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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
ARTISTDIRECT, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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[ARTISTDIRECT LOGO]
ARTISTDIRECT, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 29, 2001
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
ARTISTdirect, Inc., a Delaware corporation (the "Company"), will be held on
Friday, June 29, 2001, at 10:00 a.m. Pacific Time at _____________________ for
the following purposes, as more fully described in the Proxy Statement
accompanying this Notice:
1. To elect three directors to serve for a three-year term ending in
the year 2004 or until their successors are duly elected and
qualified;
2. To ratify the appointment of KPMG LLP as independent accountants
of the Company for the fiscal year ending December 31, 2001;
3. To approve the formation of a record label company as a
co-venture between the Company and Frederick W. Field, and
related agreements with Mr. Field;
4. To approve an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse stock split; and
5. To transact such other business as may properly come before the
meeting, or any adjournment or postponement thereof.
Only stockholders of record at the close of business on April 30, 2001
are entitled to notice of and to vote at the Annual Meeting. The stock transfer
books of the Company will remain open between the record date and the date of
the meeting. A list of stockholders entitled to vote at the Annual Meeting will
be available for inspection at the executive offices of the Company.
All stockholders are cordially invited to attend the meeting in person.
Whether or not you plan to attend, please sign and return the enclosed proxy as
promptly as possible in the envelope enclosed for your convenience. Should you
receive more than one proxy because your shares are registered in different
names and addresses, each proxy should be signed and returned to assure that all
your shares will be voted. You may revoke your proxy at any time prior to the
Annual Meeting. If you attend the Annual Meeting and vote by ballot, your proxy
will be revoked automatically and only your vote at the Annual Meeting will be
counted.
Sincerely,
Marc P. Geiger
Chairman of the Board of Directors and
Chief Executive Officer
Los Angeles, California
June 11, 2001
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY, COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED
ENVELOPE.
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[ARTISTDIRECT LOGO]
ARTISTDIRECT, INC.
5670 WILSHIRE BOULEVARD, SUITE 200
LOS ANGELES, CALIFORNIA 90036
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PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 29, 2001
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GENERAL
The enclosed proxy (the "Proxy") is solicited on behalf of the Board of
Directors of ARTISTdirect, Inc., a Delaware corporation (the "Company"), for use
at the Annual Meeting of Stockholders to be held on Friday, June 29, 2001 (the
"Annual Meeting") and at any adjournment or postponement thereof. The Annual
Meeting will be held at 10:00 a.m. Pacific Time at _____________________. These
proxy solicitation materials were mailed on or about June 12, 2001 to all
stockholders entitled to vote at the Annual Meeting.
VOTING; QUORUM
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice and are described in more
detail in this Proxy Statement. On April 30, 2001, the record date (the "Record
Date") for determination of stockholders entitled to notice of and to vote at
the Annual Meeting, 35,683,709 shares of the Company's common stock ("Common
Stock") were outstanding. No shares of the Company's preferred stock are
outstanding. Each stockholder is entitled to one vote for each share of Common
Stock held by such stockholder on the Record Date. Stockholders may not cumulate
votes in the election of directors.
The presence at the Annual Meeting, either in person or by proxy, of
holders of shares of outstanding stock entitled to vote and representing a
majority of the voting power of all of such shares shall constitute a quorum for
the transaction of business. In the election of directors, the three nominees
receiving the highest number of affirmative votes shall be elected. With regard
to Proposals Two and Three, the affirmative vote of the holders of Common Stock
representing a majority of the voting power present or represented by proxy and
voting at the Annual Meeting and entitled to vote on the subject matter is being
sought. Proposal Four requires the affirmative vote of the holders of Common
Stock representing a majority of the outstanding stock entitled to vote on the
subject matter.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
as present for purposes of determining the presence or absence of a quorum for
the transaction of business. With regard to Proposals One, Two, and Three,
abstentions will be counted towards the tabulations of votes cast on such
proposals presented to the stockholders and will have the same effect as
negative votes, whereas broker non-votes will not be counted for purposes of
determining whether such proposals have been approved. With regard to Proposal
Four, both abstentions and broker non-votes will be counted towards the
tabulations of votes cast on such proposals presented to the stockholders and
each will have the same effect as negative votes.
PROXIES
If the enclosed form of proxy is properly signed and returned, the
shares represented thereby will be voted at the Annual Meeting in accordance
with the instructions specified thereon. If the proxy does not specify how the
shares represented thereby are to be voted, the proxy will be voted FOR the
election of the directors proposed by the Board unless the authority to vote for
the election of such directors is withheld and, if no contrary instructions are
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given, the proxy will be voted FOR the approval of Proposal Two described in the
accompanying Notice and Proxy Statement. You may revoke or change your Proxy at
any time before the Annual Meeting by filing with the Secretary of the Company
at the Company's principal executive offices at 5670 Wilshire Boulevard, Suite
200, Los Angeles, California 90036 a notice of revocation or another signed
Proxy with a later date. You may also revoke your Proxy by attending the Annual
Meeting and voting in person.
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional solicitation materials furnished to the stockholders. Copies
of solicitation materials will be furnished to brokerage houses, fiduciaries and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by a solicitation by
telephone, telegram or other means by directors, officers or employees of the
Company. No additional compensation will be paid to these individuals for any
such services. Except as described above, the Company does not presently intend
to solicit proxies other than by mail.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 2002 Annual Meeting of
Stockholders must be received no later than February 12, 2002, in order that
they may be included in the proxy statement and form of proxy relating to that
meeting. In addition, the proxy solicited by the Board of Directors for the 2002
Annual Meeting will confer discretionary authority to vote on any stockholder
proposal presented at that meeting, unless the Company receives notice of such
proposal no later than April 26, 2002.
NOTE WITH RESPECT TO FORWARD-LOOKING STATEMENTS
The Company has made forward-looking statements in this Proxy Statement
that relate to expectations concerning matters that are not historical facts.
Words such as "projects," "believes," anticipates," "plans," "expects,"
"intends," and similar words and expressions are intended to identify
forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from such expectations, including risks described under "Proposal Three --
Approval of Record Label Co-Venture and Related Agreements with Frederick W.
Field," "Proposal Four -- Approval of an Amendment to the Company's Certificate
of Incorporation to Effect a One-for-Ten Reverse Split of the Company's Common
Stock" and other risks stated in this Proxy Statement. All forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such language. The Company does not undertake any obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
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PROPOSAL ONE:
ELECTION OF DIRECTORS
GENERAL
The Company's Certificate of Incorporation provides for a classified
Board of Directors consisting of three classes of directors with staggered
three-year terms, with each class as nearly equal in number as possible as
determined by the Board. The Board currently consists of nine persons. The class
whose term of office expires at the Annual Meeting currently consists of three
directors. The directors elected to this class will serve for a term of three
years, expiring at the 2004 annual meeting of stockholders or until their
successors have been duly elected and qualified. Two of the three nominees
listed below are currently directors of the Company. On May 31, 2001, the Board
nominated Frederick W. Field to be elected as a director. If this proposal is
approved, the Board will consist of nine persons, with each class consisting of
three directors.
The nominees for election have agreed to serve if elected, and
management has no reason to believe that such nominees will be unavailable to
serve. In the event any of the nominees named herein is unable to serve or
declines to serve at the time of the Annual Meeting, the persons named in the
enclosed Proxy will exercise discretionary authority to vote for substitutes.
Unless otherwise instructed, the proxy holders will vote the Proxies received by
them FOR the nominees named below.
DIRECTORS AND NOMINEES
NOMINEES FOR TERM ENDING UPON THE 2004 ANNUAL MEETING OF STOCKHOLDERS
KEITH K. YOKOMOTO, 38, co-founded the Company and has served as its
President since July 1999, as its Chief Operating Officer since January 1997 and
as a director since July 1998. From September 1985 to January 1997, Mr. Yokomoto
was a manager of new ventures and business development and a project engineer at
Hughes Electronics. Mr. Yokomoto received his B.S. in Mechanical Engineering
from the University of California at San Diego and his M.B.A. from the
University of Southern California.
FREDERICK W. FIELD, 48, was nominated in May 2001 by the Board of
Directors to be elected as a director. Mr. Field currently serves as Chairman of
the Board and Chief Executive Officer of Radar Pictures, Inc., a film production
company. From 1990 to 2001, Mr. Field served as Co-Chairman of Interscope
Records, a music production company. From 1979 to 1997, Mr. Field served as
Chairman of the Board and Chief Executive Officer of Interscope Communications,
Inc. Additionally, Mr. Field serves on the board of directors of Interland, Inc.
and several privately-held companies. See "Mr. Frederick W. Field" in Proposal
Three for more information on Mr. Field.
BENJAMIN MOODY, 41, has served as a director since March 2001. Mr. Moody
presently is Vice Chairman and Chief Financial Officer of Cisneros TV Group, a
media entertainment company, as well as Managing Director and Chief Financial
Officer of Ibero-American Partners II, Ltd. Moody also currently serves as a
director of several media companies, including Playboy TV International, LLC and
The Locomotion Channel. From June 1996 to June 1998, Mr. Moody was a Managing
Director of Violy, Byorum and Partners, LLC. From June 1992 to June 1996, Mr.
Moody was a Vice President of Citicorp Securities, Inc. Mr. Moody received his
B.A. in English Language and Literature from Saint Benet's Hall, Oxford
University.
CONTINUING DIRECTORS FOR TERM ENDING UPON THE 2002 ANNUAL MEETING OF
STOCKHOLDERS
DONALD P. MULLER, 40, co-founded the Company and has served as the
President of ARTISTdirect Agency since July 1999 and as a director since July
1998. From January 1997 to June 1999, Mr. Muller was a co-Chief Executive
Officer of ARTISTdirect, LLC. From October 1992 to December 1996, Mr. Muller was
a talent agent overseeing William Morris Agency's Contemporary Music Worldwide
division. From 1986 to September 1992, Mr. Muller was an agent at Triad Artists
Agency, which was sold to William Morris Agency in 1992. Mr. Muller
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received his B.A. in Communications from the University of Iowa. In 1990, Mr.
Muller co-founded the Lollapalooza concert tour.
STEPHEN M. KRUPA, 36, has served as a director since May 1999. Mr. Krupa
is a founding member and Managing Director of Psilos Group Managers, LLC, a
private venture capital fund focused on the digital media, information
technology and health care sectors. Mr. Krupa is currently a director of several
private technology and healthcare companies. From February 1995 to July 1998,
Mr. Krupa held various positions at Wasserstein Perella & Co., most recently as
a Vice President where he specialized in mergers and acquisitions advisory work.
Mr. Krupa received his B.S. in Mechanical Engineering from the University of
South Florida and his M.B.A. from the Wharton School of the University of
Pennsylvania.
ALLEN D. LENARD, 59, has served as a director since July 1998. Mr.
Lenard is Managing Partner of Lenard & Gonzalez LLP, a transactional
entertainment law firm. Mr. Lenard received his B.A. in Business Administration
from the University of Wisconsin, Madison and his J.D. from the University of
California at Los Angeles School of Law.
CONTINUING DIRECTORS FOR TERM ENDING UPON THE 2003 ANNUAL MEETING OF
STOCKHOLDERS
MARC P. GEIGER, 38, co-founded the Company and has served as Chief
Executive Officer since the Company's inception and as the Company's Chairman of
the Board since July 1998. From January 1992 to December 1996, Mr. Geiger was
the Senior Vice President of Marketing, A&R and New Media at American
Recordings, Inc. From 1984 to 1991, Mr. Geiger worked as a talent agent for
Regency Artists, that was later acquired by the William Morris Agency. In 1990,
Mr. Geiger co-founded the Lollapalooza concert tour.
CLIFFORD H. FRIEDMAN, 42, has served as a director since July 1998. Mr.
Friedman is a Senior Managing Director at Bear, Stearns & Co. Inc. where he
manages venture capital funds, including Constellation Venture Capital, L.P.
From January 1996 to August 1997, Mr. Friedman served as a Senior Vice President
of Universal Studios. From January 1995 to January 1996, Mr. Friedman was a Vice
President of Corporate Development at NBC. Mr. Friedman received his B.S. in
Electrical Engineering and Computer Science and his M.S. in Electrophysics from
Polytechnic University. Mr. Friedman received his M.B.A. from Adelphi
University.
DARA KHOSROWSHAHI, 32, has served as a director since March 2000. Since
July 2000, Mr. Khosrowshahi has been Executive Vice President, Operations and
Strategic Planning of USA Networks Incorporated. From October 1999 to July 2000,
Mr. Khosrowshahi was President of USANetworks Interactive, a division of USAi.
From February 1998 to October 1999, Mr. Khosrowshahi was the Vice President of
Strategic Planning for USAi and USANi LLC. From 1991 to 1998, he was at Allen &
Company Incorporated, an investment bank, where he was a Vice President from
1995 to 1996 and a director from 1996 to 1998. Mr. Khosrowshahi also serves as a
director of Hotel Reservation Network and several private companies. Mr.
Khosrowshahi received his B.S. in Bioelectrical Engineering from Brown
University.
BOARD COMMITTEES AND MEETINGS
The Board of Directors held seven meetings and acted by unanimous
written consent three times during the fiscal year ended December 31, 2000 (the
"2000 Fiscal Year"). The Board has an Audit Committee and a Compensation
Committee. Except as set forth below, each director attended or participated in
75% or more of the aggregate of (i) the total number of meetings of the Board of
Directors and (ii) the total number of meetings held by all committees of the
Board on which such director served during the 2000 Fiscal Year. Mr. Rick Rubin
attended only one Board meeting in the 2000 Fiscal Year.
AUDIT COMMITTEE. The Audit Committee currently consists of three
directors, Messrs. Friedman, Khosrowshahi and Krupa, and is primarily
responsible for approving the services performed by the Company's independent
accountants and reviewing their reports regarding the Company's accounting
practices and systems of internal accounting controls. The committee also
reviews the Company's accounting and financial policies in general and the
Company's management's procedures and policies with respect to the Company's
internal accounting controls. The Audit Committee held three meetings during the
2000 Fiscal Year and did not act by unanimous written consent during the 2000
Fiscal Year.
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The Board of Directors adopted and approved a written charter for the
Audit Committee on March 21, 2000, a copy of which is attached hereto as
Appendix A. The Board has determined that all members of the Audit Committee are
"independent" as that term is defined in Rule 4200 of the listing standards of
the National Association of Securities Dealers.
COMPENSATION COMMITTEE. The Compensation Committee currently consists of
three directors, Messrs. Friedman, Krupa and Lenard, and is primarily
responsible for reviewing and approving the Company's general compensation
policies and setting compensation levels for the Company's executive officers.
The Compensation Committee also reviews and makes recommendations to the Board
of Directors on matters relating to employee compensation and benefit plans. The
Compensation Committee did not meet during the 2000 Fiscal Year.
DIRECTOR COMPENSATION
Directors who are not employees of the Company or one of its
subsidiaries do not currently receive any cash compensation from the Company for
their service as members of the Board of Directors or any Board committee.
However, Directors are reimbursed for all reasonable travel and lodging expenses
incurred by them in attending Board and committee meetings. All directors are
eligible to participate in the 1999 Employee Stock Option Plan.
In December 2000, the Company granted Dara Khosrowshahi, one of its
outside directors, options to purchase 50,000 shares of the Company's common
stock at a price per share of $0.75. The Company did not grant any of its other
outside directors shares of, or options to purchase, its common stock during
2000.
REQUIRED VOTE
The three nominees receiving the highest number of affirmative votes of
the outstanding shares of the Common Stock, voting together as a single class,
present or represented by proxy and entitled to be voted for them, shall be
elected as directors. Each proxy cannot be voted for a greater number of persons
than three.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES LISTED ABOVE.
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PROPOSAL TWO:
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected the firm of KPMG LLP, independent
public accountants for the Company during the 2000 Fiscal Year, to serve in the
same capacity for the year ending December 31, 2001, and is asking the
stockholders to ratify this appointment. Stockholder ratification of such
selection is not required by the Company's Bylaws or other applicable legal
requirement. However, the Board of Directors is submitting the selection of KPMG
LLP to the stockholders for ratification as a matter of good corporate practice.
In the event the stockholders fail to ratify the selection, the Audit Committee
and the Board of Directors will reconsider whether or not to retain that firm.
Even if the selection is ratified, the Board of Directors in its discretion may
direct the appointment of a different independent accounting firm at any time
during the year if the Board of Directors believes that such a change would be
in the best interests of the Company and its stockholders.
A representative of KPMG LLP is expected to be present at the Annual
Meeting, will have the opportunity to make a statement if he or she desires to
do so, and will be available to respond to appropriate questions.
FEES BILLED TO COMPANY BY KPMG LLP DURING FISCAL 2000:
AUDIT FEES
Audit fees billed to the Company by KPMG LLP during the Company's 2000
Fiscal Year for the audit of the Company's annual financial statements and a
review of those financial statements included in the Company's quarterly reports
on Form 10-Q totaled $140,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The Company did not engage KPMG LLP to provide advice to the Company
regarding financial information systems design and implementation during the
2000 Fiscal Year.
ALL OTHER FEES
Fees billed to the Company by KPMG LLP during the Company's 2000 Fiscal
Year for all other non-audit services rendered to the Company, including
services related to the Company's initial public offering and tax related
services totaled $114,000.
DETERMINATION OF INDEPENDENCE
The Company's Audit Committee has determined that the fees received by
KPMG LLP for the non-audit related services listed above are compatible with
maintaining KPMG's independence.
VOTE
The affirmative vote of the holders of a majority of the shares present
or represented and entitled to vote at the meeting is being sought to ratify the
selection of KPMG LLP as the Company's independent public accountants for the
fiscal year ending December 31, 2001.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF KPMG LLP TO SERVE AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2001.
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PROPOSAL THREE:
APPROVAL OF RECORD LABEL CO-VENTURE
AND RELATED AGREEMENTS WITH FREDERICK W. FIELD
GENERAL
The Board of Directors of the Company has determined that it is
advisable and in the best interests of the Company and its stockholders to form
a new record label company (the "Record Label") as a co-venture between the
Company and Frederick W. Field, and to enter into related agreements with Mr.
Field to retain Mr. Field as the Company's Chief Executive Officer. The Company
believes these proposed transactions present an exciting opportunity to execute
on the Company's original business strategy to have a significant presence in
both the online and traditional offline segments of the music industry.
On May 31, 2001, ARTISTdirect Recordings, Inc., a wholly-owned
subsidiary of the Company, and Radar Records Holdings, LLC ("Radar Records"), an
entity wholly owned directly or indirectly by Mr. Field, entered into definitive
agreements regarding the formation and operation of the Record Label and the
terms of Mr. Field's employment. At the 2001 Annual Meeting, the Company will
ask its stockholders to approve these agreements in order to satisfy a condition
to closing set forth in the definitive agreements. This condition may be waived
by Radar Records and Mr. Field at any time prior to closing. Accordingly, in the
event the stockholders fail to approve this proposal, and Radar Records and Mr.
Field waive this condition, the Company could still consummate the transactions
with Mr. Field.
On May 31, 2001, the Board of Directors approved the formation of the
record label co-venture with Mr. Field and the related agreements. The Board of
Directors recommends that the stockholders vote FOR approval of the formation of
the record label co-venture with Mr. Field and the related agreements.
The terms of the material agreements relating to these transactions are
summarized below. Stockholders are urged to carefully review and consider the
terms of certain of those agreements that have been included as Appendices B and
C to this Proxy Statement. A complete copy of the remaining agreements, which
have been filed as Exhibits 1 through 4 with the Securities and Exchange
Commission in connection with this Proxy Statement, is available at the
Securities and Exchange Commission's web site at www.sec.gov, or from the
Company, without charge, by writing to Investor Relations, ARTISTDIRECT, INC.,
5670 Wilshire Boulevard, Los Angeles, California 90036. STOCKHOLDERS ALSO SHOULD
CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION BELOW ENTITLED "RISK FACTORS."
THE RECORD LABEL
The Company, through its wholly-owned subsidiary, ARTISTdirect
Recordings, and Mr. Field, through his affiliated entity, Radar Records, formed
the Record Label on May 29, 2001 as a Delaware limited liability company under
the name ARTISTdirect Records, L.L.C. The Record Label will have its principal
offices in Los Angeles, California and Mr. Field will serve as its Chief
Executive Officer.
The Record Label will seek to develop new music artists, and to produce
and distribute their recordings as an independent label utilizing both
traditional channels and emerging Internet distribution channels. The Record
Label will be jointly owned by the Company and by Mr. Field, and will seek to
exploit the Company's Internet music distribution network and artist services,
allowing the Company to strengthen its position as a music entertainment company
with both traditional and new media capabilities based on the Internet.
MR. FREDERICK W. FIELD
Mr. Field is a veteran executive of the entertainment industry, with
over 22 years of experience owning and operating film production companies and
record labels. Mr. Field presently serves as Chairman of the Board and Chief
Executive Officer of Radar Pictures Inc., a film production company. Mr. Field
has produced numerous films, including "Runaway Bride," "Mr. Holland's Opus" and
"The Hand that Rocks the Cradle." From 1990 to 2001, Mr. Field served as
Co-Chairman of Interscope Records, a music production company, which has signed
such acts as
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Tupac Shakur, Nine Inch Nails, Dr. Dre, No Doubt, Snoop Doggy Dogg, Limp Bizkit
and Eminem. Until 1984, Mr. Field was co-owner of Field Enterprises, a media
conglomerate that owned numerous television stations, the Chicago Sun Times
newspaper, and Cabot, Cabot and Forbes, a large real estate company. Mr. Field
also currently serves as a director on the board of directors of Huge Click,
Interland, Load Media, Omnipod, Strategic Data Corporation and E-Vox.
Mr. Field has been nominated in this Proxy Statement to serve as the
Chairman of the Board of the Company. In addition, Mr. Field will serve as Chief
Executive Officer for both the Company and the Record Label pursuant to separate
employment agreements, which have been filed with the Securities and Exchange
Commission as Exhibits 1 and 2 with this Proxy Statement, and which are
summarized below. These dual roles have the potential to create conflicts of
interest in Mr. Field's service to the Company and his service to the Record
Label, as described more fully below. Stockholders are urged to carefully
consider these potential conflicts of interest prior to voting on this proposal.
BACKGROUND OF THE VENTURE
The Company's management and its Board of Directors continually consider
opportunities to improve the Company's position in the music entertainment
industry and ways to enhance stockholder value. From time to time, these
considerations have included the creation of a significant presence for the
Company as a record label, expanding on the original strategy that had resulted
in the formation of Kneeling Elephant. As the online music business has evolved
over the last several years, the Company's original vision of an integrated
online and offline music business has been reinforced by industry trends.
