pursuant to Section 24 of the Master Lease, as though the Premises had not been sublet by Sublessor pursuant to this Sublease. Sublessee shall not be entitled to participate with Sublessor in the enforcement of Sublessor's rights against Lessor under such Section 24; in such event, however, Sublessor agrees to use commercially reasonable efforts to enforce its rights against Lessor under such Article 24 and Sublessee shall have the same right to an apportionment of rent and to repairs with respect to Sublessor as Sublessor shall have with respect to Lessor under said Section 24. No damage, compensation or claims shall be payable by Sublessor for any inconvenience, loss of business or annoyance arising from any such damage by fire or other cause or by the repair or restoration of any portion of the Premises or of the Building. Nothing contained herein shall be deemed to obligate or require Sublessor to repair or restore all or any portion of the Premises. 19.2 Sublessor will not carry insurance of any kind on its own or Sublessee's personal property kept at the Premises, and Sublessor shall not be obligated to repair any damage thereto or replace the same. Sublessee will not carry insurance of any kind on Sublessor's personal property kept at the Master Premises, and Sublessee shall not be obligated to repair any damage thereto or replace the same. 19.3 In the event that the Premises or any part thereof or the Building shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, the consequences of such -18- acquisition or condemnation shall be determined pursuant to Section 25 of the Master Lease, as though the Premises had not been sublet by Sublessor pursuant to this Sublease. Sublessee shall not be entitled to participate with Sublessor in the enforcement of Sublessor's rights against Lessor under such Section 25. No damage, compensation or claims shall be payable by Sublessor for any inconvenience, loss of business or annoyance arising from any such condemnation or acquisition. 20. SUBORDINATION TO MASTER LEASE ----------------------------- 20.1 Sublessee acknowledges and agrees that this Sublease and the estate hereby granted are subject and subordinate to all of the terms, covenants, provisions, conditions and agreements contained in the Master Lease and to all leases, mortgages, encumbrances and other agreements and/or matters to which the Master Lease is now or may hereafter become subject and subordinate. This clause shall be self-operative and no further instrument of subordination shall be required. Sublessee shall, however, execute any certificates confirming such subordination which Sublessor may request within ten (10) days after receipt of such request. Sublessee also agrees that this Sublease shall be subject and subordinate to the Master Lease as the same may hereafter be amended or modified; provided, however, that no such amendment or modification shall either increase the obligations of Sublessee hereunder or adversely affect Sublessee's rights, powers or privileges hereunder. 21. EXCULPATION ----------- 21.1 Notwithstanding anything to the contrary provided elsewhere in this Sublease, Sublessor and Sublessee each agrees that it shall not make a claim or seek personal judgment against any officer, director, employee, agent, beneficiary or shareholder of the other for any default in the performance or observance of any of the terms or conditions of this Sublease, nor seek nor assert a deficiency judgment or any other amount claimed payable against any officer, director, employee, agent, beneficiary or shareholder of the other in the same proceeding arising out of any alleged breach or non-performance of this Sublease. 22. DIRECTORY LISTINGS. ------------------ 22.1 Subject to the provisions of the Master Lease, provided Sublessee reimburses Sublessor for the charges therefore, Sublessee may use Sublessee's pro rata share of Sublessor's space on the Building Directory allocable to the Premises for the listing of Sublessee. -19- IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date hereof WITNESSES: SUBLESSOR: PAINEWEBBER INCORPORATED By: /s/ Lawrence G. DiSalvo ------------------------------ Name: Lawrence G. DiSalvo Title: Corporate Vice President WITNESSES: SUBLESSEE: AUDIBLE WORDS, INC. By: /s/ Don R. Katz ------------------------------ Name: Title: -20- The undersigned ("Lessor"), Landlord under the Master Lease, hereby ------ consents to the foregoing Sublease without waiver of any restriction in the Master Lease concerning further assignment or subletting. Dated: July ___, 1996 LESSOR: HARTZ MOUNTAIN INDUSTRIES, INC. By: ____________________________________ Name: Title: -21- EX-11.1 28 STATEMENT OF COMPUTATION OF LOSS PER SHARE Exhibit 11.1 Computation of net loss per share
Three months ended Year ended December 31, March 31, ----------------------------------------------------- ------------------ 1996 1997 1998 1999 ----------- ----------- ----------- ------------ Net loss per common share ..................... $(3,508,770) $(8,029,247) $(8,138,074) $ (1,461,184) =========== =========== =========== ============ Weighted average shares outstanding ................................... 2,117,883 3,586,002 4,731,296 4,968,043 =========== =========== =========== ============ Basic and diluted net loss per common share .................................. $ (1.66) $ (2.24) $ (1.72) $ (0.29) =========== =========== =========== ============ Pro forma weighted average shares outstanding ............................ 3,660,217 8,045,002 10,861,130 13,818,710 =========== =========== =========== ============ Pro forma basic and diluted net loss per common share ..................... $ (0.96) $ (1.00) $ (0.75) $ (0.11) =========== =========== =========== ============
EX-23.1 29 CONSENT OF KPMG LLP 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. /s/ KPMG LLP - --------------------- Short Hills, New Jersey April 22, 1999 EX-27 30 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 DEC-31-1998 9,652 10,526 0 0 243 30 8 21 190 130 10,385 10,996 1,568 1,472 1,164 1,074 10,991 11,600 2,845 2,926 0 0 28,719 27,725 0 0 51 49 (21,001) (19,578) 10,991 11,600 315 376 315 376 215 928 1,844 8,453 0 0 0 0 15 115 (1,461) (8,138) 0 0 (1,461) (8,138) 0 0 0 0 0 0 (1,461) (8,138) (.29) (1.72) (.29) (1.72)
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