In October 2000, Allen Lenard, a director of the Company who had a
previous professional relationship with Mr. Field, met with Mr. Field to explore
in general terms what opportunities Mr. Field was considering pursuing following
the end of the term of his employment with Interscope Records. During this
initial meeting, there were no specific discussions regarding the Company. When
Mr. Lenard heard that Mr. Field's employment with Interscope Records had ended,
he again contacted Mr. Field, this time discussing specifically a potential
opportunity with the Company. Mr. Field expressed an interest in further
discussing how the Company could expand its offline operations in a manner that
complemented its online operations. Mr. Lenard introduced the idea that the
Company and Mr. Field could create a co-venture record label that could benefit
from the Company's significant online presence, and Mr. Field became interested
in this opportunity. Since the time of this initial contact, Mr. Field has met
with certain of the Company's management and directors on numerous occasions to
more fully outline the material terms of a transaction. As certain of the
Company's management and directors became more familiar with Mr. Field, the
discussions progressed beyond the idea of creating a record label co-venture to
include the retention of Mr. Field as Chief Executive Officer of the Company and
Chief Executive Officer of the Record Label.
As discussions with Mr. Field progressed, certain of the Company's
management and directors who had met with Mr. Field informed the Company's full
Board of Directors of the Record Label concept, the possible retention of Mr.
Field as Chief Executive Officer of the Company and the ongoing negotiations.
After full consideration and evaluation, on April 5, 2001, the Board of
Directors decided that it was in the best interests of the Company and its
stockholders to develop the record label co-venture with Mr. Field, ratified a
non-binding term sheet between the Company and Mr. Field and authorized the
Company to proceed with negotiating a definitive agreement. Following the
execution of the term sheet, the Company and Mr. Field, together with their
respective legal, financial and accounting advisors, commenced negotiating the
terms of the definitive agreements.
Over the next several weeks, members of the Board of Directors received
regular reports regarding the status of the negotiations. On May 31, 2001, the
Board of Directors met, received summaries of the definitive agreements,
discussed these items in detail with the Company's management and its advisors,
approved the formation of the record label co-venture with Mr. Field and the
related agreements, and authorized the officers of the Company to execute the
definitive agreements with Mr. Field. The parties executed the definitive
agreements on May 31, 2001.
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REASONS FOR THE VENTURE
The Company and its Board of Directors believe that the record label
co-venture will benefit the Company in several ways, including:
- Attraction of Executive Talent. The record label co-venture attracted
the interest of Mr. Field, an accomplished and experienced executive in the
music and entertainment industry, to serve as Chief Executive Officer of the
Company. Mr. Field's track record as Co-Chairman of Interscope Records
demonstrates his ability to build and run a successful record label. The Company
believes that having a business leader of Mr. Field's caliber as its Chief
Executive Officer will strengthen and expand the Company's position in both the
online and offline segments of the music industry.
- Expand the Company's Market Opportunity. Through the Record Label, the
Company has the opportunity to achieve a larger and more diversified presence in
the music industry. The traditional sale of music recordings in CD format
represents the largest segment of the music industry. To date, the Company has
participated in this segment in only a very small way and with virtually no
proprietary content. The Company believes that the formation of the Record Label
will position the Company to participate more directly in this large business
segment.
- Leverage Current Business. The Record Label will seek to develop new
music artists, and to produce and distribute their recordings as an independent
label utilizing both traditional channels and emerging Internet distribution.
The Company believes that it will benefit significantly by being able to offer
its Internet music distribution network and artist services to meet the online
needs of the Record Label, thereby generating additional revenue opportunities.
As part of the Record Label venture, the Company expects to acquire certain
rights for the digital distribution of Record Label content that may be
exploited directly by the Company or through license agreements with third party
distributors.
- Improve Return on Investment. The Company has experienced significant
losses related to the development of its online business. Management and the
Board of Directors believe that the Record Label represents the most attractive
alternative for investment of a substantial majority of the Company's cash
resources to improve its return on investment and create value for its
stockholders. Although the Company, through its wholly-owned subsidiary,
ARTISTdirect Recordings, is committing a significant amount of its cash to the
Record Label, its commitment will take the form of a loan under what it believes
are commercially reasonable terms. The Company believes that it will realize the
return of principal plus interest on its loan, as well as a significant return
on its equity interest in the Record Label.
THE VENTURE
ARTISTdirect Recordings, a wholly-owned subsidiary of the Company, and
Radar Records, an entity affiliated with Mr. Field, have entered into definitive
agreements that provide for the joint formation and operation of the Record
Label, with ARTISTdirect Recordings providing a significant financial commitment
to the co-venture. Mr. Field will be responsible for running the day-to-day
operations of the Record Label. As an inducement to Mr. Field to enter into the
co-venture with the Company, the Company has entered into a five-year employment
agreement with Mr. Field to serve as Chief Executive Officer of the Company, has
entered into non-qualified stock option agreements with Mr. Field and has
nominated Mr. Field for election to the Company's Board of Directors at the 2001
Annual Meeting. Mr. Field also will serve as the Chief Executive Officer of the
Record Label pursuant to a separate five-year employment agreement.
The following are summaries of the material provisions of the operating
agreement, loan and security agreement, employment agreements, stock option
agreements, stock purchase agreement, notices of grant, registration rights
letter and letter agreement. The operating agreement and loan and security
agreement are included as Appendices B and C to this Proxy Statement. The other
agreements have been filed with the Securities and Exchange Commission as
Exhibits 1 through 4 with this Proxy Statement. Such summaries are qualified in
their entirety by reference to the respective agreements. Stockholders are urged
to read the operating agreement and the loan and security agreement in their
entirety for a more complete description of the transactions. A complete copy of
the remaining agreements, which have been filed as Exhibits 1 through 4 with the
Securities and Exchange Commission in connection with this Proxy Statement, is
available at the Securities and Exchange
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Commission's web site at www.sec.gov, or from the Company, without charge, by
writing to Investor Relations, ARTISTDIRECT, INC., 5670 Wilshire Boulevard, Los
Angeles, California 90036. In the case of any discrepancy between the terms of
the agreements and the following summaries, the agreements will control.
OPERATING AGREEMENT
The Record Label will be funded and will operate pursuant to the terms
of an operating agreement between ARTISTdirect Recordings, a wholly-owned
subsidiary of the Company, and Radar Records, an entity wholly owned directly or
indirectly by Mr. Field. ARTISTdirect Recordings and Radar Records will each own
a 50% equity interest in the co-venture. In addition, subject to certain
conditions described more fully below, ARTISTdirect Recordings will provide
funding to the Record Label in the form of a $50 million revolving credit
facility pursuant to a loan and security agreement.
Mr. Field currently owns directly or indirectly 100% of the membership
interests in Radar Records, and, as a result, has sole control over, and all
voting rights with respect to the exercise by Radar Records of, all voting
rights under the operating agreement and all related agreements. Radar Records
may issue membership interests or other derivative interests, such as "phantom"
interests in net profits, to employees of the Record Label, representing an
interest in up to 20% of the capital or profits of Radar Records.
ADVANCES UNDER LOAN AND SECURITY AGREEMENT. Until the earlier of (a) the
fifth anniversary of the effective date of the operating agreement, (b) the
termination of Mr. Field's employment by the Record Label for cause or due to
disability or death, or by him without good reason, or (c) the sale of the
Record Label, ARTISTdirect Recordings is required to advance funds to the Record
Label for each fiscal year in accordance with an annual budget, prepared by
Radar Records and reasonably approved by ARTISTdirect Recordings, setting forth
all anticipated expenditures and revenue of the Record Label.
Within five business days of the effective date of the operating
agreement, ARTISTdirect Recordings must advance $12 million to the Record Label.
On the first business day of the fiscal year ending December 31, 2002,
ARTISTdirect Recordings must advance 110% of the aggregate amount of advances
called for in the annual budget for that fiscal year less the amount by which
$12 million exceeds 110% of the aggregate amount of advances called for in the
annual budget for the fiscal year ended December 31, 2001. On the first business
day of the fiscal year ending December 31, 2003, ARTISTdirect Recordings must
advance 110% of the aggregate amount of advances called for in the annual budget
for that fiscal year.
The aggregate amount of advances to be made in these first three fiscal
years is subject to a maximum cap of $33 million. For subsequent fiscal years,
ARTISTdirect Recordings must make advances as requested by the Record Label's
Chief Executive Officer within the guidelines of the annual budget for that
fiscal year. ARTISTdirect Recordings will not be required to make an advance in
any fiscal year that would increase the outstanding principal amount by more
than $15 million over the existing outstanding amount as of the end of the prior
fiscal year, or to make advances beyond $50 million in the aggregate.
As of May 31, 2001, the Company had approximately $71 million in cash.
Within five business days of the effective date of the operating agreement, the
Company's cash position will be reduced by $12 million to approximately $59
million pro forma. Assuming that ARTISTdirect Recordings is required to make the
maximum amount of advances under the operating agreement and loan and security
agreement, the Company's cash position will be reduced by $33 million within the
first three fiscal years to approximately $38 million, and by $50 million within
the first five fiscal years to approximately $21 million, in each case without
giving effect to other uses of cash during those periods. See "Risk Factors --
The Company expects to commit a substantial amount of cash to the Record Label
and may not have sufficient cash to continue operating its other businesses or
to pursue other business opportunities."
CAPITAL CONTRIBUTIONS. The Record Label is a Delaware limited liability
company and each of ARTISTdirect Recordings (the Company's wholly-owned
subsidiary) and Radar Records (Mr. Field's affiliated entity) will be members.
Initially, ARTISTdirect Recordings and Radar Records will each receive five
million membership units in the Record Label, representing a 50% equity interest
for each party, in return for their initial capital contributions of $50,000
each. An individual capital account will be maintained for each member in
compliance with Treasury Regulation Section 1.704-1(b).
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No member will (a) have any obligation to make any additional capital
contributions beyond the initial $50,000 to the Record Label (this provision
does not limit ARTISTdirect Recordings' obligations under the loan and security
agreement); (b) be entitled to withdraw all or any part of its capital
contribution or capital account from the Record Label prior to liquidation or,
if such withdrawal is permitted, to demand a distribution of property other than
money; and (c) be entitled to receive interest on its capital account or any
capital contribution. Except as provided in the operating agreement or
pertaining to loan advances made by a member to the Record Label, no member will
have priority over any other member for the return of a capital contribution, a
distribution or an allocation.
DIVESTITURE. ARTISTdirect Recordings' equity interest in the Record
Label is subject to divestiture if it defaults on its funding obligations prior
to a sale of the Record Label or prior to the termination of Mr. Field's
employment by the Record Label for cause or due to disability or death, or by
him without good reason. A termination of employment for cause, disability or
good reason is explained more fully below under the heading "Employment
Agreements."
In the event that ARTISTdirect Recordings defaults on its funding
obligation before the occurrence of any of the events described above, Radar
Records will have the right on behalf of the Record Label to obtain substitute
financing or services for which the Record Label would otherwise have had to pay
cash upon such arm's length terms as Radar Records determines in its reasonable
discretion. If the Record Label obtains substitute financing or services (valued
at fair market value) in an amount equal to or greater than the amount that gave
rise to the default, then it will be entitled to divest ARTISTdirect Recordings
and its permitted transferees of a number of their units to be calculated based
upon both the number of units issued to the substitute financier as well as the
amounts advanced and remaining to be advanced by ARTISTdirect Recordings to the
Record Label. For purposes of this calculation, the aggregate number of units
issued to the substitute financier(s) may never exceed the "Maximum Financier
Units," which means the number of units issued in consideration for the lower
of: (i) 125% of the amount by which ARTISTdirect Recordings' $50 million
commitment exceeds the highest outstanding balance at any time of ARTISTdirect
Recordings' advances to the Record Label or (ii) the maximum amount ARTISTdirect
Recordings could have been required to advance following the funding default,
based on the annual advance limitation of $15 million, pro rated on a monthly
basis. The number of units to be divested from ARTISTdirect Recordings and its
permitted transferees will equal the Maximum Financier Units, or, if lower, the
sum of (A) and (B), where (A) is equal to the product of (w) the number of units
held by ARTISTdirect Recordings and its permitted transferees as of the default
date and (x) the quotient obtained by dividing by $50 million the amount by
which ARTISTdirect Recordings' $50 million commitment exceeds the highest
outstanding balance at any time of ARTISTdirect Recordings' advances to the
Record Label, and (B) is equal to the lesser of (y) 25% of the Maximum Financier
Units (or, if less, 25% of 50% of the total number of units outstanding as of
the default date) and (z) the amount by which the Maximum Financier Units
exceeds the number derived from (A) above. For purposes of the preceding
calculation, the 50% figure is subject to reduction in the event the interests
of ARTISTdirect Recordings and its permitted transferees in the Record Label are
diluted by future issuances of units prior to the default date. If any units
divested from ARTISTdirect Recordings and issued to a substitute financier or
service provider are subsequently forfeited by or divested from that substitute
financier or service provider, they will be returned to ARTISTdirect Recordings,
but can be reissued to future substitute financiers or service providers.
If ARTISTdirect Recordings defaults on its funding obligations, its
voting rights will be terminated as will its right to obtain, from an acquiror
upon a sale of the Record Label, the non-exclusive right to exploit by
electronic transmission those recordings to which the Record Label had rights
immediately prior to such sale or that are created by any recording artist that
is a party to a recording agreement with the Record Label immediately prior to
such sale. In addition, if ARTISTdirect Recordings defaults on its funding
obligations, its right to repayment of prior advances will be subordinated to
the extent provided in the loan and security agreement. However, ARTISTdirect
Recordings will remain entitled to vote on the following matters concerning the
Record Label: entering into an agreement, arrangement or transaction with an
employee, or with an officer or member or their affiliates, relatives,
beneficiaries or employees, that calls for aggregate payment (other than salary,
bonus or expense reimbursement) in excess of $10,000, except pursuant to the
divestiture provisions of the operating agreement; changing the rights or
obligations among ARTISTdirect Recordings, Radar Records, Mr. Field or the
Record Label under the operating agreement or related agreements, except
pursuant to the divestiture provisions of the operating agreement or such
changes to the rights and obligations of Mr. Field as may be approved by a
substitute financier in connection with providing at least $2 million in
substitute financing; taking any action against a member for a breach or alleged
breach of any obligation to the Record Label, or terminating the Chief Executive
Officer's employment pursuant to the operating
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agreement provision regarding removal of the Chief Executive Officer; entering
into or modifying the terms of any employment agreement or arrangement with Mr.
Field in a manner that increases Mr. Field's compensation, benefits or
perquisites; authorizing an amendment to the operating agreement that would
disproportionately affect ARTISTdirect Recordings, or to the Certificate of
Formation, the loan and security agreement or any exhibits to such agreements;
causing or permitting any controlled affiliate to take the above actions; any
decision in which no other member is entitled to vote (e.g., because such member
is an interested party); and granting approvals regarding a forced sale of the
Record Label (as described more fully below). If, following ARTISTdirect
Recordings' funding default, Mr. Field's employment is terminated by the Record
Label for cause or due to disability or death, or by him with or without good
reason, all of ARTISTdirect Recordings' voting rights will automatically be
restored and ARTISTdirect Recordings will have the right to choose and remove
any successor Chief Executive Officer of the Record Label. All of the above
consequences of a funding default by ARTISTdirect Recordings will be the sole
remedies available to the Record Label and the other members for such a default.
Radar Records' equity interest in the Record Label is subject to
divestiture if Mr. Field's employment is terminated by the Record Label for
cause or due to disability or death, or by him without good reason, prior to a
sale of the Record Label or prior to a funding default by ARTISTdirect
Recordings. If Mr. Field's employment is terminated in this manner, ARTISTdirect
Recordings will have the right to hire a replacement officer and issue him any
reasonable number of units. Doing so will entitle ARTISTdirect Recordings to
divest Radar Records and its permitted transferees of a number of units to be
calculated based upon both the number of units issued to the replacement officer
(or any replacement of such replacement officer) as well as the date of and
reason for the termination of Mr. Field's employment with the Record Label. The
number of units to be divested will equal the lesser of the number of units
issued to the replacement officer and the number of units that equal the sum of
(C) and (D), where (C) is equal to 100% of Radar Records' and its permitted
transferees' units as of the date of Mr. Field's termination if it occurs in
months 1 through 12 of his employment, 70% of Radar Records' and its permitted
transferees' units as of the date of Mr. Field's termination if it occurs in
months 13 through 24 of his employment (less 2.5% for each completed month in
that period), 40% of Radar Records' and its permitted transferees' units as of
the date of Mr. Field's termination if it occurs in months 25 through 36 of his
employment (less 2.5% for each completed month in that period), 10% of Radar
Records' and its permitted transferees' units as of the date of Mr. Field's
termination if it occurs in months 37 through 48 of his employment (less 0.42%
for each completed month in that period), or 5% of Radar Records' and its
permitted transferees' units as of the date of Mr. Field's termination if it
occurs in months 49 through 60 of his employment (less 0.42% for each completed
month in that period), and (D) is equal to the lesser of (x) 25% of the number
of units to be issued to the replacement officer (or, if less, 25% of 50% of the
total number of units outstanding as of the date of Mr. Field's termination) and
(y) the amount by which the number of units to be issued to the replacement
officer exceeds the number derived from (C) above. For purposes of the preceding
calculation, the 50% figure is subject to reduction in the event the interests
of Radar Records and its permitted transferees in the Record Label are diluted
by future issuances of units prior to the default date. However, if Mr. Field's
employment is terminated by the Record Label due to disability or death, the
number of units to be divested from Radar Records and its permitted transferees
may not exceed the number derived from (C) above. If any units divested from
Radar Records and issued to a replacement officer are subsequently divested from
that replacement officer, they will be returned to Radar Records, but can be
reissued to a future replacement officer.
If, prior to a funding default by ARTISTdirect Recordings, Mr. Field's
employment is terminated by the Record Label for cause or due to disability or
death, or by him without good reason, Radar Records' voting rights will be
terminated, except that Radar Records will remain entitled to vote on the
following matters concerning the Record Label: entering into an agreement,
arrangement or transaction with an employee, or with an officer or member or
their affiliates, relatives, beneficiaries or employees, that calls for
aggregate payment (other than salary, bonus or expense reimbursement) in excess
of $10,000, except pursuant to the divestiture provisions of the operating
agreement; changing the rights or obligations among ARTISTdirect Recordings,
Radar Records, Mr. Field or the Record Label under the operating agreement or
related agreements, except pursuant to the divestiture provisions of the
operating agreement or such changes to the rights and obligations of Mr. Field
as may be approved by a substitute financier in connection with providing at
least $2 million in substitute financing; taking any action against a member for
a breach or alleged breach of any obligation to the Record Label; entering into
or modifying the terms of any employment agreement or arrangement with Mr. Field
in a manner that increases Mr. Field's compensation, benefits or perquisites;
authorizing an amendment to the operating agreement that would
disproportionately affect Radar Records, or to the Certificate of Formation, the
loan and security agreement or any exhibits to such
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agreements; causing or permitting any controlled affiliate to take the above
actions; any decision in which no other member is entitled to vote; and granting
approvals regarding a forced sale of the Record Label (as described more fully
below).
MANAGEMENT AND INDEMNIFICATION. Mr. Field will serve as the Chief
Executive Officer of the Record Label, will operate and manage its day-to-day
business and affairs and will be authorized to take any actions or make any
decisions for the Record Label, subject to those decisions that are reserved to
the members. No member may operate or manage the Record Label's day-to-day
business and affairs, or have the power to bind the Record Label, unless
authorized by the Chief Executive Officer, the members or the operating
agreement. The Chief Executive Officer of the Record Label will be chosen and
may be removed by a majority of the voting members (which must include
ARTISTdirect Recordings and Radar Records so long as they are entitled to vote),
subject to the following: Mr. Field will be the initial Chief Executive Officer
pursuant to the terms of his employment agreement with the Record Label, and may
be removed only for cause. Radar Records will have no right to participate in
any decision by the Record Label whether to commence arbitration proceedings in
order to terminate Mr. Field's employment for cause. If, following a funding
default by ARTISTdirect Recordings, Mr. Field's employment is terminated by the
Record Label for cause or due to disability or death, or by him with or without
good reason, ARTISTdirect Recordings will have the right to choose and remove
any successor Chief Executive Officer of the Record Label.
The Record Label will provide standard indemnification to its members,
officers, employees or agents, as long as they acted in good faith and in a
manner that they reasonably believed to be in, or not opposed to, the best
interests of the Record Label, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. Each
member will indemnify the Record Label and the other members and their
affiliates for any loss due to that member purporting to act as an agent of, or
to execute a binding instrument on behalf of, the Record Label.
MAJORITY VOTING. Neither the Record Label nor the Chief Executive
Officer acting on behalf of the Record Label may take any of the following
actions without the approval of a majority of its voting members (which must
include ARTISTdirect Recordings and Radar Records so long as they are entitled
to vote): (a) engage in business or transactions unrelated to the record label
business; (b) dissolve or liquidate, except through a sale of the Record Label;
(c) join in, commence or consent to an entry of order in any bankruptcy or
insolvency proceeding, or consent to the appointment of a receiver, trustee or
other custodian; (d) adopt or amend an annual budget; (e) incur an expenditure
beyond 110% of the aggregate expenditures specified in the annual budget, or
beyond 125% of the aggregate expenditures specified for the expenditure's
particular category, except for independent marketing and promotion of a
particular album where the aggregate expenditures do not exceed 20% of the
amount received from distribution of such album; (f) request an advance from
ARTISTdirect Recordings' credit facility before it is required; (g) sell,
transfer, lease, license or dispose of to a third party any tangible or
intangible asset or property valued in excess of $500,000 individually or
$2,500,000 in the aggregate, except in a sale of the Record Label; (h) enter
into an agreement for the manufacture or distribution of records, unless through
traditional distribution channels selected by Radar Records and reasonably
approved by ARTISTdirect Recordings; (i) authorize, issue, sell, acquire,
repurchase or redeem any units or equity securities, except pursuant to the
divestiture provisions of the operating agreement or in a sale of the Record
Label; (j) admit new members, other than transferees of ARTISTdirect Recordings
and Radar Records receiving up to 20% of the outstanding units as consideration
for services provided; (k) merge or consolidate with any entity, except in a
sale of the Record Label; (l) except as set forth in an annual budget, acquire a
substantial portion of the assets or business of any entity, or any assets
valued in excess of $500,000 ($1,000,000 in the case of copyrights), except in a
sale of the Record Label; (m) acquire any securities or ownership interest of
any entity, other than certain interest-bearing securities; (n) encumber any
Record Label assets, except pursuant to the substitute financing provisions of
the operating agreement or in a sale of the Record Label; (o) incur, assume or
guarantee any indebtedness in excess of $2,000,000, except pursuant to the
substitute financing provisions of the operating agreement or in a sale of the
Record Label; (p) form an affiliate; (q) compromise, settle or release any debt
in excess of $500,000; (r) confess a judgment against the Record Label or its
property; (s) grant a power of attorney; (t) enter into a joint venture or
partnership other than with a recording artist, production company or producer
receiving no more than 50% of the venture's equity interests or net profits
after repayment of the Record Label's funding commitment, provided the Record
Label is not committing to fund in excess of the limits set forth in (y) below;
(u) appoint, remove or change the Record Label's primary external attorneys or
accountants; (v) enter into an agreement, arrangement or transaction with an
employee, or with an
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officer or member or their affiliates, relatives, beneficiaries or employees,
that calls for aggregate payment (other than salary, bonus or expense
reimbursement) in excess of $10,000, except pursuant to the divestiture
provisions of the operating agreement; (w) incur a capital expenditure in excess
of $500,000 ($1,000,000 in the case of copyrights), unless pursuant to the
annual budget; (x) enter into a contract or arrangement (other than for
employment) that has a term or is to be performed over a period exceeding one
year, other than agreements to pay less than $500,000 in the aggregate or
entered into in the ordinary course of business with recording artists,
producers, or talent finders; (y) pay recording costs, advances or guarantees in
connection with the creation of, or acquisition of rights to, recordings in
amounts exceeding $600,000 for any one album or $2,000,000 in the aggregate for
more than one album, or of which more than $100,000 is nonrecoupable, except
payments pursuant to the annual budget, payments of earned royalties or payments
made by reason of an exercised option; (z) enter into a contract or arrangement
to pay royalties in excess of 22% of the suggested retail price of the
applicable record, a "pennies per record" rate that disproportionately exceeds
such royalty rate or "non standard" consideration; (aa) enter into a contract or
arrangement that provides for a default, termination, acceleration or penalty in
the event an officer or employee of the Record Label no longer performs a
specified function or upon a change of control; (bb) create a royalty
participation commission plan for artist and repertoire executives; (cc) subject
to the operating agreement provision regarding appointment and removal of the
Chief Executive Officer, enter into or amend any written employment agreement,
employee benefit plan or policy, or arrangement to pay any employee in excess of
$400,000 in any one year or any compensation based upon net profits, revenues or
gross sales, except for transfers by Radar Records of up to 20% of the
outstanding units as consideration for services provided or participation in the
A&R Points Plan; (dd) enter into any music publishing agreement to obtain
copyrights and/or administration rights for musical compositions; (ee) sell,
transfer, license exclusively or dispose of intellectual property rights other
than in the ordinary course of business or in a sale of the Record Label; (ff)
cause or permit any controlled affiliate to take any action if the Record Label
could not take such action without approval under the majority voting provision
of the operating agreement; (gg) change the rights or obligations among
ARTISTdirect Recordings, Radar Records, Mr. Field or the Record Label under the
operating agreement or related agreements, except pursuant to the divestiture
provisions of the operating agreement or such changes to the rights and
obligations of Mr. Field as may be approved by a substitute financier in
connection with providing at least $2 million in substitute financing (subject
to (ii) below); (hh) take any action against a member for a breach or alleged
breach of any obligation to the Record Label, or to terminate the Chief
Executive Officer's employment pursuant to the operating agreement provision
regarding removal of the Chief Executive Officer; (ii) enter into or modify the
terms of any employment agreement or arrangement with Mr. Field in a manner that
increases Mr. Field's compensation, benefits or perquisites; (jj) authorize an
amendment to the operating agreement, the Certificate of Formation, the loan and
security agreement or any exhibits to such agreements; or (kk) borrow any funds
from any member or third party, except pursuant to the loan and security
agreement with ARTISTdirect Recordings.
The voting provisions of the operating agreement require that any Record
Label action authorized by the approval of a majority of its voting members must
also include the vote of ARTISTdirect Recordings and Radar Records (as long as
they remain entitled to vote). Therefore, ARTISTdirect Recordings and Radar
Records must unanimously agree on the Record Label's corporate actions that
require a majority vote. If ARTISTdirect Recordings and Radar Records cannot
unanimously agree, a deadlock will occur and the corporate action will not be
authorized.
OUTSIDE ACTIVITIES. During the term of Mr. Field's employment with the
Record Label, none of ARTISTdirect Recordings, the Company or their controlled
affiliates is permitted to enter into any agreement for the acquisition or
production of recordings for the purpose of making records for sale through
traditional distribution channels, or any music publishing agreement to obtain
copyrights and/or administration rights for musical compositions, without first
providing the Record Label with a right of first refusal with respect to
entering into such an agreement or, in the alternative, a right of first offer
to act as the traditional channel distributor for ARTISTdirect Recordings, the
Company or their controlled affiliates, as applicable, under such an agreement,
on financial terms no less favorable to ARTISTdirect Recordings, the Company or
their controlled affiliates, as applicable, than those provided in the Record
Label's distribution agreements for its records. However, with respect to a
distribution agreement where the Record Label rather than the distributor pays
for manufacturing costs, the Record Label will have the right to retain for its
own benefit on each record a fee equal to 2% of the base amount upon which the
distributor computes its distribution fee, and with respect to a license
agreement for the manufacture and distribution of the Record Label's records
whereby the Record Label is entitled to a royalty, the Record Label will remit
to ARTISTdirect Recordings, the Company or their controlled affiliates, as
applicable, 90% of the royalties paid or
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credited to the Record Label on each record under such agreement and will retain
the remaining 10% for its own benefit.
ARTISTdirect Recordings and its affiliates will have an exclusive global
license to distribute by electronic transmission each recording and record
owned, controlled or acquired by the Record Label, subject only to any
third-party distributor agreements approved by a majority of the voting members
of the Record Label (which must include ARTISTdirect Recordings and Radar
Records so long as they are entitled to vote). This exclusive global license
will terminate upon a sale of the Record Label, although ARTISTdirect Recordings
will have the right to obtain, from an acquiror upon a sale of the Record Label,
the non-exclusive right to exploit by electronic transmission those recordings
to which the Record Label had rights immediately prior to such sale or that are
created by any recording artist that is a party to a recording agreement with
the Record Label immediately prior to such sale.
LIMITED LIABILITY. Under the terms of the operating agreement, neither
ARTISTdirect Recordings nor any other member will be liable for any debts,
obligations or liabilities of the Record Label or of the other members.
DISTRIBUTIONS. If, after repaying the outstanding advances (plus
interest) made by ARTISTdirect Recordings, and after providing for the current
and anticipated cash needs of the Record Label (as mutually determined by Radar
Records and ARTISTdirect Recordings or, if no agreement can be reached, an
amount equal to 50% of the annual budget expenditure projection), there is any
cash balance remaining at the end of each fiscal year, then the Record Label
will make a tax distribution to each member in an amount equal to the product of
(i) the amount of taxable income allocable to such member for the preceding
fiscal year (net of unused cumulative tax losses previously allocated to such
member in all prior fiscal years) and (ii) the combined marginal rate for such
preceding fiscal year (but only to the extent that the distribution exceeds that
member's distributions from the preceding fiscal year). The combined marginal
rate is equal to the sum of (a) the highest marginal federal income tax rate
assessable for such year on the member's (i) ordinary income or (ii) long term
capital gain, as applicable, and (b) the highest combined marginal state income
tax rate assessable for such year on the ordinary income of individuals residing
in California, after giving effect to the federal income tax benefit derived
from any state and local taxes assessable on the member's income.
If there is any available cash remaining, the Record Label will make
further distributions to each member until all distributions made equal in the
aggregate that member's pro rata share of the full cash balance that was
remaining to be distributed at the end of the fiscal year. If the cash balance
at the end of the fiscal year is insufficient to make tax distributions for that
particular fiscal year, then ARTISTdirect Recordings must advance the additional
amount required to fund the applicable tax distributions, notwithstanding any
annual advance limitations, provided that if the additional amount required to
fund the applicable tax distributions would exceed the aggregate advance
limitation, then ARTISTdirect Recordings need not advance the additional amount
required to fund the applicable tax distributions, but such tax distributions
will be made prior to repaying any outstanding advances made by ARTISTdirect
Recordings. The Record Label is entitled to offset all amounts owing to it by a
member against any distribution to be made to that member. Distributions will be
subject to required withholdings.
ALLOCATIONS OF INCOME AND LOSS. The Record Label's net income and other
items of income and gain for each fiscal year will be allocated first to the
members pro rata in accordance with prior allocations of net losses, next to
ARTISTdirect Recordings to the extent of prior allocations of net losses and
finally to the members pro rata in accordance with their respective percentage
interests. However, in the event that, upon a forced sale of the Record Label
(as discussed more fully below), ARTISTdirect Recordings is entitled to receive
either a minimum price per unit equal to the per unit consideration specified in
ARTISTdirect Recordings' early offer (as discussed more fully below) or $75
million, and the members agree to distribute the proceeds from such sale other
than in accordance with their respective percentage interests, allocations of
net income will be made in proportion to and to the extent of the amount of
distributions to be received by each member.
The Record Label's net losses and other items of deduction and loss for
each fiscal year will be allocated first to the members pro rata in accordance
with prior allocations of net income, next to ARTISTdirect Recordings until the
amount of net losses allocated to ARTISTdirect Recordings from inception equals
the amount of non-repaid advances made by ARTISTdirect Recordings (unless
duplicative of regulatory allocations that are not offset) and finally to the
members pro rata in accordance with their respective percentage interests.
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The Record Label's allocations of net income and net loss are subject to
certain allocations required by the Treasury Regulations, including those
related to minimum gain chargebacks and qualified income offsets.
All of the regulatory allocations will be offset, to the extent
possible, either with other regulatory allocations or with special allocations
of other items of Record Label income, gain, loss or deduction (taking into
account future regulatory allocations) so that, after such offsetting
allocations are made, each member's capital account balance is, to the extent
possible, equal to the capital account balance such member would have had if all
Record Label items were allocated without regard to the regulatory allocations.
Each separate item of income, deduction, credit, gain and loss of the
Record Label will be allocated among the members in the same proportion as the
portion of the total net income or net loss for the period which is credited or
charged to the capital account of each member bears to the total net income or
net loss for such period. If the membership interests change during a year, net
income or net loss for such year will be allocated among the members on the
basis of the computation method that serves the best interests of the Record
Label and conforms with Internal Revenue Code Section 706 and Treasury
Regulation Section 1.706-1(c)(2)(ii). Any transferee will succeed to the
transferor's capital account as it relates to the transferred interest.
Income, gain, loss and deductions of the Record Label will, solely for
income tax purposes, be allocated among the members in accordance with Internal
Revenue Code Section 704(c) so as to take account of any difference between the
adjusted basis of the assets of the Record Label for federal income tax purposes
and their respective adjusted book values, and otherwise will be allocated in
the same manner as the related book items were allocated pursuant to the
discussion above.
In the event of a liquidation of the Record Label, items of income,
gain, loss, deduction and credit will be allocated among the members in
accordance with their respective percentage interests after making the payments
required by the liquidation provisions described more fully below, other than
the payments to the members in accordance with their respective positive capital
account balances.
RESTRICTIONS ON TRANSFER OF UNITS. Members are not permitted to transfer
any of their membership interests without the consent a majority of voting
members (excluding the proposed transferor), except:
- to a member's affiliates, partners, shareholders, members, spouse,
descendant or parent, or descendants of any of them, or a trust for the sole
benefit, or any entity owned solely by any one or more of the foregoing,
including the member. However, the member must retain all voting rights.
- by Radar Records in an amount up to 20% of the outstanding units to
one or more officers or other employees of the Record Label (as reasonably
approved by ARTISTdirect Recordings). Such transferees will not have any right
to vote unless approved by ARTISTdirect Recordings.
- by ARTISTdirect Recordings in an amount up to 20% of the outstanding
units to persons or entities providing the Record Label with financing, services
or support for which the Record Label would otherwise have had to pay cash
(subject to the reasonable consent of Radar Records). Such transferees will not
have any right to vote unless approved by Radar Records.
Assignees of units will not have voting rights or any other ability to
influence the management of the Record Label unless they have been admitted as
members. No transfer of a membership interest, or any indirect interest, will be
made if the transfer would: (a) result in the termination of the Record Label as
a partnership for federal income tax purposes; (b) result in the violation of
the Securities Act, or any other applicable federal or state laws; (c) be a
violation of or a default under, or result in an acceleration of any
indebtedness under, any note, mortgage, loan agreement or similar instrument or
document to which the Record Label is a party; (d) result in or create a
"prohibited transaction" or cause the Record Label or a member to become a
"party in interest" as such terms are defined in Section 3(3) of ERISA, or a
"disqualified person" as defined in Internal Revenue Code Section 4975, with
respect to any "plan" as defined in Section 3(14) of ERISA and/or Internal
Revenue Code Section 4975, or to be liable for tax under Internal Revenue Code
Chapter 42, or to be liable for excise tax pursuant to Internal Revenue Code
Subtitle D, Chapter 42A; (e) be made to an individual who is not legally
competent or has not achieved an age of majority (excluding trusts for the
benefit of minors); or (f) be made to a "tax-exempt entity" or a "tax-exempt
controlled entity" within the meaning of Internal Revenue Code Sections
168(h)(2) and 168(h)(6)(F)(ii).
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SALE OF RECORD LABEL. Either Radar Records or ARTISTdirect Recordings is
entitled to initiate a procedure under the operating agreement to sell the
Record Label. As long as Mr. Field's employment has not been terminated by the
Record Label for cause or due to disability or death, or by him without good
reason (or by him for good reason following a funding default by ARTISTdirect
Recordings), Radar Records may exercise its initiation right at any time after
the third anniversary of the effective date of the operating agreement or after
a funding default by ARTISTdirect Recordings.
ARTISTdirect Recordings may exercise its initiation right at any time
(a) after the date six months following the fifth anniversary of the effective
date of the operating agreement, as long as it has not defaulted on its funding
obligations, or (b) after the termination of Mr. Field's employment by the
Record Label for cause or due to disability or death, or by him without good
reason, or (c) after the termination of Mr. Field's employment with the Record
Label for good reason following a funding default by ARTISTdirect Recordings.
If Radar Records initiates a sale of the Record Label prior to the date
six months following the fifth anniversary of the effective date of the
operating agreement (but not following a funding default), it must first give
written notification to the Record Label and ARTISTdirect Recordings indicating
its desire to sell all of its units and to initiate a sale of the Record Label.
Within 30 days of the date such initiation notice is given, ARTISTdirect
Recordings will be entitled to make an early offer to purchase all of Radar
Records' units. If ARTISTdirect Recordings fails to deliver this early offer
within the 30 day period, Radar Records may seek a forced sale of the Record
Label. Radar Records will have 90 days from the date ARTISTdirect Recordings'
early offer is given to agree, by giving notice to ARTISTdirect Recordings, to
sell all of its units for the price and on the terms of ARTISTdirect Recordings'
early offer. If Radar Records does not accept ARTISTdirect Recordings' early
offer within the 90 day period, it will be deemed rejected. If Radar Records
rejects or is deemed to have rejected ARTISTdirect Recordings' early offer, it
may seek a forced sale of the Record Label.
For all other sale initiations, the initiating member must first give
written notification to the Record Label and the other member indicating its
initiation of the sale of the Record Label. Subject to the following sentence,
if either Radar Records or ARTISTdirect Recordings is initiating the sale after
the date six months following the fifth anniversary of the effective date of the
operating agreement, it must include in the initiation notice a proposed base
value for the entire Record Label. If Radar Records is initiating the sale
following a funding default by ARTISTdirect Recordings but prior to the
termination of Mr. Field's employment with the Record Label for good reason, or
if ARTISTdirect Recordings is initiating the sale after the termination of Mr.
Field's employment by the Record Label for cause or due to disability or death,
or by him without good reason, or after the termination of Mr. Field's
employment with the Record Label for good reason following a funding default by
ARTISTdirect Recordings, they are not required to include a proposed base value
in the initiation notice, but the other member must, within 30 days, give notice
to the initiating member setting forth the proposed base value. If the other
member fails to give this notice within the 30 day period, the initiating member
may seek a forced sale of the Record Label.
Within 90 days of the date a base value notice is given, the recipient
member will be entitled to elect, by giving notice to the delivering member, to
(a) purchase all of the delivering member's (and its permitted transferees')
units for a purchase price equal to the base value times the percentage of the
total number of outstanding units held by the delivering member and its
permitted transferees, or (b) sell all of the recipient member's (and its
permitted transferees') units for a purchase price equal to the base value times
the percentage of the total number of outstanding units held by the recipient
member and its permitted transferees, or (c) reject the base value notice, which
will allow the initiating member to seek a forced sale of the Record Label. If
the recipient member fails to deliver its election notice within the 90 day
period following receipt of the base value notice, the base value notice will be
deemed rejected and the initiating member will be entitled to seek a forced sale
of the Record Label.
If any transfer of units occurs between ARTISTdirect Recordings and
Radar Records, the party that has the right to purchase the units may assign
this right, in whole or in part, to the Record Label, to the extent permitted by
applicable law, in which case any decision to be made by the Record Label
pertaining to such right will be made without the vote or approval of the member
seeking to sell units. Unless ARTISTdirect Recordings and Radar Records agree
otherwise, the closing of any such transfer must occur no more than 60 days
following the acceptance of ARTISTdirect Recordings' early offer or the date an
election notice is given. In connection with the closing of any such transfer,
the purchaser will have the right, but not the obligation, to purchase the units
of all other members
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(and their assignees) for the same price and upon the same terms as the transfer
of units between ARTISTdirect Recordings and Radar Records.
If ARTISTdirect Recordings or Radar Records has the right to seek a
forced sale of the Record Label, then the initiating member will be entitled for
a period of 180 days to cause a sale of the entire Record Label. If the
initiating member fails to consummate such a sale within the 180 day period,
then the procedures discussed above will be renewed. After complying with those
procedures discussed above, the initiating member may cause a sale of the entire
Record Label to any person or entity as long as the procedures and conditions
discussed below are satisfied or waived.
If Radar Records seeks to force a sale of the entire Record Label after
delivering an initiation notice that entitles ARTISTdirect Recordings to make an
early offer, each of the following two conditions must be satisfied:
- The sale price must be sufficient to pay ARTISTdirect Recordings at a
minimum a price per unit equal to the per unit consideration specified in its
early offer, if any. If Radar Records is receiving less than this minimum amount
per unit, however, ARTISTdirect Recordings will have the right to elect to
receive, in lieu of this minimum amount, the same consideration for its units
(subject only to such proportionate adjustment for the difference in number of
units held by ARTISTdirect Recordings and Radar Records); and
- ARTISTdirect Recordings must receive at least $75 million for its
units if (i) it waived or was deemed to have waived its right to make an early
offer, (ii) the sale is to occur prior to the fifth anniversary of the effective
date of the operating agreement and (iii) it has not defaulted on its funding
obligations.
Regardless of who is the initiating member, if ARTISTdirect Recordings
is selling its units, it must receive payment in full under the loan and
security agreement.
Regardless of who is the initiating member, the other member must have
the right to reasonably approve the terms of sale to the extent they would
afford the initiating member or its affiliates any advantage not shared by the
other member (including the terms of any continued employment of Mr. Field), and
to reasonably approve the payment terms and conditions if the consideration
includes anything other than cash paid in full upon closing.
Regardless of who is the initiating member, if there has not been a
funding default, ARTISTdirect Recordings must have the right to obtain from the
acquiror, upon arm's length terms negotiated in good faith with the acquiror,
the nonexclusive right to exploit via electronic transmissions those recordings
to which the Record Label has rights immediately prior to the sale, as well as
any recordings subsequently created by any recording artist that is a party to a
recording agreement with the Record Label immediately prior to the sale.
However, ARTISTdirect Recordings may be obligated to waive this right, as
discussed below.
If each of the above conditions is satisfied, or waived, then at the
request of the initiating member, the other members (and their assignees) must
sell or otherwise transfer all of their respective units to the acquiror on the
same terms and conditions that apply to the initiating member. If ARTISTdirect
Recordings' right to obtain electronic transmission rights causes a reduction in
the amount received by Radar Records and its permitted transferees, then
ARTISTdirect Recordings must pay Radar Records and its permitted transferees,
pro rata in proportion to their respective ownership interests, an amount equal
to the product of (x) the aggregate percentage of total outstanding units held
by Radar Records and its permitted transferees immediately prior to the sale and
(y) the amount, if any, by which the reduction exceeds 7.5% of the aggregate
amount that Radar Records and its permitted transferees would receive in the
absence of ARTISTdirect Recordings' right to obtain electronic transmission
rights. If ARTISTdirect Recordings does not have sufficient funds to make this
payment, or if ARTISTdirect Recordings' right to obtain electronic transmission
rights would altogether prevent a sale of the Record Label, then ARTISTdirect
Recordings must waive that right. However, if the acquiror is a direct
competitor of the Company, then ARTISTdirect Recordings will not have to make
the above payment and will have the right to prevent the sale if ARTISTdirect
Recordings' right to obtain electronic transmission rights would altogether
prevent a sale of the Record Label to the direct competitor of the Company.
Upon the closing of any sale of the Record Label, ARTISTdirect
Recordings, the Company, Radar Records and Mr. Field must repay all sums then
owing and due under any agreement among them. These repayments are a condition
precedent to the closing of a sale of the Record Label. If Radar Records or
ARTISTdirect Recordings is
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purchasing the other's units, that other entity will have the right to offset
and deduct any amounts owing and due from the purchase price.
SUBSTITUTE MEMBERS. The assignee or purchaser of a membership interest
will have the right to become a substituted member in the Record Label only if
the assignor or seller provides an instrument of assignment, the assignee or
purchaser agrees in writing to be bound by the terms of the operating agreement,
the members consent to such admission and the assignee or purchaser pays the
Record Label's reasonable costs for amending the operating agreement and the
Certificate of Formation.
Any transferee who is not admitted as a member will be considered an
assignee and will be entitled to receive distributions from the Record Label and
the shares of income, gain, loss, deduction and credit attributable to the
membership interest assigned. No assignee will be entitled to vote in any matter
unless admitted as a member. In the event such transferee desires to make a
further assignment of its membership interest, it will be bound to the sale
provisions of the operating agreement to the same extent as any member.
DISSOLUTION, LIQUIDATION AND WITHDRAWAL. The Record Label will dissolve
and liquidate upon the first to occur of the following: (a) the affirmative vote
of a majority of the voting members; (b) the disposition of all or substantially
all of the Record Label's assets; or (c) a decree of judicial dissolution. A
dissolution of the Record Label will not be caused by the withdrawal of any
member.
Upon liquidation, the Record Label's assets will be distributed first to
the payment of the Record Label's debts and liabilities and the expenses of
liquidation, second to the setting up of any reserves that a majority of voting
members may deem reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Record Label and third to the members in
accordance with their respective positive capital account balances. No member
will have any right to demand property other than cash upon dissolution and
termination of the Record Label. If a majority of voting members determines that
any assets should be distributed in kind, they will be distributed to the
entitled members in the same amounts, sequence and priority as if the
distribution were in cash, and valued at their fair market value.
A member is considered to have withdrawn from the Record Label upon that
member's resignation, bankruptcy, insolvency, reorganization, receivership,
conservatorship, relief of debtors, general assignment for the benefit of its
creditors, attachment, death, legal incompetency, trust termination (if the
member is a trust), dissolution, winding up or revocation of charter (if the
member is a partnership, limited liability company or corporation), distribution
of its entire interest in the Record Label (if the member is an estate), or
filing for a decree of judicial dissolution. No member will have the right or
power to withdraw by way of resignation from the Record Label without the prior
consent of a majority of voting members. Immediately upon the bankruptcy,
insolvency, reorganization, receivership, conservatorship, relief of debtors,
general assignment for the benefit of its creditors or attachment of a member,
unless the Record Label is dissolved, the successor of the withdrawn member will
become an assignee but not have the right to vote or exercise any other rights
of a member unless admitted as a member.
FISCAL AFFAIRS. All Record Label funds will be deposited in any bank or
accounts designated by a majority of the voting members. Bank account
withdrawals must be made upon the signature of the Chief Executive Officer, or
the designees of the Chief Executive Officer, and must be made only for the
purposes of the Record Label. All members have the right to inspect and copy the
books, records and tax returns of the Record Label. Any information obtained by
a member with respect to the affairs of the Record Label must, except as may be
required by law, be kept strictly confidential. The Record Label will deliver to
each member annual financial statements within 90 days after the end of each
fiscal year, and a copy of the Record Label's informational federal income tax
return, within 75 days after the end of each fiscal year but no later than its
filing deadline, and such other information as is reasonably necessary to enable
the members to comply with their tax reporting requirements.
EXPENSES. Upon the effective date of the operating agreement, the Record
Label will pay or reimburse the members for their professional fees incurred in
connection with the operating agreement, not to exceed $500,000 for each member.
These payments will constitute advances to the Record Label.
The Company urges its stockholders to read the operating agreement,
which is included as Appendix B to this Proxy Statement, carefully and in its
entirety.
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LOAN AND SECURITY AGREEMENT
The advances made to the Record Label by ARTISTdirect Recordings (the
Company's wholly-owned subsidiary) under the $50 million credit facility are
governed by the terms of a loan and security agreement and revolving credit
note. Interest on the advances will accrue and compound quarterly at a rate
equal to LIBOR plus 4%, subject to an additional 2% increase upon an event of
default (or, if lower, such maximum rate allowable by law).
Prior to January 1, 2004, if the Record Label holds any cash at the end
of each calendar quarter in excess of the sum of (A) and (B), where (A) is equal
to the excess, if any, of the aggregate amount of advances made by ARTISTdirect
Recordings with respect to the first three fiscal years over the aggregate
amount of expenditures made by the Record Label and (B) is equal to the greater
of the total annual expenditures projected by the annual budget or $12 million,
then the Record Label must apply that excess cash flow towards repayment of
ARTISTdirect Recordings' advances, plus interest, at the beginning of the next
calendar quarter. At the beginning of each calendar quarter commencing on
January 1, 2004, the Record Label must pay all accrued interest to the extent of
the amount of cash it holds in excess of the sum of 50% of the total annual
expenditures projected by the annual budget and the amount necessary to cover
those expenditures for the next 30 days, and must repay the advances, in an
amount which when added to the interest then paid, is equal to the Record
Label's excess cash flow. In the event that the Record Label fails to pay
interest to the extent described above, then (i) the Record Label will be deemed
to have paid interest to the extent described above and (ii) ARTISTdirect
Recordings will be deemed to have made an advance to the Record Label in such
amount. Any such deemed advances will be treated as an advance, except that it
will be disregarded for purposes of the annual advance limitation under the
operating agreement. All outstanding advances, plus interest, must be repaid on
the earlier of the date ARTISTdirect Recordings sells or transfers all of its
units in the Record Label, the date of the Record Label's liquidation or
December 31, 2015.
ARTISTdirect Recordings will have a continuing first priority security
interest in all of the following collateral: the Record Label's accounts,
inventory, equipment, general intangibles, investment property, machinery,
monies and other property in the possession or under the control of the Record
Label or its bailees or affiliates, and all books and records pertaining to the
above, as well as all accessions to, substitutions for, replacements, products,
insurance, cash and non-cash proceeds of the above. The Record Label will also
grant ARTISTdirect Recordings a mortgage of copyrights under which it mortgages
and assigns all of its copyrights to ARTISTdirect Recordings as collateral
security. The obligations under, and the security interests created by, the loan
and security agreement will be fully subordinated to the Record Label's
obligations and security interests granted to repay principal or reasonable
interest or return the amount invested to the provider(s) of debt financing, or
equity financing with a first priority payment preference, to the extent that
the amount of such financing does not exceed the sum of (a) the financing that
meets the criteria used to calculate the Maximum Financier Units (as described
above under the heading "Operating Agreement -- Divestiture"), and (b) such
additional financing that the Record Label obtains in connection with a funding
default in excess of the financing that meets the criteria used to calculate the
Maximum Financier Units, which, when added to such financing that meets the
criteria used to calculate the Maximum Financier Units, equals the lesser of (i)
the amount by which $50 million exceeds the outstanding advances, plus interest,
at the time of the funding default, or (ii) the maximum amount ARTISTdirect
Recordings could have been required to advance following the funding default,
based on the annual advance limitation of $15 million pro rated on a monthly
basis, but only in respect of the amounts that meet the criteria set forth in
(a) or (b) above. In addition, if required by any distributors of the Record
Label's records pursuant to a distribution agreement with the Record Label, the
obligations under the loan and security agreement will be fully subordinated to
the Record Label's obligations to such distributors, and the security interests
created by the loan and security agreement will be fully subordinated to any
security interests in the Record Label's accounts receivable or inventory
granted to such distributors.
If the Record Label defaults (other than by reason of a breach of the
operating agreement by ARTISTdirect Recordings) by failing to pay principal or
interest when due, failing to perform or observe any term, representation,
warranty, covenant or agreement contained in the loan and security agreement
without cure, failing to pay any debts as they become due, initiating or
becoming subject to a proceeding for bankruptcy, insolvency, liquidation,
reorganization, receivership or a general assignment for the benefit of
creditors, failing to satisfy or bond a final judgment or order in excess of
$50,000 for 60 days, taking any action that causes the loan and security
agreement, mortgage of copyright or related agreements to cease to create valid
and perfected first priority liens and security
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interests in the collateral they cover, or due to a default under any senior
obligations created by a substitute financing, then ARTISTdirect Recordings is
entitled to suspend or terminate its advances and to accelerate the note and
obligations to be immediately due and payable. Notwithstanding the foregoing, in
the event of an actual or deemed entry of an order for relief with respect to
the Record Label or Radar Records under the Federal Bankruptcy Code,
ARTISTdirect Recordings' obligation to make further advances will automatically
terminate and the note and the obligations will become immediately due and
payable. In the event that (i) Radar Records desires that the Record Label take
a particular reasonable action in order to avoid an event of default, (ii) such
action requires the consent of ARTISTdirect Recordings as a member pursuant to
the operating agreement, and (iii) ARTISTdirect Recordings refuses to consent to
the Record Label taking such action, which causes the event of default to
materialize, then Radar Records (on behalf of the Record Label) will be entitled
to arbitrate whether ARTISTdirect Recordings acted reasonably in not approving
the Record Label's proposed action.
Under the terms of the loan and security agreement, and during the time
that ARTISTdirect Recordings is not entitled to vote as a member under the
operating agreement, ARTISTdirect Recordings is entitled to inspect the Record
Label's properties, books and records and to receive annual and quarterly
financial statements and any other reasonably requested information related to
the collateral described above or the Record Label's financial condition. In
addition, if any of the collateral consists of instruments or letters of credit,
the Record Label must deliver it duly endorsed to ARTISTdirect Recordings. After
an event of default, ARTISTdirect Recordings may require any account debtor or
obligor of the collateral to pay ARTISTdirect Recordings directly.
During the term of the loan and security agreement, and during the time
that ARTISTdirect Recordings is not entitled to vote as a member under the
operating agreement and the aggregate outstanding advances plus interest at any
point during the term of the loan and security agreement equal or exceed $20
million (and the then current outstanding advances plus interest exceed $5
million), the Record Label must not (unless otherwise permitted by ARTISTdirect
Recordings' written consent): (a) acquire, repurchase or redeem any units or
equity securities, other than from employees (except Mr. Field) or pursuant to
the substitute financing, Chief Executive Officer replacement or forced sale
provisions of the operating agreement; (b) make distributions (other than tax
distributions) on any units; (c) merge or consolidate with any entity not
engaged in the record label business, unless all obligations are paid in full;
(d) acquire a substantial portion of the assets, business or division of any
entity not engaged in the record label business, or any assets valued in excess
of $5 million, other than pursuant to the forced sale provisions of the
operating agreement; (e) acquire any securities of any entity, other than
certain interest-bearing securities; (f) create or incur any liens, other than
liens granted in favor of ARTISTdirect Recordings, the copyright mortgage, liens
on inventory or accounts receivable granted to distributors, purchase money
indebtedness or liens subordinate to those granted in favor of ARTISTdirect
Recordings or the copyright mortgage, or pursuant to the substitute financing
provisions of the operating agreement; (g) create, incur or assume any
indebtedness, other than with respect to distributors, purchase money
indebtedness or indebtedness subordinate to the loan and security agreement, or
pursuant to the substitute financing provisions of the operating agreement; (h)
enter into any agreement, arrangement or transaction with any officer or member,
or their affiliates, relatives, beneficiaries or employees, or with any
employee, in excess of $10,000 (other than salary, bonus or expense
reimbursement), other than pursuant to the substitute financing provisions of
the operating agreement; (i) enter into or modify the terms of any employment
agreement or arrangement with Mr. Field in a manner that increases Mr. Field's
compensation, benefits or perquisites; and (j) cause or permit any controlled
affiliate to take any action that the Record Label could not take without
consent of ARTISTdirect Recordings.
The Company urges its stockholders to read the loan and security
agreement and revolving credit note, which is included as Appendix C to this
Proxy Statement, carefully and in its entirety.
EMPLOYMENT AGREEMENTS
COMPANY EMPLOYMENT AGREEMENT. Under a five year employment agreement
with the Company, which has been filed with the Securities and Exchange
Commission as Exhibit 1 with this Proxy Statement, Mr. Field will receive an
annual base salary of $500,000 to serve as the Company's Chief Executive Officer
and Chairman of the Board (the "Company Employment Agreement"). Mr. Field also
will receive three non-qualified stock option grants as described more fully
below, will be entitled to participate in the Company's executive performance
bonus pool and all other Company benefit programs that are made available to the
Company's other most senior executives, will be entitled to reimbursable
expenses and will receive four weeks' vacation per year (to be take concurrently
with any vacation under the Label Employment Agreement below). Mr. Field must
devote his business time exclusively
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to the Company and its subsidiaries (including Sno-Core, LLC), except that he
will be entitled to devote up to 20% of his total business time on a yearly
basis to Radar Pictures, LLC and to his service on the board of directors of
Huge Click, Interland, Load Media, Omnipod, Strategic Data Corporation and
E-Vox. Mr. Field's concurrent employment with the Record Label also is permitted
as long as it does not materially and adversely affect his performance under the
Company Employment Agreement. In all decisions or determinations regarding the
Record Label to be made by ARTISTdirect Recordings, Mr. Field must defer to the
decision of the Company's Board of Directors and he must abstain from voting in
any such decision by the Board of Directors (unless it is by unanimous written
consent). If the Company terminates Mr. Field's employment other than for cause,
disability or death, or Mr. Field terminates his employment for good reason, Mr.
Field will receive a lump sum payment equal to the amount of his annual base
salary for (i) 50% of the remaining term of the employment agreement if the
termination occurs within the first 3 years of Mr. Field's employment, (ii) 12
months if the termination occurs in the fourth year of Mr. Field's employment or
(iii) the full remaining term of the employment agreement if the termination
occurs in the fifth year of Mr. Field's employment. These payments also will be
made if (i) Mr. Field terminates his employment upon written notice upon the
commencement of any arbitration proceeding to determine whether or not his
employment with the Record Label may be terminated for good reason (as defined
under the Label Employment Agreement below) and (ii) Mr. Field's employment with
the Record Label is terminated for good reason. If (i) Mr. Field terminates his
employment upon written notice upon the commencement of any arbitration
proceeding to determine whether or not his employment with the Record Label may
be terminated for cause (as defined under the Label Employment Agreement) and
(ii) Mr. Field remains employed at the Record Label because the arbitrator
determined that the Record Label is not entitled to terminate Mr. Field's
employment for cause, then the payments will be made, but the applicable pay
period will be reduced by 50%. The Company Employment Agreement also contains
covenants on proprietary information and inventions, confidentiality,
noncompetition and nonsolicitation. Any disputes as to whether Mr. Field's
termination constituted a termination for cause, good reason or with
justification, and the resulting determinations regarding Mr. Field's severance
pay, and the applicability of the confidentiality, noncompetition and
nonsolicitation provisions, are subject to arbitration.
A termination of employment for cause under the Company Employment
Agreement means a termination of employment due to Mr. Field having: (i) been
convicted of, or pleaded nolo contendere to, any felony or any lesser crime
involving fraud, embezzlement, or misappropriation of the property of the
Company or its subsidiaries; (ii) engaged in gross negligence or willful
misconduct in the performance of his duties without cure; (iii) materially
breached certain provisions of the Company Employment Agreement without cure;
(iv) misappropriated for his own purpose and benefit any (A) material property
of the Company or its subsidiaries or (B) any material opportunity of the
Company or its subsidiaries without cure, (v) had his employment with the Record
Label terminated for cause (as defined under the Label Employment Agreement); or
(vi) terminated his employment with the Record Label without good reason (as
defined under the Label Employment Agreement). Mr. Field's first breach of
either the commitment regarding his performance of services to the Record Label
under the Label Employment Agreement or the commitment regarding his permitted
outside activities, will not be grounds for termination for cause. Mr. Field's
resignation from the Company's Board, and his consequential loss of the title of
"Chairman," will not in and of themselves constitute a breach of the Company
Employment Agreement. The termination of Mr. Field's employment will be deemed
to have been for cause under the Company Employment Agreement if (i) Mr. Field
terminates his employment upon written notice upon the commencement of any
arbitration proceeding to determine whether or not his employment with the
Record Label may be terminated for cause (as defined under the Label Employment
Agreement) and (ii) Mr. Field's employment is terminated by the Record Label for
cause.
A termination of employment for good reason under the Company Employment
Agreement means the occurrence of any of the following: (i) a material and
substantial uncured reduction in Mr. Field's title, responsibilities, duties or
reporting (other than the loss of the title of "Chairman" if Mr. Field ceases to
be Chairman of the Board); (ii) an uncured reassignment of Mr. Field without his
consent to a geographic location in excess of 35 miles from the Company's
current principal offices; (iii) a material, uncured breach by the Company of
any of its material obligations to Mr. Field under the Company Employment
Agreement; (iv) the uncured failure of Mr. Field to be re-elected to the Board
following the expiration of his initial service, so long as he did not
previously resign or was removed from the Board, and such failure is not due to
Mr. Field suffering from a disability; (v) the Company materially altering the
nature of its business without cure; or (vi) Mr. Field's termination of his
employment with the Record Label for good reason (as defined under the Label
Employment Agreement). The termination of Mr. Field's employment will be deemed
to have been for good reason under the Company Employment Agreement if (i) Mr.
Field terminates his employment upon written notice upon the commencement of any
arbitration proceeding to
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determine whether or not his employment with the Record Label may be terminated
for good reason (as defined under the Label Employment Agreement) and (ii) Mr.
Field's employment with the Record Label is terminated for good reason.
A termination of employment with justification under the Company
Employment Agreement means a termination of employment after: (i) the uncured
commission by the Company of any act or omission (over the objection of Mr.
Field, if he was afforded the opportunity to participate in the decision whether
to commit such act or omission) that Mr. Field reasonably believes constitutes a
material violation of any law or governmental regulation; or (ii) the
commencement of any legal proceeding in which (A) the Record Label and/or
ARTISTdirect Recordings alleges that Radar Records materially breached the
operating agreement or (B) the Record Label and/or Radar Records alleges that
ARTISTdirect Recordings materially breached the operating agreement. The
termination of Mr. Field's employment will be deemed to have been with
justification under the Company Employment Agreement if (i) Mr. Field terminates
his employment upon written notice upon the commencement of any arbitration
proceeding to determine whether or not his employment with the Record Label may
be terminated for cause (as defined under the Label Employment Agreement) and
(ii) Mr. Field remains employed at the Record Label because the arbitrator
determined that the Record Label is not entitled to terminate Mr. Field's
employment for cause.
LABEL EMPLOYMENT AGREEMENT. Under a five year employment agreement with
the Record Label, which has been filed with the Securities and Exchange
Commission as Exhibit 2 with this Proxy Statement, Mr. Field will receive an
annual base salary of $1,000,000 to serve as the Chief Executive Officer of the
Record Label (the "Label Employment Agreement"). Mr. Field will be entitled to
participate in the Record Label's benefit programs that are made available to
the Record Label's other most senior executives, will be entitled to
reimbursable expenses and will receive four weeks' vacation per year (to be
taken concurrently with any vacation under the Company Employment Agreement).
Mr. Field must devote his business time exclusively to the Record Label and its
affiliates, except that he will be entitled to devote up to 20% of his total
business time on a yearly basis to Radar Pictures, LLC and to his service on the
board of directors of Huge Click, Interland, Load Media, Omnipod, Strategic Data
Corporation and E-Vox. Mr. Field's concurrent employment with the Company also
is permitted. If Mr. Field terminates his employment with the Record Label for
good reason, Mr. Field will receive a lump sum payment equal to the amount of
his annual base salary for (i) 50% of the remaining term of the employment
agreement if the termination occurs within the first 3 years of Mr. Field's
employment, (ii) 12 months if the termination occurs in the fourth year of Mr.
Field's employment or (iii) the full remaining term of the employment agreement
if the termination occurs in the fifth year of Mr. Field's employment. Any
disputes as to whether Mr. Field's employment may be terminated for cause or for
good reason, are subject to arbitration. The Record Label may not terminate Mr.
Field's employment other than for cause or due to Mr. Field's disability or
death. The Label Employment Agreement also contains covenants on proprietary
information and inventions, confidentiality, noncompetition and nonsolicitation.
A termination of employment for cause under the Label Employment
Agreement means a termination of employment due to Mr. Field having: (i) been
convicted of, or pleaded nolo contendere to, any felony or any lesser crime
involving fraud, embezzlement, or misappropriation of the property of the Record
Label or its affiliates; (ii) engaged in gross negligence or willful misconduct
in the performance of his duties without cure; (iii) materially breached certain
provisions of the Label Employment Agreement without cure; (iv) misappropriated
for his own purpose and benefit any (A) material property of the Record Label or
its affiliates or (B) any material opportunity of the Record Label or its
affiliates without cure, (v) materially failed to abide by the management,
majority voting and bank account withdrawal provisions of the operating
agreement without cure; (vi) had his employment with the Company terminated for
cause due to willful misconduct or a material breach of the Company Employment
Agreement provisions regarding limitations on authority, competition,
confidentiality and solicitation; or (vii) terminated his employment with the
Company without good reason or justification (as defined under the Company
Employment Agreement). Mr. Field's first breach of either the commitment
regarding his performance of services to the Company under the Company
Employment Agreement or the commitment regarding his permitted outside
activities, will not be grounds for termination for cause.
A termination of employment for good reason under the Label Employment
Agreement means a termination of employment (i) with the Company for good reason
(as defined under the Company Employment Agreement); (ii) with the Company that
is neither for cause, disability or death, nor deemed to be for cause, under
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the Company Employment Agreement; (iii) at any time following a funding default
by ARTISTdirect Recordings; or (iv) upon a material breach by the Company of any
of its material obligations to Mr. Field under the Label Employment Agreement,
without cure.
A termination of employment due to disability under either employment
agreement means a termination of employment, after 30 days' written notice, due
to Mr. Field's incapacity to perform substantially all of his then current
duties for 180 days or more within any period of 365 consecutive days because of
mental or physical condition, illness or injury, consistent with applicable
state and federal law or, if disputed, as determined by a qualified California
physician selected by Mr. Field and reasonably approved by the Company (or
Record Label), or, failing such approval, by a majority of three qualified
California physicians, one to be selected by the Company (or Record Label), one
to be selected by Mr. Field and the third to be selected by the two designated
physicians.
A complete copy of these employment agreements, which have been filed as
Exhibits 1 and 2 with the Securities and Exchange Commission in connection with
this Proxy Statement, is available at the Securities and Exchange Commission's
web site at www.sec.gov, or from the Company, without charge, by writing to
Investor Relations, ARTISTDIRECT, INC., 5670 Wilshire Boulevard, Los Angeles,
California 90036.
NON-QUALIFIED STOCK OPTION AGREEMENTS
Pursuant to the Company Employment Agreement, the Company granted Mr.
Field three non-plan, non-qualified stock options. The first stock option is for
up to 3,023,700 shares (prior to any reverse stock split) of the Company's
common stock (which represents approximately 8.5% of the total outstanding
shares of the Company's common stock, without taking into account the shares
issuable upon the exercise of options granted to Mr. Field) (the "Base Stock
Option"). The second stock option is for up to 755,880 shares (prior to any
reverse stock split) of the Company's common stock (which represents
approximately 2.1% of the total outstanding shares of the Company's common
stock, without taking into account the shares issuable upon the exercise of
options granted to Mr. Field) (the "Level One Stock Option"). The third stock
option is for up to 665,220 shares (prior to any reverse stock split) of the
Company's common stock (which represents approximately 1.9% of the total
outstanding shares of the Company's common stock, without taking into account
the shares issuable upon the exercise of options granted to Mr. Field) (the
"Level Two Stock Option"). As of May 31, 2001, the last reported sale price of
the Company's common stock on The Nasdaq National Market was $0.64 per share.
BASE STOCK OPTION. The Base Stock Option is immediately exercisable for
all the option shares, but any shares purchased under the Base Stock Option will
be subject to repurchase by the Company, at the exercise price paid per share,
to the extent those shares are unvested when Mr. Field ceases to remain in the
Company's service. Mr. Field will acquire a vested interest in and the Company's
repurchase right will lapse with respect to the option shares in a series of 60
successive equal monthly installments upon Mr. Field's completion of each month
of service measured from the vesting commencement date, which is the date Mr.
Field commences his employment with the Company. The option shares will
automatically accelerate in full so that they are immediately fully vested and
exercisable upon (i) a change of control of the Company that occurs prior to Mr.
Field's cessation of service with the Company or (ii) upon Mr. Field's cessation
of service with the Company pursuant to an involuntary termination. A change of
control of the Company includes a merger, consolidation, sale of all or
substantially all of the assets and a sale of the voting control of the Company.
An involuntary termination includes (i) a termination by the Company of Mr.
Field's employment for reasons other than for cause, (ii) a cessation of
services pursuant to Mr. Field's permanent disability or death and (iii) Mr.
Field's voluntary resignation for good reason, as set forth in the Company
Employment Agreement. Permanent disability exists if Mr. Field becomes unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of at least 12
months. In addition, if (i) Mr. Field terminates his employment upon written
notice in connection with the commencement of any arbitration proceeding to
determine whether or not his employment with the Record Label may be terminated
for cause and (ii) Mr. Field remains employed at the Record Label because the
arbitrator determined that the Record Label was not entitled to terminate Mr.
Field's employment for cause, as defined under the Label Employment Agreement
(together such events will constitute a "Termination With Justification"), then
50% of the then unvested option shares will automatically accelerate so they are
immediately fully vested and exercisable.
LEVEL ONE STOCK OPTION. The Level One Stock Option will not be
exercisable by Mr. Field unless one of the following events occurs prior to the
third anniversary of the vesting commencement date, which is the date Mr.
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Field commences his employment with the Company, in which event Mr. Field will
acquire a vested interest in and the option will become fully exercisable with
respect to all of the option shares: (i) the 30-day average closing sale price
of the Company's common stock or the consideration paid per share in an
acquisition of the Company reaches a minimum of $3.50 per share (prior to any
reverse stock split); (ii) the Company's common stock is re-listed on The Nasdaq
National Market following a delisting; (iii) a change of control of the Company
occurs; or (iv) Mr. Field's service with the Company ceases pursuant to an
involuntary termination (each a "Level One Triggering Event"). If no Level One
Triggering Event has occurred by the third anniversary of the vesting
commencement date, then the option will terminate and no option shares will vest
or become exercisable by Mr. Field.
LEVEL TWO STOCK OPTION. The Level Two Stock Option will not be
exercisable by Mr. Field unless one of the following events occurs prior to the
third anniversary of the vesting commencement date, which is the date Mr. Field
commences his employment with the Company, in which event Mr. Field will acquire
a vested interest in and the option will become fully exercisable with respect
to all of the option shares: (i) the 30-day average closing sale price of the
Company's common stock or the consideration paid per share in an acquisition of
the Company reaches a minimum of $7.00 per share (prior to any reverse stock
split); (ii) the Company's common stock is re-listed on The Nasdaq National
Market following a delisting; (iii) a change of control of the Company occurs;
or (iv) Mr. Field's service with the Company ceases pursuant to an involuntary
termination (each a "Level Two Triggering Event"). If no Level Two Triggering
Event has occurred by the third anniversary of the vesting commencement date,
then the option will terminate and no option shares will vest or become
exercisable by Mr. Field.
EXERCISE PRICE AND PAYMENT. All three stock options have an exercise
price of $0.75 per share (prior to any reverse stock split). The exercise price
may be paid in cash or in shares of common stock valued at fair market value on
the exercise date. Alternatively, to the extent they are vested, the options may
be exercised through a cashless exercise procedure pursuant to which Mr. Field
provides irrevocable instructions to a brokerage firm to sell the purchased
shares and to remit to the Company, out of the sale proceeds, an amount equal to
the exercise price plus all applicable withholding taxes.
EXPIRATION AND TERMINATION. All three stock options expire no later than
7 years after the date of grant. All three stock options may also terminate
prior to the expiration date as follows: (i) upon the later of the 12 month
anniversary of Mr. Field's cessation of service or the expiration of Mr. Field's
initial five-year employment term if Mr. Field's employment with the Company
ceases pursuant to an involuntary termination; (ii) upon the earlier of the 12
month anniversary of Mr. Field's cessation of service or the expiration of Mr.
Field's initial five-year employment term if Mr. Field terminates his employment
pursuant to a Termination With Justification; (iii) upon the earlier of the
90-day anniversary of Mr. Field's cessation of service or the expiration date of
the stock option if Mr. Field ceases to remain in the Company's service for any
reason other than an involuntary termination or a Termination With
Justification; (iv) immediately if the Company terminates Mr. Field's employment
for cause; (v) upon the earlier of the 12 month anniversary of Mr. Field's death
or the expiration date of the stock option if Mr. Field ceases to remain in the
Company's service due to his death; and (vi) upon the latter of the 12 month
anniversary of Mr. Field's cessation of service with the Company or the
expiration of Mr. Field's initial five-year employment term if Mr. Field ceases
to remain in the Company's service due to his permanent disability,
Additionally, the Level One Stock Option and the Level Two Stock Option will
also terminate if a Level One Triggering Event or a Level Two Triggering Event,
as applicable, has not occurred by the third anniversary of the applicable
vesting commencement date.
REGISTRATION RIGHTS AND TRANSFERABILITY. The Company has also agreed to
use all reasonable efforts to register Mr. Field's option shares on a Form S-8
with the Securities and Exchange Commission (and under any state securities laws
as reasonably requested by Mr. Field), and to keep such registration statement
on Form S-8 effective until all of the options have been exercised in full or
have expired. However, Mr. Field has agreed not to sell or transfer his option
shares prior to the first anniversary of the commencement of his employment,
without the prior written consent of the Company's Board of Directors. The stock
options may be transferred by will or by the laws of descent and distribution
following Mr. Field's death. The stock options may also be assigned during Mr.
Field's lifetime to one or more members of Mr. Field's immediate family or to a
trust established for the exclusive benefit of one or more such family members.
TAX TREATMENT. No taxable income will be recognized by Mr. Field upon
the grant of his non-statutory options. Generally, Mr. Field will recognize
ordinary income, in the year in which any option is exercised, equal to
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the excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and Mr. Field will be required to
satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the Base Stock Option are
unvested and subject to repurchase by the Company, then Mr. Field will not
recognize any taxable income at the time of exercise but will have to report as
ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. Mr.
Field may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, Mr. Field will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by Mr. Field with respect to the exercised
non-statutory options. The deduction will generally be allowed for the taxable
year of the Company in which such ordinary income is recognized by Mr. Field.
A complete copy of the stock option agreements, the notices of grant,
the stock purchase agreement and the registration rights letter, which have been
filed as Exhibits 1 and 3 with the Securities and Exchange Commission in
connection with this Proxy Statement, is available at the Securities and
Exchange Commission's web site at www.sec.gov, or from the Company, without
charge, by writing to Investor Relations, ARTISTDIRECT, INC., 5670 Wilshire
Boulevard, Los Angeles, California 90036.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
If Mr. Field is elected as a director pursuant to Proposal One in this
Proxy Statement, and if Proposal Three in this Proxy Statement is approved by
the Company's stockholders, Mr. Field will become Chairman of the Board and
Chief Executive Officer of the Company, and Chief Executive Officer of the
Record Label. Also, by virtue of the non-qualified stock option grants described
above, and under the beneficial ownership rules of the Securities and Exchange
Commission, Mr. Field would beneficially own up to approximately 11% of the
Company's outstanding common stock (taking into account the shares issuable upon
the exercise of options granted to Mr. Field), causing the Company's officers
and directors to beneficially own, in the aggregate, approximately 45.4% of the
Company's outstanding common stock (taking into account the shares issuable upon
the exercise of options granted to Mr. Field, and assuming that Mr. Rubin is
replaced by Mr. Field as a director). This would allow the Company's officers
and directors to significantly affect the outcome of all matters brought before
stockholders, including matters relating to the Record Label and the terms of
Mr. Field's employment or service. Mr. Field also will have a 50% ownership
interest, through his affiliated entity Radar Records, in the Record Label.
Accordingly, Mr. Field will be considered an "interested director" in any Record
Label matters that are brought before the Company's Board of Directors for
approval.
ARTISTdirect Recordings will pay legal fees to Lenard & Gonzalez LLP in
connection with its representation of ARTISTdirect Recordings in negotiating the
agreements with Mr. Field. Allen Lenard, a director of the Company, is the
managing partner of Lenard & Gonzalez. In addition, ARTISTdirect Recordings will
pay the legal fees of Radar Records. These payments to Lenard & Gonzalez and on
behalf of Radar Records will be treated as advances to the Record Label under
the operating agreement. Mr. Lenard has in the past provided, and may in the
future provide, legal representation to Mr. Field on matters unrelated to the
above-described agreements. The Company's Board of Directors was aware of these
present and future interests and considered them in approving the agreements.
POTENTIAL CONFLICTS OF INTEREST
As previously discussed, Mr. Field will beneficially own approximately
11% of the Company and have an initial ownership interest in the Record Label of
50%. By virtue of the difference in his ownership interests, Mr. Field would
likely gain a greater personal benefit if opportunities are capitalized on by
the Record Label rather than by the Company. Accordingly, there are potential
conflicts of interest between the Company and Mr. Field.
Although the Company Employment Agreement precludes Mr. Field from
voting on behalf of the Company on matters concerning the Record Label, Mr.
Field will, by virtue of his authority as Chief Executive
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Officer of both the Company and the Record Label, have substantial influence
over the execution of any decisions made by the Company's Board of Directors. As
a result, Mr. Field still could, through his day-to-day managerial decisions,
take actions which are detrimental to the Company and favorable to the Record
Label. In addition, Mr. Field's concurrent service as the Chief Executive
Officer of both the Company and the Record Label could allow Mr. Field to devote
more time to the Record Label than to the Company. Under the terms of the
employment agreement with each entity, Mr. Field is required to devote at least
80% of his business time exclusively to the Company and the Record Label.
However, Mr. Field is allowed to devote all of that business time exclusively to
the Record Label as long as it does not adversely affect his performance under
the terms of the Company Employment Agreement.
While the Company does not expect that any of the foregoing events will
occur, there can be no assurance that Mr. Field will always act in the best
interests of the Company and its stockholders.
CONDITIONS TO THE TRANSACTIONS
The transactions described above will be completed only if the following
conditions are either satisfied or waived on or before July 31, 2001, including:
- the Company's stockholders approve the operating agreement, loan and
security agreement, employment agreements, stock option agreements, stock
purchase agreement, notices of grant and registration rights letter, and the
issuance of options to Mr. Field;
- following such stockholder approval, the Company's Board of Directors
consists of Messrs. Field, Geiger, Yokomoto, Krupa, Lenard, Friedman, Moody,
Khosrowshahi and Muller;
- the representations and warranties of the respective parties made in
the transaction agreements are true and correct in all material respects;
- there is no material adverse change in the business, assets,
liabilities, financial condition or results of operation of the respective
parties; and
- there is no action, suit or proceeding pending or threatened before
any governmental authority or arbitrator that could result in an unfavorable
injunction, judgment, order, decree or ruling that would prevent the
consummation of any of the transactions described above.
ACCOUNTING TREATMENT
ARTISTdirect Recordings expects to account for its 50% equity interest
in the Record Label under the modified equity method. Under this method, the
amount of its investment in and advances to the Record Label would be initially
recorded as an asset at cost and subsequently be adjusted to recognize its
proportionate share of the net earnings of the Record Label or the full amount
of any net losses which are generated. In accordance with generally accepted
accounting principles, ARTISTdirect Recordings expects to be required to record
100% of any net losses of the Record Label due to its commitment to the full
funding of any such losses. The Company expects to consolidate the operations of
ARTISTdirect Recordings.
RISK FACTORS
IF THE RECORD LABEL IS NOT ABLE TO SUCCESSFULLY DEVELOP AND OPERATE ITS NEW
BUSINESS, THE COMPANY WILL NOT RECEIVE THE ANTICIPATED BENEFITS OF ITS
INVESTMENT.
The Record Label is a new enterprise and will face significant
challenges in developing and operating its planned business, including but not
limited to the following:
- identifying and entering into recording agreements with artists for
the Record Label;
- hiring new personnel for the Record Label;
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- producing and promoting new music recordings for artists signed to the
Record Label;
- developing distribution, branding and other strategies for the Record
Label;
- integrating the Record Label's operations with the Company's existing
operations; and
- generating Record Label revenue and achieving profitability.
The Record Label has no operating history upon which to assess whether it will
be able to meet all of the challenges required to successfully develop and
operate its business. If the Record Label is not able to do so, the Company will
not receive the anticipated benefits of its investment in the Record Label and
its business, financial condition and results of operations would be materially
and adversely affected.
THERE IS NO PUBLIC MARKET FOR THE RECORD LABEL'S SECURITIES THAT THE COMPANY'S
WHOLLY-OWNED SUBSIDIARY IS PURCHASING.
Pursuant to the operating agreement, the Company's wholly-owned
subsidiary, ARTISTdirect Recordings, is purchasing 50% of the outstanding units
of the Record Label. There is currently no public market for the Record Label's
securities, and there can be no assurance that a trading market for the Record
Label's securities will develop in the future. In addition, the Company may not
be able to resell the Record Label securities at a price that reflects its fair
market value, if at all.
THROUGH ITS WHOLLY-OWNED SUBSIDIARY, THE COMPANY EXPECTS TO COMMIT A SUBSTANTIAL
AMOUNT OF CASH TO THE RECORD LABEL AND, AS A RESULT, THE AMOUNT OF CASH THAT THE
COMPANY WILL HAVE AVAILABLE TO OPERATE ITS BUSINESSES WILL BE SUBSTANTIALLY
REDUCED.
Entering into the proposed transaction with Mr. Field represents a
significant shift in the Company's plans for its cash resources. Under the loan
and security agreement, the Company has, through its wholly-owned subsidiary,
committed to advance as much as $50 million to the Record Label over the next
five years. Subject to this overall limit, the Company may be required to
advance as much as $15 million per year to the Record Label, including an
initial $12 million that the Company will be required to fund within five days
of the effective date of the operating agreement.
As of May 31, 2001, the Company had approximately $71 million in cash
which the Company currently believes is adequate to fund ARTISTdirect
Recordings' obligations under the loan and security agreement and the Company's
existing business for the foreseeable future. However, if the Record Label is
not successful, or, if there is a material delay in anticipated cash flow from
the Record Label, there can be no assurance that the Company's existing cash
resources will be adequate to enable the Company to become cash flow positive.
If this occurs, the Company will need to raise additional cash to continue
operating its businesses. There can be no assurance that the Company will be
able to raise this additional funding at all or on reasonably acceptable terms
if it is needed in the future. In that event, the Company's ability to
successfully operate its business would be materially adversely affected.
In addition, while the Company believes that committing its cash
resources for ARTISTdirect Recording's obligations under the loan and security
agreement is a prudent use for its cash, by doing so, the Company may not have
sufficient cash to take advantage of other business opportunities that may arise
in the future. Accordingly, the loan and security agreement will significantly
limit the Company's ability to pursue other business opportunities that may
arise from time to time.
THE COMPANY MAY NOT RECEIVE ITS INTEREST PAYMENTS, A RETURN OF ITS PRINCIPAL, OR
A REASONABLE RETURN ON ITS EQUITY INVESTMENT, IN WHICH CASE, ITS RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WILL BE MATERIALLY AND ADVERSELY AFFECTED.
The Company is anticipating receiving interest on the loan amounts,
return of its principal, distributions of its allocated portion of the net
income (if any) of the Record Label (subject to the required prior payments),
and a return on its equity if the Record Label is sold or otherwise part of a
liquidity event.
There can be no assurance that the Record Label will ever be able to
generate significant revenue, or achieve or maintain positive cash flow or
profitability. If the Record Label is not able to generate revenue and net
income, the Company will not receive any distributions. Moreover, there can be
no assurance that the Record Label will not default under the loan and security
agreement if the cash flow of the Record Label is inadequate to cover the
interest payments on the outstanding principal balance or repay the principal
balance when it comes due. If any of these situations arise, the Company's
results of operation and financial condition would be materially and adversely
affected.
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In addition, if the Record Label is not successful, there can be no
assurance that the Record Label could be sold at all or at a price that enables
the Company to achieve a return on its investment.
THE COMPANY WILL NOT BE ABLE TO REPORT THE FINANCIAL RESULTS OF THE RECORD LABEL
ON A CONSOLIDATED BASIS AND, AS A RESULT, WILL NOT BE ABLE TO INCLUDE REVENUE
FROM THE RECORD LABEL IN ITS REPORTED REVENUE.
The Company will not be able to report the results of operations of the
Record Label on a consolidated basis under generally accepted accounting
principles, as the Company will not be deemed to control the Record Label.
Instead, the Company expects to report and account for its investment in the
Record Label using the modified equity method. Under this accounting method, the
Company will not include any revenue generated by the Record Label in its
reported revenue, but instead will report its allocable share of any net income
of the Record Label on a line item separate from revenue. In the case of net
losses of the Record Label, the Company expects to report 100% of its allocable
share of such losses. The Company believes that this type of financial reporting
has the potential to obscure the potential value of the Record Label to the
overall value of the Company and therefore, the Company's valuation may not
increase even if the Record Label is successful.
SIGNIFICANT CONFLICTS OF INTEREST MAY ARISE AS A RESULT OF MR. FIELD'S SEPARATE
OWNERSHIP OF THE RECORD LABEL AND HIS DUAL ROLES AS CHIEF EXECUTIVE OFFICER OF
BOTH THE RECORD LABEL AND THE COMPANY.
See "Potential Conflicts of Interest" on page 27 for more information on
potential conflicts of interest that may arise as a result of Mr. Field's
ownership interest in the Record Label and his dual operating roles as Chief
Executive Officer of both the Record Label and the Company.
VOTE
Pursuant to the terms of the definitive agreements, unless waived by Mr.
Field, the affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the 2001 Annual
Meeting is being sought to approve the formation of the record label co-venture
with Mr. Field and the related agreements.
RECOMMENDATION OF THE BOARD OF DIRECTORS
At each stage of the ongoing negotiations with Mr. Field, the Company's
Board of Directors was informed of the proposed agreements relating to the
Record Label, and of the status of the negotiations. Presentations were made by
the Company's management and individual directors at regularly scheduled Board
meetings, and the Board of Directors reasonably informed itself of the terms of
the proposed Record Label agreements. The Board of Directors also considered,
among other things, all the reasons described under "Reasons for the Venture,"
all the risks and uncertainties described under "Risk Factors," the Company's
current cash positions, financial condition, results of operation, business and
prospects, Mr. Field's extensive experience in building and running successful
record labels and other entertainment companies, the anticipated financial
impact of the venture on the Company, the Record Label's business plan and
strategy, the specific terms and conditions of the definitive agreements, the
Company's recent stock performance, Mr. Field's ownership positions in the
Company and the Record Label after the transactions are consummated, the
accounting treatment for the transactions, and the tax consequences of the
transactions to the Company. In addition, the Board of Directors was made aware
of the material facts of certain directors' and officers' present and future
relationship or interest in the venture.
After full consideration and evaluation, the Board of Directors,
including each of the directors who have no interest in the record label
co-venture, has determined that the terms and conditions of the record label
co-venture and the related agreements are fair, advisable and in the best
interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE FORMATION OF THE RECORD LABEL CO-VENTURE WITH MR. FIELD AND THE
RELATED AGREEMENTS.
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PROPOSAL FOUR:
APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO EFFECT A ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON STOCK
GENERAL
The Company and its Board of Directors currently believe it would be in
the best interests of the Company and its stockholders to adopt an amendment of
the Company's certificate of incorporation that will effect a reverse stock
split in which each ten issued and outstanding shares of the Company's common
stock will be converted into one share. The amendment to the certificate of
incorporation that will effect the reverse split will become effective upon its
filing with the Delaware Secretary of State, which the Company currently plans
to make as soon as reasonably practicable after receiving stockholder approval.
The full text of the proposed amendment to the certificate of incorporation is
attached to this Proxy Statement as Appendix D.
Although the Company presently intends to effect the reverse split as
proposed, under Section 242(c) of the Delaware General Corporation Law, the
Board of Directors has reserved the right, notwithstanding the stockholders'
approval of the amendment to the certificate of incorporation at the 2001 Annual
Meeting, to abandon it at any time before the amendment to the certificate of
incorporation is filed with the Secretary of State of the State of Delaware. The
Board of Directors may consider a variety of factors in determining whether or
not to proceed with the amendment to the certificate of incorporation, including
overall trends in the stock market, recent changes and anticipated trends in the
per share market price of the Company's common stock, business developments, and
its actual and projected financial performance. If the closing bid price of the
Company's common stock on Nasdaq reaches a minimum of $1.00 per share on or
before July 9, 2001 and remains at or above that level for a minimum of 10
consecutive trading days (or longer, if required by the Nasdaq Listing
Qualifications Panel), as discussed more fully below, the Board of Directors may
decide to abandon the filing of the amendment to the certificate of
incorporation.
The Board of Directors approved the proposed amendment to the Company's
certificate of incorporation on May 31, 2001, subject to stockholder approval,
and recommends that the stockholders vote FOR approval of the amendment.
PURPOSE AND BACKGROUND OF THE REVERSE SPLIT
The Company's primary objective in proposing the reverse split is to
attempt to raise the per share trading price of its common stock in an effort to
continue its listing on The Nasdaq National Market. To maintain listing, The
Nasdaq National Market requires, among other things, that the Company's common
stock maintain a minimum bid of $1.00 per share. The closing bid price of the
Company's common stock has been below $1.00 per share since October 2000.
On November 30, 2000, Nasdaq notified the Company that, because the
closing bid price of its common stock had been below $1.00 for over 30
consecutive trading days, it would be subject to delisting. At the Company's
request, the Nasdaq Listing Qualifications Panel conducted a hearing on April
12, 2001 to give the Company an opportunity to appeal Nasdaq's decision to
delist its common stock.
On May 23, 2001, the Nasdaq Listing Qualifications Panel decided to
allow the continued listing of the Company's common stock on The Nasdaq National
Market provided that (i) the closing bid price of the Company's common stock on
Nasdaq reaches a minimum of $1.00 per share on or before July 9, 2001 and
remains at or above that level for a minimum of 10 consecutive trading days (or
longer, if required by the Nasdaq Listing Qualifications Panel), and (ii) the
Company demonstrates compliance with all requirements for continued listing on
The Nasdaq National Market. Even if the reverse split is approved, there can be
no assurance that the Company will be able to meet these requirements and remain
listed on The Nasdaq National Market.
The Company expects that the reverse split will increase the bid price
per share of its common stock above the $1.00 per share minimum price, thereby
satisfying the listing requirement. However, there can be no assurance that the
reverse split will have that effect, initially or in the future, or that it will
enable the Company to maintain the listing of its common stock on The Nasdaq
National Market.
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In addition to its desire to remain listed on The Nasdaq National
Market, the Board of Directors believes that the low per share market price of
the Company's common stock impairs its marketability to and acceptance by
institutional investors and other members of the investing public and creates a
negative impression of the Company. Theoretically, decreasing the number of
shares of common stock outstanding should not, by itself, affect the
marketability of the shares, the type of investor who would be interested in
acquiring them, or the Company's reputation in the financial community. In
practice, however, many investors and market makers consider low-priced stocks
as unduly speculative in nature and, as a matter of policy, avoid investment and
trading in such stocks. The presence of these factors may be adversely
affecting, and may continue to adversely affect, not only the pricing of the
Company's common stock but also its trading liquidity. In addition, these
factors may affect the Company's ability to raise additional capital through the
sale of stock.
The Company hopes that the decrease in the number of shares of its
common stock outstanding as a consequence of the reverse split, and the
anticipated increase in the price per share, will encourage greater interest in
its common stock by the financial community and the investing public and
possibly promote greater liquidity for the Company's stockholders with respect
to those shares presently held by them. However, the possibility also exists
that liquidity may be adversely affected by the reduced number of shares which
would be outstanding if the reverse split is effected, particularly if the price
per share of the Company's common stock begins a declining trend after the
reverse split is effected.
There can be no assurance that the reverse split will achieve any of the
desired results. There also can be no assurance that the price per share of the
Company's common stock immediately after the reverse split will increase
proportionately with the reverse split, or that any increase will be sustained
for any period of time.
The Company is not aware of any present efforts by anyone to accumulate
its common stock, and the proposed reverse split is not intended to be an
anti-takeover device.
EFFECT ON MARKET FOR COMMON STOCK
On June ___, 2001, the closing bid price for the Company's common stock
on The Nasdaq National Market was $____ per share. By decreasing the number of
shares of common stock outstanding without altering the aggregate economic
interest represented by the shares, the Company believes the market price will
be increased. The greater the market price rises above $1.00 per share, the less
risk there will be that the Company will fail to meet the requirements for
maintaining the listing of its common stock on The Nasdaq National Market.
However, there can be no assurance that the market price of the common stock
will rise to or maintain any particular level or that the Company will at all
times be able to meet the requirements for maintaining the listing of its common
stock on The Nasdaq National Market.
EFFECTS OF REVERSE SPLIT ON COMMON STOCK; NO FRACTIONAL SHARES
If stockholders approve the amendment to the Company's certificate of
incorporation, the principal effect of the reverse split will be to decrease the
number of outstanding shares of the Company's common stock from approximately
35.7 million shares to approximately 3.6 million shares, based on the number of
shares outstanding on the record date for the stockholder meeting and not
including approximately 2 million shares (prior to the reverse split) of the
Company's common stock that were repurchased in a tender offer and are held in
treasury. The total number of shares of common stock each stockholder holds will
be reclassified automatically into the number of shares equal to the number of
shares each stockholder held immediately before the reverse split divided by
ten. If the number of shares a stockholder holds is not evenly divisible by ten,
that stockholder will not receive a fractional share but instead will receive
cash in an amount equal to the fraction of a share that stockholder otherwise
would have been entitled to receive multiplied by the average of the closing bid
and closing asked prices of the common stock as last reported on The Nasdaq
National Market before the reverse split takes effect.
EFFECT ON OUTSTANDING OPTIONS AND WARRANTS
As of the record date for the stockholder meeting, the Company had
outstanding employee stock options to purchase an aggregate of 4,888,035 shares
of common stock with exercise prices per share ranging from $0.75 to $14.00 per
share and warrants to purchase an aggregate of 1,319,953 shares of common stock
with exercise prices per share ranging from $0.19 to $37.36 per share. Under the
terms of the options and warrants, when the reverse
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split becomes effective, the number of shares covered by each of them will be
reduced to one-tenth the number currently covered and the exercise price per
share will be increased by ten times the current exercise price.
EFFECT ON LEGAL ABILITY TO PAY DIVIDENDS
The Company's Board of Directors has not in the past declared, nor does
it have any plans to declare in the foreseeable future, any distributions of
cash, dividends or other property, and the Company is not in arrears on any
dividends. Therefore, the Company does not believe that the reverse split will
have any effect with respect to future distributions, if any, to the Company's
stockholders.
PAYMENT FOR FRACTIONAL SHARES; EXCHANGE OF STOCK CERTIFICATES
The Company will appoint Mellon Investor Services LLC, 400 South Hope
Street, 14th Floor, Los Angeles, California 90079, (213) 553-9722, to act as
exchange agent for common stockholders in connection with the reverse split. The
Company will deposit with the exchange agent, as soon as practicable after the
effective date of the reverse split, cash in an amount equal to the value of the
estimated aggregate number of fractional shares that will result from the
reverse split. The funds required to purchase the fractional share interests are
available and will be paid from the Company's current cash reserves. The
Company's stockholder list shows that some of the outstanding common stock is
registered in the names of clearing agencies and broker nominees. Because the
Company does not know the numbers of shares held by each beneficial owner for
whom the clearing agencies and broker nominees are record holders, the Company
cannot predict with certainty the number of fractional shares that will result
from the reverse split or the total amount it will be required to pay for
fractional share interests. However, the Company does not expect that amount
will be material.
As of the record date for the stockholders meeting, the Company had
approximately 128 common stockholders of record (although the Company had
significantly more beneficial holders). The Company does not expect the reverse
split and the payment of cash in lieu of fractional shares to result in a
significant reduction in the number of record holders. The Company presently
does not intend to seek any change in its status as a reporting company for
federal securities law purposes, either before or after the reverse split.
On or after the effective date of the reverse split, the Company will
mail a letter of transmittal to each stockholder. Each stockholder will be able
to obtain a certificate evidencing its post-reverse-split shares and, if
applicable, cash in lieu of a fractional share only by sending the exchange
agent its old stock certificate(s), together with the properly executed and
completed letter of transmittal and such evidence of ownership of the shares as
the Company may require. Stockholders will not receive certificates for
post-reverse-split shares unless and until their old certificates are
surrendered. Stockholders should not forward their certificates to the exchange
agent until they receive the letter of transmittal, and they should only send in
their certificates with the letter of transmittal. The exchange agent will send
each stockholder's new stock certificate and payment in lieu of any fractional
share promptly after receipt of that stockholder's properly completed letter of
transmittal and old stock certificate(s).
Stockholders will not have to pay any service charges in connection with
the exchange of their certificates or the payment of cash in lieu of fractional
shares.
REQUIRED VOTE
The affirmative vote of a majority of the Company's outstanding voting
shares is required for approval of the amendment to the Company's certificate of
incorporation authorizing the one-for-ten reverse split of the Company's common
stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
AUTHORIZING THE ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON STOCK.
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OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board of Directors may
recommend. Discretionary authority with respect to such other matters is granted
by the execution of the enclosed Proxy.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Common Stock as of May 31, 2001
by (i) all persons who are beneficial owners of five percent (5%) or more of the
Common Stock, (ii) each director and nominee for director, (iii) the executive
officers named in the Summary Compensation Table of the Executive Compensation
and Related Information section of this Proxy Statement and (iv) all current
directors and executive officers as a group. Unless otherwise indicated, each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws, where applicable.
PERCENTAGE
SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED(1)
---------------------------------------------------------------------- ------------ ------------
Entities affiliated with Constellation Venture Capital, L.P. (2) ..... 2,751,134 7.7%
575 Lexington Avenue
New York, New York 10022
Universal Music Group, Inc. .......................................... 3,125,000 8.8
10 Universal City Plaza
Universal City, California 91608
Marc P. Geiger ....................................................... 3,377,404 9.5
Donald P. Muller ..................................................... 3,291,778 9.2
Keith K. Yokomoto (3) ................................................ 2,604,227 7.3
James B. Carroll (4) ................................................. 583,582 1.6
Rick Rubin ........................................................... 3,620,220 10.1
c/o Alan S. Halfon & Company
9595 Wilshire Boulevard, Suite 505
Beverly Hills, California 90212
Clifford H. Friedman (2) ............................................. 2,751,134 7.7
Dara Khosrowshahi .................................................... -- --
Stephen Krupa (5) .................................................... 783,535 2.2
Allen D. Lenard (6) .................................................. 655,508 1.8
1801 Century Park West, Sixth Floor
Los Angeles, California 90067
Benjamin Moody ....................................................... -- --
All current directors and executive officers as a group
(10 persons) (7)...................................................... 17,667,388 48.7
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(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment
power with respect to the securities. Common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
May 31, 2001 are deemed to be outstanding and to be beneficially owned
by the person holding such options or warrants for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated, the address for each of the
individuals listed in the table is care of ARTISTdirect, Inc., 5670
Wilshire Boulevard, Suite 200, Los Angeles, California, 90036. Unless
otherwise indicated by footnote, the persons named in the table have
sole voting and sole investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to applicable
community property laws. Percentage of beneficial ownership is based on
35,710,374 shares of common stock outstanding as of May 31, 2001 and
reflects the effect of the Company's tender offer which was consummated
on April 18, 2001, pursuant to which the Company purchased approximately
2,000,000 shares of its common stock. Shares of Common Stock subject to
stock options which are currently exercisable or will become exercisable
within 60 days after May 31, 2001 are deemed outstanding for computing
the percentage of the person or group holding such options, but are not
deemed outstanding for computing the percentage of any other person or
group.
(2) Includes (a) 2,263,793 shares held by Constellation Venture Capital,
L.P.; and (b) 487,341 shares held by Constellation Ventures (BVI), Inc.
Mr. Friedman is President and Chief Executive Officer of Constellation
Ventures (BVI), Inc. and a member of Constellation Ventures Management,
LLC, the general partner of Constellation Venture Capital, L.P. As such,
Mr. Friedman may be deemed to exercise voting and investment power over
such shares. Mr. Friedman disclaims beneficial ownership of such shares,
except to the extent of his proportionate interest therein.
(3) Includes (a) 371,027 shares held by Keith Yokomoto as trustee of the
Geiger Children's Trust, (b) 371,027 shares held by Keith Yokomoto as
trustee of the Muller Children's Trust and (c) 696,831 shares issuable
upon options exercisable within 60 days of May 31, 2001. Mr. Yokomoto
has sole voting and dispositive power over these shares. Mr. Yokomoto
disclaims beneficial ownership of these shares. Also includes 2,000
shares held by Mr. Yokomoto's spouse.
(4) Includes 583,582 shares subject to options which are exercisable within
60 days of May 31, 2001.
(5) Includes 783,535 shares held by Psilos Group Partners, L.P. Mr. Krupa is
managing director of Psilos Group Managers, LLC and a member of Psilos
Group Investors, LLC. Psilos Group Investors, LLC is the general partner
of Psilos Group Partners, L.P. As such, Mr. Krupa may be deemed to
exercise voting and investment power over such shares. Mr. Krupa
disclaims beneficial ownership of such shares, except to the extent of
his proportionate interest therein.
(6) Includes (a) 356,866 shares held by L&G Associates One, and (b) 298,642
shares issuable upon immediately exercisable options. Mr. Lenard is
General Partner of Lenard Holdings, L.P., which is the Managing Partner
of L&G Associates One, and as such, may be deemed to exercise voting and
investment power over such shares. He disclaims beneficial ownership of
the share held by this entity except to the extent of his proportionate
interest therein.
(7) Includes the information set forth in notes 2-6 above. Does not include
up to approximately 4,444,800 shares issuable to Frederick W. Field upon
the exercise of options which will be granted to Mr. Field if he is
appointed as Chairman and Chief Executive Officer pursuant to Proposal
Three of this Proxy Statement. Assuming that Mr. Field is appointed as
Chairman and Chief Executive Officer and that such shares are deemed
beneficially owned as of May 31, 2001, and assuming that Mr. Rubin is
replaced by Mr. Field as a director, the Company's officers and
directors would beneficially own approximately 18,491,968 shares, or
45.4% of the Company's common stock (taking into account the shares
issuable upon the exercise of options granted to Mr. Field).
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EXECUTIVE COMPENSATION AND RELATED INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The following table sets forth certain information regarding the
directors, executive officers and certain key employees of the Company as of May
31, 2001:
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Clifford H. Friedman(1)(2).............. 42 Director
Marc P. Geiger.......................... 38 Chairman of the Board and Chief Executive
Officer
Dara Khosrowshahi(1).................... 32 Director
Stephen M. Krupa(1)(2).................. 36 Director
Allen D. Lenard(2)...................... 59 Director
Benjamin Moody.......................... 41 Director
Donald P. Muller........................ 40 President, ARTISTdirect Agency and Director
Keith K. Yokomoto....................... 38 President, Chief Operating Officer and
Director
James B. Carroll........................ 45 Executive Vice President, Chief Financial
Officer and Secretary
Richard B. Colbert...................... 44 Senior Vice President, Sales and Marketing
Solutions
Pascal O. Desmarets..................... 39 Senior Vice President, Information Technology
Thomas F. Fuelling...................... 39 Executive Vice President, Finance and
Operations
Nicholas J. Turner...................... 42 Senior Vice President, Artist Services
(1) Member of Audit Committee
(2) Member of Compensation Committee
The following is a brief description of the capacities in which each of
the Company's directors, executive officers and key employees has served during
the past five years. The biographies of Clifford H. Friedman, Marc P. Geiger,
Dara Khosrowshahi, Stephen M. Krupa, Allen D. Lenard, Benjamin Moody, Donald P.
Muller and Keith K. Yokomoto appear earlier in this Proxy Statement. See
"Proposal One: Election of Directors."
JAMES B. CARROLL has served as Executive Vice President and Chief
Financial Officer since May 1999. Mr. Carroll has served as Secretary since July
1999. From November 1994 to May 1999, Mr. Carroll was a Managing Director in the
Media & Entertainment Group at Bear, Stearns & Co. Inc., where he served as an
investment banker to companies primarily in broadcasting and new media. From
January 1989 to August 1994, Mr. Carroll was a Managing Director at Smith Barney
Inc., where he co-founded the Media & Communications Group and served on the
Investment Banking Management Committee. Mr. Carroll received his B.A. in
Psychology from Claremont McKenna College and his M.B.A. from Harvard Business
School.
RICHARD B. COLBERT has served as Senior Vice President of Sales and
Marketing Solutions since September 1999. From October 1998 to September 1999,
Mr.Colbert served as President of Northern NOMA Corp., providing consulting
services to internet and broadcasting companies. From 1983 to 1998, Mr. Colbert
was President of IntelliVentures, Inc., a producer and distributor of special
interest video programming. From 1989 to 1993, Mr. Colbert was Senior Executive
Vice President of ITC Domestic Television, a distributor of first-run television
programming.
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PASCAL O. DESMARETS has served as Senior Vice President, Information
Technology since February 1999. From February 1997 to February 1999, Mr.
Desmarets held various management positions in the engineering group at Optum
Software. Mr. Desmarets received his B.S. in Industrial Engineering and
Management from the Catholic University of Louvain, Belgium and his M.B.A. from
the University of Southern California.
THOMAS F. FUELLING has served as Executive Vice President, Finance and
Operations since October 1999. From April 1998 to September 1999, Mr. Fuelling
was Vice President, Finance and CFO of Sega GameWorks, LLC. From December 1995
to March 1998, Mr. Fuelling was Executive Vice President, Finance and CFO of
Village Roadshow Pictures. From March 1994 to November 1995, Mr. Fuelling was
Vice President and Controller of The Samuel Goldwyn Company. From 1984 to 1994,
Mr. Fuelling was a certified public accountant with Price Waterhouse LLP in its
Entertainment practice unit. Mr. Fuelling received his B.S. in Business
Administration from the University of Southern California and his Master of
Management from Northwestern University.
NICHOLAS J. TURNER has served as Senior Vice President, Artist Services,
since March 1999. From June 1996 to February 1999, Mr. Turner was Vice
President, West Coast for N2K's Music Boulevard, and from June 1994 to June
1996, Mr. Turner founded and operated Rocktropolis. Music Boulevard and
Rocktropolis are online music entertainment companies. Before founding
Rocktropolis, Mr. Turner was an associate of artist manager Miles Copeland,
working in various capacities with recording artists.
The Company's executive officers are elected by the Board of Directors
on an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the directors or
executive officers of the Company.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers of the Company whose
salary and bonus for the 2000 Fiscal Year was in excess of $100,000, for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended December 31, 1998, 1999 and 2000. None of these executive
officers received any long-term compensation during the fiscal years ended
December 31, 1998, 1999 and 2000. No other executive officers who would have
otherwise been includable in such table on the basis of salary and bonus earned
for the 2000 Fiscal Year have been excluded by reason of their termination of
employment or change in executive status during that year. The listed
individuals shall be hereinafter referred to as the named executive officers.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------
OTHER
ANNUAL
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
---------------------------- ---- ----------- -------- ------------
Marc P. Geiger 2000 $156,250 $120,833 $ 1,300
Chairman and Chief 1999 150,000 100,000 4,715
Executive Officer 1998 175,192 50,000 --
Donald P. Muller 2000 156,250 104,167 1,300
President, ARTISTdirect 1999 150,000 100,000 4,508
Agency and Kneeling 1998 176,431 50,000 --
Elephant Records
Keith K. Yokomoto 2000 156,250 104,167 1,300
President, Chief Operating 1999 150,000 50,000 6,011
Officer and Director 1998 130,769(2) 25,000 --
Stephen P. Rennie (1) 2000 156,250 91,667 --
President, UBL 1999 137,500 37,500 --
1998 75,000 -- --
James B. Carroll 2000 156,250 79,167 --
Executive Vice President 1999 81,250 29,167 --
and Chief Financial Officer 1998 -- -- --
----------------------------
(1) Mr. Rennie resigned in March 2001.
(2) Does not include deferred compensation in 1998 of $200,000.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the stock options
granted to the named executive officers during the 2000 Fiscal Year. All the
grants were made under the Company's 1999 Employee Stock Option Plan. No stock
appreciation rights were granted to the named executive officers during the 2000
Fiscal Year.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE MARKET PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PRICE FOR OPTION TERM (1)
OPTIONS EMPLOYEES PER ON DATE EXPIRATION ----------------------------
NAME GRANTED IN FISCAL YEAR SHARE OF GRANT DATE 5% 10%
--------------------- ---------- -------------- --------- -------- ---------- ---------- ----------
James B. Carroll 226,084 7.1% $ 12.00 $ 12.00 3/26/07 $1,104,467 $2,573,877
Keith K. Yokomoto 696,831 21.8 13.928 6.9375 3/30/07 -- --
Stephen P. Rennie (2) 238,913 7.5 13.928 6.9375 3/30/07 -- --
-------------------
(1) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
its future common stock prices. Amounts represent hypothetical gains
that could be achieved for the
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respective options if exercised at the end of the option term. These
amounts represent assumed rates of appreciation in the value of the
common stock from the fair market value on the date of grant. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Company's common stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be
achieved. Potential realizable values are net of exercise price, but
before the payment of taxes associated with exercise.
(2) Mr. Rennie resigned in March 2001.
AGGREGATED OPTION\FISCAL YEAR-END VALUE
The following table provides information, with respect to the named
executive officers, concerning unexercised options held by them at the end of
the 2000 Year. None of named executive officers exercised any stock appreciation
rights during the 2000 Fiscal Year and no stock appreciation rights were held by
the named executive officers at the end of such year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
END (#) FISCAL YEAR END ($)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- ----------- ------------- ----------- -------------
James B. Carroll 286,990 172,194 0 0
Keith K. Yokomoto 0 696,831 0 0
Stephen P. Rennie(1) 0 238,913 0 0
======= ======= === ===
(1) Mr. Rennie resigned in March 2001.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company has entered into employment agreements with its named
executive officers. The compensation and dates of employment under the
employment agreements are as follows:
MARC GEIGER
In July 1998, the Company entered into an employment agreement with Marc
Geiger, its Chairman and Chief Executive Officer which provides for the
following:
- Mr. Geiger is paid an annual salary of $150,000 and a guaranteed
annual bonus of $100,000.
- The initial term of his employment expires July 27, 2001, with
automatic extensions for successive one-year periods. On April 27, 2001,
the Company extended the initial term of Mr. Geiger's employment to
September 30, 2001.
- The agreement provides for the payment of salary and a guaranteed
bonus for twelve months after the date of termination if the termination
was other than:
(1) due to a disability,
(2) for "cause," such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the
performance of duties,
(3) due to Mr. Geiger's death, or
(4) if he terminates his employment for other than "good
reason," such as an adverse change of duties, a reassignment of
location, or a material breach of the Company's obligations to
him.
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- If Mr. Geiger's employment is terminated for cause or disability, or
he resigns for other than good reason, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
DONALD MULLER
In July 1998, the Company entered into an employment agreement with
Donald Muller, the President of ARTISTdirect Agency and Kneeling Elephant
Records, and one of the Company's directors, which provides for the following:
- Mr. Muller is paid an annual salary of $150,000 and a guaranteed
annual bonus of $100,000.
- The initial term of the agreement expires July 27, 2001, with
automatic extensions for successive one-year periods. On April 27, 2001,
the Company extended the initial term of Mr. Muller's employment to
September 30, 2001.
- The agreement provides for the payment of salary and a guaranteed
bonus for twelve months after the date of termination if the termination
was other than:
(1) due to a disability,
(2) for "cause," such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the
performance of duties,
(3) due to Mr. Muller's death, or
(4) if he terminates his employment for other than "good
reason," such as an adverse change of duties, a reassignment of
location, or a material breach of the Company's obligations to
him.
- If Mr. Muller's employment is terminated for cause or disability or
resigns for other than good reason, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
KEITH YOKOMOTO
In January 1998, the Company entered into an employment agreement with
Keith Yokomoto, its President and Chief Operating Officer, which provides for
the following:
- Mr. Yokomoto was paid an annual salary of $100,000 for the first five
months of the agreement and $150,000 thereafter, with a guaranteed bonus
of $50,000 the second year and $100,000 for each year thereafter.
- The initial term of the agreement expired December 31, 2000. The
Company is currently in discussions to renew this agreement but there
can be no assurance that a new agreement will be reached.
- The agreement provides for the payment of his salary and a guaranteed
bonus for the lesser of:
(1) twelve months after the date of termination, or
(2) until the end of the agreement, if he is terminated other
than due to a disability, death, for "cause," such as the
commission of a felony, material dishonesty against
ARTISTdirect, or gross negligence in the performance of duties.
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Mr. Yokomoto also signed a separate agreement concurrently with his
employment agreement which prohibits him from competing with ARTISTdirect or
attempting to hire any ARTISTdirect employee for the later of one year after
termination of employment, or the expiration of the then-current period of the
term of the agreement.
JAMES CARROLL
In May 1999, the Company entered into an employment agreement with James
Carroll, its Chief Financial Officer, which provides for the following:
- Mr. Carroll is paid an annual salary of $150,000 and a guaranteed
annual bonus of $50,000.
- The initial term of the agreement expired May 23, 2001. On March 30,
2001, the Company extended the initial term of Mr. Carroll's employment
to May 23, 2002.
- The employment agreement provides that if Mr. Carroll's employment is
terminated other than due to a disability, death or for "cause," such as
the commission of a felony, material dishonesty against ARTISTdirect, or
gross negligence in the performance of duties, he will be paid his base
salary for the lesser of:
(1) six months after the date of termination, or
(2) the remainder of the agreement.
- If Mr. Carroll is terminated for cause, he is prohibited from
competing with ARTISTdirect until the date the agreement would otherwise
have expired. Mr. Carroll is also prohibited from attempting to hire any
ARTISTdirect employee for one year following the later of:
(1) the date the agreement expires, or
(2) the actual date of termination.
The Compensation Committee of the Board of Directors has the authority
to provide for accelerated vesting of the shares of Common Stock subject to any
outstanding options held by the Chief Executive Officer or any other executive
officer or any unvested share issuances actually held by such individual, in
connection with certain changes in control of the Company or the subsequent
termination of the officer's employment following the change in control event.
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AUDIT COMMITTEE REPORT
The following is the report of the Audit Committee with respect to the
Company's audited financial statements for the fiscal year ended December 31,
2000, which include the consolidated balance sheets of the Company as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2000, and the notes thereto.
The information contained in this report shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the 1934
Securities Exchange Act, as amended, except to the extent that the Company
specifically incorporates it by reference in such filing.
REVIEW WITH MANAGEMENT
The audit committee has reviewed and discussed the Company's audited
financial statements with management.
REVIEW AND DISCUSSIONS WITH INDEPENDENT ACCOUNTANTS
The audit committee has discussed with KPMG LLP, the Company's
independent accountants, the matters required to be discussed by SAS 61
(Codification of Statements on Accounting Standards), which includes, among
other items, matters related to the conduct of the audit of the Company's
financial statements.
The audit committee has also received written disclosures and the letter
from KPMG LLP required by Independence Standards Board Standard No. 1 (which
relates to the accountant's independence from the Company and its related
entities) and has discussed with KPMG LLP the independence of KPMG LLP from the
Company.
CONCLUSION
Based on the review and discussions referred to above, the committee
recommended to the Company's Board that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
Submitted by the Audit Committee of
the Board of Directors
Clifford H. Friedman
Dara Khosrowshahi
Stephen M. Krupa
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Friedman, Krupa
and Lenard. Neither of these individuals was an officer or employee of
ARTISTdirect at any time during the 2000 fiscal year or at any other time. No
current executive officer of ARTISTdirect has ever served as a member of the
board of directors or compensation committee of any other entity that has or has
had one or more executive officers serving as a member of ARTISTdirect's Board
of Directors or Compensation Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Compensation Committee to establish the general
compensation policies for the Company and to review and determine the overall
compensation packages provided to the executive officers of the Company,
including the Chairman and Chief Executive Officer. As part of its
responsibilities, the Compensation Committee also has the authority to make
discretionary option grants to the Company's executive officers under the
Company's 1999 Employee Stock Option Plan.
The Compensation Committee believes that the compensation programs for
the Company's executive officers should reflect the Company's performance and
the value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
GENERAL COMPENSATION POLICY. The Compensation Committee was established
in September 1999. Prior to its establishment, the Board of Directors determined
the compensation of executive officers, representing the interests of
stockholders at the time. Presently, the Compensation Committee's policy is to
provide the Company's executive officers with compensation opportunities that
are based upon their personal performance, the financial performance of the
Company and their contribution to that performance and that are competitive
enough to attract and retain highly skilled individuals. Based upon this policy,
executive compensation packages will be comprised of three elements: (i) a base
salary that reflects the individual's responsibilities and is competitive with
the market, (ii) an annual variable performance award, or bonus, payable in cash
and reflecting achievement of annual goals both by the individual and the
Company, and (iii) where appropriate, long-term stock-based incentive awards
designed to strengthen the mutuality of interests between the executive officer
and the Company's stockholders.
The Compensation Committee will periodically review total compensation
levels and the distribution of compensation among the three elements identified
above for each of the executive officers in the context of the compensation
policy of the Company and compensation packages awarded to executive officers in
comparable positions at companies within related industries. The Compensation
Committee believes that the Company's most direct competitors for executive
talent include significantly larger and better-capitalized companies in the
technology, media and entertainment industries, comprising a broader range of
companies than those with which the Company is usually compared for purposes of
stock performance.
The Compensation Committee believes that its employees and executives
are targets for competitors seeking to recruit people with established talent
and experience. As a result, the Compensation Committee has recommended that the
Company actively manage compensation packages to be competitive in retaining all
key employees. This may lead to changes in the mix of compensation between base
salary, bonus awards, and stock-based incentive awards. Specifically, the
Compensation Committee has observed industry trends toward a greater percentage
of compensation payable in cash. In order to retain certain key employees, the
Company may find it necessary to significantly increase levels of cash
compensation. The employment agreements relating to each of the executive
officers either have or will expire during 2001. The Compensation Committee is
considering new employment arrangements for the executive officers at this time,
though the Company has entered into no new agreements.
BASE SALARY. Under the terms of existing employment agreements between
the Company and each of its executive officers, each of them was paid a base
salary of $150,000 during 2000. During 2000, the Compensation Committee reviewed
the base salary of each executive officer. In assessing appropriately
competitive salary levels, the Compensation Committee considered the duties of
each officer, changes in those duties, past accomplishments,
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and information on competitive compensation levels for similar executive
positions. Based upon this evaluation, it was determined that no adjustments
were necessary in the base salaries of the Company's executive officers.
ANNUAL INCENTIVE BONUSES. Under the terms of existing employment
agreements between the Company and each of the executive officers, each of them
was paid a guaranteed bonus for 2000. For each of Mssrs. Geiger, Muller,
Yokomoto and Rennie, this bonus amount was $100,000. For Mr. Carroll, this bonus
amount was $50,000. At the time that each employment agreement was entered into,
the level of these bonuses was established to provide an overall level of cash
compensation that the Board of Directors felt was appropriate and necessary to
retain each of the executive officers.
During 2000, the Compensation Committee reviewed each of these
agreements to determine if the established bonus levels should be adjusted in
light of current market conditions, the duties of each of the executive officers
and their performance of those duties. Based upon this review, the Compensation
Committee determined that the amount of Mr. Carroll's bonus should be increased
to $100,000.
Going forward, the Compensation Committee expects to establish an
incentive bonus plan to apply to the Company's executive officers and other key
senior employees. This plan is expected to result in cash bonuses being made
available to executive officers based upon the achievement of specific
performance goals designed to support the strategic objectives of the Company
and the creation of stockholder value. As a result of an observed shift in
competitive compensation practices and the Company's desire to retain its key
employees, and particularly its key executives, future incentive bonuses may be
significantly larger than those paid in prior years, though it is contemplated
that such bonuses will be discretionary and tied to the achievement of specific
objectives rather than guaranteed.
LONG TERM STOCK-BASED INCENTIVES. At least once each year, the
Compensation Committee evaluates the granting of stock-based incentives to each
of the Company's executive officers. Each grant is designed to align the
interests of the executive officer with those of stockholders and provide each
individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the business. Each grant allows
the officer to acquire shares of Common Stock at a fixed price per share
(generally the market price on the grant date) over a specified period of time
(up to ten years). Each option becomes exercisable in a series of installments
generally over a three-year period, contingent upon the officer's continued
employment with the Company. Accordingly, the option will provide a return to
the executive officer only if he or she remains employed by the Company during
the vesting period, and then only if the market price of the shares appreciates
over the option term.
The size of the option grant to each executive officer, including any
grant considered for the Chief Executive Officer, is set by the Compensation
Committee at a level that is intended to create a meaningful opportunity for
stock ownership based upon the individual's current position with the Company,
the individual's personal performance in recent periods and his or her potential
for future responsibility and promotion over the option term. The Compensation
Committee also takes into account the number of unvested options held by the
executive officer in order to maintain an appropriate level of equity incentive
for that individual. The relevant weight given to each of these factors varies
from individual to individual.
Three of the Company's executive officers (Messrs. Geiger, Muller and
Yokomoto) were founders of the Company and have significant equity holdings as a
result. In 2000, the Compensation Committee determined that additional grants of
stock-based incentives to these individuals were not necessary. Messrs. Yokomoto
and Rennie, however, did receive stock options as the result of a transfer of
equity interests agreed to by Messrs. Geiger, Muller and Rubin (a director of
the Company), which transaction was reviewed and approved by the Company's Board
of Directors in March 2000.
During 2000, the Compensation Committee recommended to the Board of
Directors, and the Board of Directors approved, the acceleration of certain
stock options granted to Mr. Carroll during 1999 and the grant of additional
options at the time of the IPO. The acceleration and additional grant were done
in recognition of Mr. Carroll's performance of his duties.
CEO COMPENSATION. In setting the total compensation payable to the
Company's Chief Executive Officer for 2000, the Compensation Committee sought to
provide him with a stable level of cash compensation within the range of
compensation found among competitive companies. It was determined that the level
of Mr. Geiger's cash
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compensation did not require adjustment during the year. However, actual
payments made during 2000 were slightly higher than those made in 1999 as a
result of a change in pay periods for all employees. Mr. Geiger received no
grants of stock-based incentive compensation during 2000.
Mr. Geiger's employment agreement with the Company was to have expired
by its terms on July 27, 2001, though the Company and Mr. Geiger have agreed to
an extension until September 30, 2001. In connection with the proposed
appointment of Frederick W. Field as Chairman and CEO of the Company, the
Compensation Committee is currently considering a new employment agreement for
Mr. Geiger that would include a revised compensation package in the context of
his proposed new duties and the desire of the Board of Directors to retain Mr.
Geiger under a long-term employment agreement. No agreement as to Mr. Geiger's
ongoing employment has been reached at this time.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Section 162(m) of
the Internal Revenue Code disallows a tax deduction to publicly held companies
for compensation paid to certain of their executive officers, to the extent that
compensation exceeds $1 million per covered officer in any fiscal year. The
limitation applies only to compensation that is not considered to be
performance-based. Non-performance based compensation paid to the Company's
executive officers for the 2000 Fiscal Year did not exceed the $1 million limit
per officer; however, it is possible that non-performance based compensation to
be paid to the Company's executive officers for fiscal 2001 may exceed that
limit. In establishing the various components of the compensation payable to the
executive officers, the Committee considers the deductibility of that
compensation as only one of a number of relevant factors, and for that reason,
the Committee may deem it appropriate under certain circumstances to authorize
compensation in excess of the amount deductible by reason of Section 162(m) or
other provisions of the Internal Revenue Code in order to provide the requisite
incentives to attract and retain the executive officers essential to the
Company's financial success.
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short and long-term.
Submitted by the Compensation Committee
of the Board of Directors
Clifford H. Friedman
Stephen M. Krupa
Allen D. Lenard
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STOCK PERFORMANCE GRAPH
The graph depicted below shows a comparison of cumulative total
stockholder returns for the Company, the Nasdaq Market Index and the Media
General Internet Information Provider Index for the period from March 28, 2000,
the date of the Company's initial public offering, to December 29, 2000, the
last trading day of the 2000 Fiscal Year.
Company/Index/Market March 28, 2000 December 29, 2000
-------------------- -------------- -----------------
ARTISTdirect, Inc. $100.00 $5.32
MG Internet Information Provider Index 100.00 33.97
NASDAQ Market Index 100.00 53.34
(1) The graph assumes that $100 was invested in the Company on March 28,
2000, in the Common Stock and in each index, and that all dividends were
reinvested. The Company has not paid or declared any cash dividends on
the Common Stock.
(2) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings made under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by the Company under those statutes, neither the preceding Stock
Performance Graph nor the Compensation Committee Report on Executive
Compensation is to be incorporated by reference into any such prior filings, nor
shall such graph or report be incorporated by reference into any future filings
made by the Company under those statutes.
CERTAIN TRANSACTIONS
Since January 1, 2000 there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the amount
involved exceeded or exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of any class of the Company's voting securities,
or any member of the immediate family of any of the foregoing persons had or
will have a direct or indirect material interest, other than the transactions
contemplated in Proposal Three of this Proxy Statement or as described below.
In February 2001 the Company loaned Marc Geiger, the Company's Chairman
and Chief Executive Officer $150,000. The term of the loan is one year and the
loan bears an interest rate of 7%.
For the year ended December 31, 2000, the Company paid Lenard & Gonzalez
LLP $464,000 for legal services provided to the Company. Allen Lenard, one of
the Company's directors, is Managing Partner of Lenard & Gonzalez LLP.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934 which require them to file reports with respect
to their ownership of the Common Stock and their transactions in such Common
Stock. Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 2000 Fiscal Year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 2000 Fiscal Year, the Company believes that
all reporting requirements under Section 16(a) for such fiscal year were met in
a timely manner by its directors, executive officers and greater than ten
percent beneficial owners.
ANNUAL REPORT
The Company filed with the Securities and Exchange Commission an Annual
Report on Form 10-K on April 2, 2001, and an Amendment No. 1 to the Annual
Report on Form 10-K/A on April 30, 2001. A copy of the
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Annual Report on Form 10-K has been mailed concurrently with this Proxy
Statement to all stockholders entitled to notice of and to vote at the Annual
Meeting. No separate annual report to the stockholders was prepared by the
Company. Stockholders may obtain copies of the reports on Form 10-K and Form
10-K/A, without charge, by writing to Investor Relations, ARTISTDIRECT, INC.,
5670 Wilshire Boulevard, Los Angeles, California 90036.
THE BOARD OF DIRECTORS OF
ARTISTDIRECT, INC.
Dated: June ___, 2001
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APPENDIX A
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APPENDIX A
WRITTEN CHARTER OF AUDIT COMMITTEE
CHARTER
OF THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF
ARTISTDIRECT, INC.
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors (the "Board") of ARTISTdirect, Inc. (the "Corporation") in fulfilling
its oversight responsibilities by reviewing: the financial reports and other
financial information provided by the Corporation to any governmental body or
the public; the Corporation's systems of internal controls regarding finance,
accounting, legal compliance and ethics that management and the Board have
established; and the Corporation's auditing, accounting and financial reporting
processes generally. Consistent with this function, the Audit Committee should
encourage continuous improvement of, and should foster adherence to, the
Corporation's policies, procedures and practices at all levels. The Audit
Committee's primary duties and responsibilities are to:
1. Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control
system.
2. Review and appraise the audit efforts of the Corporation's
independent accountants and internal auditing department.
3. Provide an open avenue of communication among the independent
accountants, financial and senior management, the internal
auditing department, and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be an "independent director," and
free from any relationship that, in the opinion of the Board, would interfere
with the exercise of his or her judgment as a member of the Audit Committee. An
"independent director" is a director other than an officer or employee of the
Corporation or its subsidiaries or any other individual having a relationship
which, in the opinion of the Board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.(1) All
members of the
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(1) The following persons shall not be considered independent:
(a) a director who is employed by the Corporation or any of its
affiliates for the current year or any of the past three years;
(b) a director who accepts any compensation from the Corporation or any
of its affiliates in excess of $60,000 during the previous fiscal year, other
than compensation for board service, benefits under a tax-qualified retirement
plan, or non-discretionary compensation;
(c) a director who is a member of the immediate family of an individual
who is, or has been in any of the past three years, employed by the Corporation
or any of its affiliates as an executive officer. Immediate family includes a
person's spouse, parents, children, siblings, mother-in-law, father-in-law,
brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who
resides in such person's home;
(d) a director who is a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organization to which the
Corporation made, or from which the Corporation received, payments (other than
those arising solely from investments in the Corporation's securities) that
exceed 5% of the Corporation's or business organization's consolidated gross
revenues for that year, or $200,000, whichever is more, in any of the past three
years;
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Committee shall have a working familiarity with basic finance and
accounting practices, and at least one member of the Committee shall have
accounting or related financial management expertise. Committee members may
enhance their familiarity with finance and accounting by participating in
educational programs conducted by the Corporation or an outside consultant.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the members
of the Committee may designate a Chair by majority vote of the full Committee
membership.
III. MEETINGS
The Committee shall meet at least four times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Committee should meet at least annually with management, the
director of the internal auditing department and the independent accountants in
separate executive sessions to discuss any matters that the Committee or each of
these groups believe should be discussed privately. In addition, the Committee
or at least its Chair should meet with the independent accountants and
management quarterly to review the Corporation's financials consistent with
Section IV.4. below. The Committee shall keep a record of its proceedings and
report the same at a subsequent meeting of the Board, or as otherwise required
by law, or whenever it shall be called upon by the Board to do so.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
DOCUMENTS/REPORTS REVIEW
1. Review and update this Charter periodically, at least
annually, as conditions dictate.
2. Review the organization's annual financial statements and any
reports or other financial information submitted to any governmental body, or
the public, including any certification, report, opinion, or review rendered by
the independent accountants.
3. Review the regular internal reports to management (including,
without limitation, the Corporation's annual budgets and interim forecasts)
prepared by the internal auditing department and management's response.
4. Review the Corporation's strategic plan periodically, at
least annually, as conditions dictate.
INDEPENDENT ACCOUNTANTS
5. Recommend to the Board of Directors the selection of the
independent accountants, considering independence and effectiveness and approve
the fees and other compensation to be paid to the independent accountants. On an
annual basis, the Committee shall obtain a formal written statement from
accountants delineating all relationships between the accountants and the
Corporation consistent with Independence Standards Board Standard 1, and shall
review and discuss with the accountants all significant relationships the
accountants have with the Corporation to determine the accountants'
independence.
6. Review the performance of the independent accountants and
approve any proposed discharge of the independent accountants when circumstances
warrant.
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(e) a director who is employed as an executive of another entity where
any of the Corporation's executives serve on that entity's compensation
committee.
53
7. Periodically consult with the independent accountants out of
the presence of management about internal controls and the completeness and
accuracy of the organization's financial statements.
FINANCIAL REPORTING PROCESSES
8. In consultation with the independent accountants and the
internal auditors, review the organization's annual audit plan in order to
assure, among other things, the completeness of the coverage.
9. In consultation with the independent accountants, review the
results of the annual audit.
10. In consultation with the independent accountants and the
internal auditors, review the integrity of the organization's financial
reporting processes, both internal and external.
11. Consider the independent accountants' judgments about the
quality and appropriateness of the Corporation's accounting principles as
applied in its financial reporting, including, without limitation, whether
management's choices of accounting principles are conservative, moderate or
aggressive from the perspective of income, asset and liability recognition and
whether those principles are common practices or are minority practices.
12. Consider and approve, if appropriate, major changes to the
Corporation's auditing and accounting principles and practices as suggested by
the independent accountants, management, or the internal auditing department.
PROCESS IMPROVEMENT
13. Establish regular and separate systems of reporting to the
Audit Committee by each of management, the independent accountants and the
internal auditors regarding any significant judgments made in management's
preparation of the financial statements and the view of each as to
appropriateness of such judgments.
14. Review the independent accountants' findings and
recommendations on accounting and internal control matters as contained in their
annual letter to the Committee and to management and review management's
response and action plans to address the audit findings and recommendations.
15. Following completion of the annual audit, review separately
with each of management, the independent accountants and the internal auditing
department any significant difficulties encountered during the course of the
audit, including any restrictions on the scope of work or access to required
information.
16. Review any significant disagreement among management and the
independent accountants or the internal auditing department in connection with
the preparation of the financial statements.
17. Review with the independent accountants, the internal
auditing department and management the extent to which changes or improvements
in financial or accounting practices, as approved by the Audit Committee, have
been implemented. (This review should be conducted at an appropriate time
subsequent to implementation of changes or improvements, as decided by the
Committee.)
ETHICAL AND LEGAL COMPLIANCE
18. Establish, review and update periodically a Code of Ethical
Conduct and ensure that management has established a system to enforce this
Code.
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19. Review management's monitoring of the Corporation's
compliance with the organization's Ethical Code, and ensure that management has
the proper review system in place to ensure that the Corporation's financial
statements, reports and other financial information disseminated to governmental
organizations, and the public satisfy legal requirements.
20. Review activities, organizational structure, and
qualifications of the internal audit department.
21. Review, with the organization's counsel, legal compliance
matters including corporate securities trading policies.
22. Review, with the organization's counsel, any legal matter
that could have a significant impact on the organization's financial statements.
23. Investigate any matter brought to the Committee's attention
within the scope of its duties and recommend to the Board retention of outside
counsel as appropriate.
24. Perform any other activities consistent with this Charter,
the Corporation's By-laws and governing law, as the Committee or the Board deems
necessary or appropriate.
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APPENDIX B
56
OPERATING AGREEMENT
OF
ARTISTDIRECT RECORDS, L.L.C.
THIS OPERATING AGREEMENT of ARTISTdirect Records, L.L.C., a Delaware
limited liability company (the "COMPANY"), dated May 31, 2001, is made among
the Company, ARTISTdirect Recordings, Inc., a Delaware corporation ("ADR"), and
Radar Records Holdings, LLC, a Delaware limited company ("FIELDCO"), and each
other person or entity who is admitted as a member of the Company (each a
"MEMBER," and collectively, the "MEMBERS") from time to time in accordance with
the provisions of this Agreement, and shall be effective upon the date that all
of the conditions set forth in that certain side letter agreement of even date
(the "SIDE LETTER") among the Company, ADR, ARTISTdirect, Inc., a Delaware
corporation that is ADR's parent corporation ("AD"), FieldCo and Frederick W.
Field ("FIELD") shall have been satisfied or waived pursuant thereto (the
"EFFECTIVE DATE").
WHEREAS, the Members desire to form a limited liability company for the
purposes and on the terms and conditions set forth in this Agreement;
WHEREAS, the Members desire that such limited liability company be taxed
for the purposes of federal, state and local income taxes as a partnership;
WHEREAS, the Members desire to have no personal liability for the
liabilities and obligations of the limited liability company (except as
expressly provided herein) to the maximum extent permitted under applicable law;
WHEREAS, the Company and Field, are entering into an employment
agreement of even date (the "FIELD EMPLOYMENT AGREEMENT"), a copy of which is
attached hereto as Exhibit A; and
WHEREAS, AD and Field are entering into an employment agreement of even
date pursuant to which Field is becoming the Chairman and Chief Executive
Officer of AD (the "AD EMPLOYMENT AGREEMENT");
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows:
ARTICLE 1.
DEFINITIONS
The defined terms used in this Agreement shall have the meanings
specified in this Article 1.
"ACT" shall mean the Delaware Limited Liability Company Law, chapter 18
of the consolidated laws of the State of Delaware Section 18-101, et seq., as it
may be amended from time to time, and any successor to the Act.
"AD" shall have the meaning ascribed to it in the preamble.
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"AD EMPLOYMENT AGREEMENT" shall have the meaning ascribed to it in the
preamble.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" shall have the meaning set forth in
Section 9.2(a) below.
"ADR" shall have the meaning ascribed to it in the preamble.
"ADR ADJUSTED PERCENTAGE" shall mean 50%, subject to reduction in the
same proportion as the Percentage of ADR shall be diluted as a result of the
issuances, if any, of additional Units by the Company in accordance with the
terms of this Agreement.
"ADR COMPENSATORY TRANSFER" shall have the meaning set forth in Section
10.1(a)(iii) below.
"ADR CONTROLLED AFFILIATE" shall have the meaning set forth in Section
2.6(b)(ii)(A) below.
"ADR OPPORTUNITY" shall have the meaning set forth in Section
2.6(b)(ii)(A) below.
"ADR PENALTY AMOUNT" shall mean such number of Units as shall be equal
to the lesser of (a) 25% of the applicable Substitute Financier Percentage
(which for purposes of this calculation shall not exceed the ADR Adjusted
Percentage at the time of the issuance of the Initial Substitute Financier
Units) times the outstanding Units of the Company measured immediately prior to
the divestiture of any ADR Units and the issuance of any Initial Substitute
Financier Units; and (b) the excess, if any, of (i) the product of the
applicable Substitute Financier Percentage and the outstanding Units of the
Company measured immediately prior to the divestiture of any ADR Units and the
issuance of any Initial Substitute Financier Units over (ii) the number of ADR
Restricted Units.
"ADR RESTRICTED UNITS" shall mean the number of Units that equals the
product of:
(a) the aggregate number of Units held by ADR and its Permitted
Transferees as of the Default Date; and
(b) the quotient obtained by dividing the Unfunded Amount by
$50,000,000.
"ADVANCE" shall have the meaning set forth in Section 5.1(b) below.
"ADVANCE NOTICE" shall have the meaning set forth in Section 5.1(d)(ii)
below.
"AFFILIATE" of a specified Person shall mean any entity that directly or
indirectly Controls, is Controlled by or is under common Control with such
Person.
"AGGREGATE ADVANCE LIMITATION" shall have the meaning set forth in
Section 5.1(b) below.
"AGREEMENT" shall mean this Operating Agreement of ARTISTdirect Records,
L.L.C., as amended, modified, supplemented or restated from time to time.
"ANNUAL ADVANCE LIMITATION" shall have the meaning set forth in Section
5.1(b) below.
"ANNUAL BUDGET" shall have the meaning set forth in Section 5.1(c)
below.
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"AVAILABLE CASH" as of the date of determination, shall mean the cash
held by the Company (after the repayment to ADR of all outstanding Advances,
plus interest) in excess of the amount of cash that the Founding Members
mutually determine is sufficient to fund the anticipated cash needs of the
Company, including, without limitation, provision for payment of all outstanding
and unpaid current obligations of the Company and anticipated contingent, future
obligations. Notwithstanding the preceding sentence, in the event that the
Founding Members are unable to agree upon the amount of cash that is sufficient
to fund the anticipated cash needs of the Company such amount shall be deemed to
equal 50% of the total annual expenditures that the Annual Budget for such
Fiscal Year projects will be covered by Advances during such Fiscal Year. By way
of clarification and without limiting the generality of the foregoing, there
shall not be any Available Cash unless and until all then-outstanding Advances
from ADR to the Company, plus interest, have been repaid to ADR pursuant to the
Loan and Security Agreement.
"BANKRUPTCY" shall mean, with respect to any Member, when (a) such
Person shall commence any case, proceeding or other action (i) under any
existing or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, conservatorship or relief of debtors
seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts, or (ii) seeking appointment of a receiver,
trustee, custodian, conservator or other similar official for it or for all or
any substantial part of its assets, or such Person shall make a general
assignment for the benefit of its creditors; (b) there shall be commenced
against such Person any case, proceeding or other action of a nature referred to
in clause (a) above that (i) results in the entry of an order for relief or any
such adjudication or appointment or (ii) remains undismissed or undischarged for
a period of sixty (60) days; or (c) there shall be commenced against such Person
any case, proceeding or other action seeking issuance of a warrant of
attachment, execution or similar process against all or any substantial part of
its assets that results in the entry of an order for any such relief that shall
not have been vacated, discharged, or stayed or bonded pending appeal within
sixty (60) days from the entry thereof.
"BASE VALUE" shall have the meaning set forth in Section 10.2(c) below.
"BASE VALUE NOTICE" shall have the meaning set forth in Section 10.2(c)
below.
"BASE VALUE NOTICE DELIVERER" shall have the meaning set forth in
Section 10.2(c) below.
"BASE VALUE NOTICE RECIPIENT" shall have the meaning set forth in
Section 10.2(c) below.
"BUSINESS DAY" shall mean any day other than Saturday, Sunday and any
other day on which the majority of banks in California are not open for
business.
"BUY/SELL DATE" shall mean the date six months following the fifth
anniversary of the Effective Date.
"CAPITAL ACCOUNT" shall have the meaning set forth in Section 4.2 below.
"CAPITAL CONTRIBUTION" shall mean the amounts contributed by each of the
Members pursuant to Section 4.1 below.
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"CAUSE" shall have the meaning ascribed to it in the Field Employment
Agreement or, if applicable, any successor written agreement governing the
employment of Field by the Company, regardless of whether the term of the
applicable such agreement has expired or been terminated; provided, however,
that if there is more than one Field Employment Agreement or successor written
agreement, the definition in the latest such agreement shall control.
"CERTIFICATE OF FORMATION" shall mean the Company's Certificate of
Formation as filed with the Secretary of State of Delaware, as it may be
amended, supplemented or restated from time to time.
"CHIEF EXECUTIVE OFFICER" shall mean the Chief Executive Officer of the
Company appointed pursuant to Section 3.5(a)(i) below.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time (or any corresponding provisions of any succeeding law).
"COMBINED MARGINAL RATE" shall mean, for any Fiscal Year, the sum of:
(a) the highest marginal federal income tax rate assessable for such year on, as
applicable, (i) the ordinary income of individual taxpayers or (ii) the long
term capital gain of individual taxpayers; and (b) the highest combined marginal
state income tax rate assessable for such year on the ordinary income of
individual taxpayers residing within the State of California, after giving
effect to the federal income tax benefit derived, based on the rate determined
in the preceding clause (a), from any state and local taxes assessable on the
income of such individual taxpayers.
"COMPANY" shall have the meaning set forth in the preamble.
"COMPENSATORY PAYMENT" shall have the meaning set forth in 10.2(e)
below.
"CONTROL" (including the terms "Controlling," "Controlled by" and "under
common Control with") shall mean the power to direct the affairs of an entity by
reason of ownership of securities, by contract, or otherwise. Without limiting
the preceding sentence, a Person owning directly or indirectly 50% or more of
the voting securities of an entity shall be deemed to Control such entity.
"CONTROLLED PERSON" shall mean an entity over whom the specified Person
has Control.
"COVERED FIELD TERMINATION" shall mean a termination of the Field
Employment Agreement (a) by the Company for Cause; or (b) by Field other than
for Good Reason.
"DEEMED ANNUAL BUDGET" shall have the meaning set forth in Section
5.1(c) below.
"DEFAULT DATE" shall mean the date of occurrence of the Funding
Default.
"DEFAULT NOTICE" shall have the meaning set forth in Section 6.2(a)
below.
"DEFAULTED ADVANCE" shall have the meaning set forth in Section 6.2(a)
below.
"DEPRECIATION" shall mean, with respect to each Fiscal Year or other
period, an amount equal to the depreciation, amortization or other cost recovery
deduction allowable with respect to a Company asset for such year or other
period, except that, if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such
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year or other period, Depreciation shall be an amount that bears the same ratio
to such beginning Gross Asset Value as the federal income tax depreciation,
amortization or other cost recovery deduction for such year or other period
bears to such beginning adjusted tax basis; provided, however, that if the
federal income tax depreciation, amortization, or other cost recovery deduction
for such asset for such year is zero, Depreciation shall be determined with
reference to such beginning Gross Asset Value using any reasonable method
selected by a Majority in Interest.
"DIRECT AD COMPETITOR" shall mean any Person whose business consists in
material part of the acquisition and exploitation of the right to make
Electronic Transmissions, which shall mean that 25% or more of such Person's
total annual gross revenues or total annual expenses during such Person's most
recent fiscal year shall be related to the acquisition and exploitation of the
right to make Electronic Transmissions; provided, however, that any Person whose
primary business is entering into Traditional Record Agreements shall be deemed
not to be a Direct AD Competitor.
"EARLY INITIATION NOTICE" shall have the meaning set forth in Section
10.2(b) below.
"EARLY OFFER" shall have the meaning set forth in Section 10.2(b) below.
"EFFECTIVE DATE" shall have the meaning ascribed to it in the preamble.
"ELECTION NOTICE" shall have the meaning set forth in Section 10.2(c)
below.
"ELECTRONIC TRANSMISSION" shall mean any transmission to consumers,
whether sound alone, sound coupled with an image, or sound coupled with data, in
any form, whether analog or digital, now known or later developed (including
cybercasts, streaming audio, streaming audiovisual, digital downloads, direct
broadcast satellite, point-to-multipoint satellite, multipoint distribution
service, point-to-point distribution service, cable system, telephone system,
broadcast station, and any other forms of transmission now known or hereafter
devised) whether or not such transmissions are made on-demand or near on-demand,
and whether or not a direct or indirect charge is made to receive the
transmission.
"ELECTRONIC TRANSMISSION RIGHT" shall have the meaning set forth in
10.2(e)(v) below.
"EQUITY SECURITIES" shall mean all (a) Units, all rights, options or
warrants to purchase Units, all securities of any type whatsoever that are
convertible into or exchangeable for Units, and all rights, options or warrants
to purchase securities that are convertible into or exchangeable for Units and
(b) all shares, options, warrants, general or limited partnership interests,
limited liability company membership interests, participations or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity that are issued in exchange for
any of the items described in the preceding clause (a).
"EXPENDITURE CATEGORY" shall have the meaning set forth in Section
5.1(c) below.
"FAIR MARKET VALUE" shall mean, with respect to any property (including
the Membership Interests), the value that would be obtained in an arm's length
transaction for ownership of such property for cash between an informed and
willing seller and an informed and willing purchaser, each with an adequate
understanding of the facts and under no compulsion to buy or sell, as determined
by a Majority in Interest (excluding the affected party or parties) and the
affected
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party or parties. Failing such determination, said value shall be determined by
an independent appraiser mutually selected by the involved parties within ten
(10) Business Days after notice by one such party to the other of the inability
of the parties to agree upon the Fair Market Value, which notice shall name such
party's desired appraiser. If the parties are unable to agree upon a single
appraiser (whether or not the appraiser named in the aforementioned notice),
each of them shall select an appraiser not later than three Business Days after
notice by one party to the other of their inability to agree on a single
appraiser. If the party delivering the notice indicating the failure to agree
upon Fair Market Value does not deliver a notice selecting a different appraiser
prior to the expiration of said three business day period (whether or not in the
form of the notice indicating the failure to agree upon a single appraiser),
such party shall be deemed to have selected the appraiser named in its notice
indicating the failure to agree upon Fair Market Value. If the other party does
not does not deliver a notice selecting an appraiser prior to the expiration of
said three business day period (whether or not in the form of the notice
indicating the failure to agree upon a single appraiser), such other party shall
be deemed to have waived its right to select an appraiser and the appraiser
selected by the party delivering the notice indicating the failure to agree upon
Fair Market Value shall be deemed jointly selected by both parties. Otherwise,
the two selected appraisers shall make their appraisals. If one appraisal is
less than (or equal to) 10% higher than the other appraisal, the Fair Market
Value shall be the average of each of the appraisals. If one appraisal is more
than 10% higher than the other appraisal, those two appraisers shall appoint a
third appraiser, and the Fair Market Value shall be equal to the value
determined by the third appraiser. Each selected appraiser shall be experienced
in valuing assets similar in nature to the assets of the Company. The parties
shall share equally the fees and expenses of any appraiser jointly selected or
deemed jointly selected (including the third appraiser, if applicable), but each
party shall be solely responsible for the fees and expenses of the appraiser
selected solely by said party.
"FIELD" shall have the meaning ascribed to it in the preamble.
"FIELD EMPLOYMENT AGREEMENT" shall have the meaning ascribed to it in
the preamble.
"FIELD REPLACEMENT" shall have the meaning set forth in Section 6.1
below.
"FIELD REPLACEMENT PERCENTAGE" shall mean the Percentage of the total
Units of the Company issued to a Field Replacement.
"FIELD REPLACEMENT UNITS" shall have the meaning set forth in Section
6.1 below.
"FIELD TERM" shall mean the period during which Field is employed by the
Company.
"FIELDCO" shall have the meaning ascribed to it in the preamble.
"FIELDCO ADJUSTED PERCENTAGE" shall mean 50%, subject to reduction in
the same proportion as the Percentage of FieldCo shall be diluted as a result of
the issuances, if any, of additional Units by the Company in accordance with the
terms of this Agreement.
"FIELDCO COMPENSATORY TRANSFER" shall have the meaning set forth in
Section 10.1(a)(ii) below.
"FIELDCO PENALTY AMOUNT" shall mean such number of Units as shall be
equal to the lesser of (a) 25% of the applicable Field Replacement Percentage
(which for purposes of this calculation shall not exceed the FieldCo Adjusted
Percentage at the time of the issuance of any
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Initial Field Replacement Units) times the outstanding Units of the Company
measured immediately prior to the divestiture of any FieldCo Units and the
issuance of any Initial Field Replacement Units; and (b) the excess, if any, of
(i) the product of the applicable Field Replacement Percentage and the
outstanding Units of the Company measured immediately prior to the divestiture
of any FieldCo Units and the issuance of any Initial Field Replacement Units;
over (ii) the number of FieldCo Restricted Units.
"FIELDCO RESTRICTED UNITS" shall mean the following percentages of the
aggregate number of Units held by FieldCo and its Permitted Transferees as of
the date Field's employment with the Company terminates due to a Covered Field
Termination, Field's Disability or Field's death:
(a) If such termination occurs during the first twelve (12) month
period following the Effective Date: 100%;
(b) If such termination occurs during the second twelve (12)
month period following the Effective Date: 70% less 2.5% for each full month of
said second twelve (12) month period that shall have expired prior to said
termination;
(c) If such termination occurs during the third twelve (12) month
period following the Effective Date: 40% less 2.5% for each full month of said
third twelve (12) month period that shall have expired prior to said
termination;
(d) If such termination occurs is during the fourth twelve (12)
month period following the Effective Date: 10% less 5/12% for each full month of
said fourth twelve (12) month period that shall have expired prior to said
termination;
(e) If such termination occurs during the fifth twelve (12) month
period following the Effective Date: 5% less 5/12% for each full month of said
fifth twelve (12) month period that shall have expired prior to said
termination; and
(f) If such termination occurs after the fifth anniversary of the
Effective Date: 0%.
"FIELD'S DISABILITY" shall mean the "Disability" of Field as defined in
the Field Employment Agreement.
"FISCAL YEAR" shall mean the calendar year.
"FOUNDING MEMBERS" shall mean ADR and FieldCo.
"FUNDING DEFAULT" shall have the meaning set forth in Section 6.2(a)
below.
"GOOD REASON" shall have the meaning set forth in Section 7(d) of the
Field Employment Agreement.
"GROSS ASSET VALUE" shall mean, with respect to any asset, such asset's
adjusted basis for federal income tax purposes, except as follows:
(a) the initial Gross Asset Value of any asset (other than cash)
contributed by a Member to the Company shall be the gross Fair Market Value of
such asset at such time, as determined by a Majority in Interest;
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(b) the Gross Asset Value of all Company assets (other than cash)
shall be adjusted to equal their respective gross Fair Market Values, as
determined by a Majority in Interest, as of the following times: (i) the
acquisition of an additional Membership Interest by any new or existing Member
in exchange for more than a de minimis Capital Contribution; (ii) the
distribution by the Company to a Member of more than a de minimis amount of
Company property as consideration for a Membership Interest; and (iii) the
liquidation of the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clause (i)
and clause (ii) of this sentence shall be made only if the TMP reasonably
determines that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Members in the Company;
(c) the Gross Asset Value of any Company asset (other than cash)
distributed to any Member shall be the Fair Market Value of such asset (taking
Code Section 7701(g) into account) on the date of distribution, as determined by
a Majority in Interest; and
(d) the Gross Asset Values of Company assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that
such adjustments are taken into account in determining Capital Accounts pursuant
to Section 1.704-1(b)(2)(iv)(m) of the Regulations; provided, however, that
Gross Asset Values shall not be adjusted pursuant to this paragraph (d) to the
extent that the TMP determines that an adjustment pursuant to paragraph (b)
above is necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this paragraph (d).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
paragraphs (a), (b) or (d) above, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Net Income and Net Loss.
"INDEMNIFICATION OBLIGATIONS" shall have the meaning set forth in
Section 7.1 below.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 7.1
below.
"INITIAL ANNUAL BUDGET" shall have the meaning set forth in Section
5.1(c) below.
"INITIAL FIELD REPLACEMENT" shall have the meaning set forth in Section
6.1 below.
"INITIAL FIELD REPLACEMENT UNITS" shall mean the initial Field
Replacement Units issued to the first Field Replacement receiving Field
Replacement Units.
"INITIAL FIELD TERM" shall mean the period commencing upon the Effective
Date and ending upon the earliest of:
(a) The fifth anniversary of the Effective Date; or
(b) The date Field's employment with the Company ends due to a
Covered Field Termination, Field's Disability or Field's death.
"INITIAL SUBSTITUTE FINANCIER UNITS" shall mean the initial Substitute
Financier Units issued to the first Substitute Financier receiving Substitute
Financier Units.
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"INITIATING MEMBER" shall have the meaning set forth in Section 10.2
below.
"INITIATION NOTICE" shall have the meaning set forth in Section 10.2(c)
below.
"INVOLUNTARY WITHDRAWAL" shall mean, with respect to any Member, the
occurrence of any of the following events:
(a) the Bankruptcy of such Person;
(b) if such Person is an individual, such Person's death or
adjudication by a court of competent jurisdiction as incompetent to manage such
Person's person or property, other than as a result of a Transfer of Units to a
Permitted Transferee;
(c) if such Person is acting as a Member by virtue of being a
trustee of a trust, the termination of the trust other than as a result of a
Transfer of Units to a Permitted Transferee;
(d) if such Person is a partnership or limited liability company,
the dissolution and commencement of winding up of the partnership or limited
liability company, other than as part of a plan of reincorporation or as a
result of a Transfer of Units to a Permitted Transferee;
(e) if such Person is a corporation, the dissolution of the
corporation or the revocation of its charter, other than as a result of a
Transfer of Units to a Permitted Transferee;
(f) if such Person is an estate, the distribution by the estate's
fiduciary of the estate's entire interest in the Company, other than as a result
of a Transfer of Units to a Permitted Transferee; or
(g) if such Person files an action seeking a decree of judicial
dissolution pursuant to Section 18-802 of the Act.
"LIQUIDATION" shall mean a liquidation of the Company in accordance with
Section 11.4 below.
"LOAN AND SECURITY AGREEMENT" shall have the meaning set forth in
Section 5.3 below.
"MAJORITY IN INTEREST" shall mean, with respect to any vote, consent,
approval, determination or decision to be made or given pursuant to this
Agreement, the affirmative vote of those Members that: (a) this Agreement does
not exclude from participating in or making such vote, consent, approval,
determination or decision; and (b) hold at least a majority of the aggregate
outstanding Percentages held by all Members that are not so excluded, which
majority must include each Founding Member not so excluded.
"MEMBER" shall have the meaning ascribed to it in the preamble.
"MEMBERSHIP INTEREST" means a Member's entire interest in the Company,
including the Member's (a) interest in the Net Income, Net Loss and
distributions of the Company, as set forth herein, (b) right to vote as set
forth herein or as required under the Act, and (c) right to participate in the
management of the Company as set forth herein or as required under the Act.
"MINIMUM AMOUNT" shall have the meaning set forth in Section
10.2(e)(i)(A) below.
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"MUSIC PUBLISHING AGREEMENT" shall mean any agreement, contract or
arrangement pursuant to which a Person obtains copyrights and/or administration
rights in respect of musical compositions.
"NET INCOME" or "NET LOSS" shall mean with respect to each Fiscal Year
or other period, an amount equal to the Company's taxable income or tax loss, as
the case may be, for such year or period determined in accordance with Code
Section 703(a) (for this purpose, all items of income, gain, loss or deduction
required to be separately stated pursuant to Code Section 703(a)(1) shall be
included in such taxable income or loss), together with the following
adjustments:
(a) any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Net Income or Net Loss
pursuant to this definition shall be added to such taxable income or tax loss;
(b) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulation Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in
computing Net Income or Net Loss pursuant to this definition shall be subtracted
from such taxable income or tax loss in the year paid;
(c) in the event the Gross Asset Value of any Company property is
adjusted in accordance with clause (b) or clause (c) of the definition of Gross
Asset Value above, (i) the amount of such adjustment shall be taken into account
as a gain or loss on the disposition of such property for purposes of computing
Net Income and Net Loss, and (ii) in lieu of the depreciation, amortization, and
other cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for such Fiscal
Year or other period, computed in accordance with the definition of Depreciation
herein;
(d) gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal income tax
purposes (or is deemed recognized pursuant to clause (c) above) shall be
computed by reference to the Gross Asset Value less Depreciation of the property
disposed of, notwithstanding that the adjusted tax basis of such property may
differ from its Gross Asset Value less Depreciation; and
(e) notwithstanding any other provision of this definition of Net
Income and Net Loss, any items comprising the Company's Net Income or Net Loss
that are allocated pursuant to Section 9.2 below shall not be taken into account
in computing Net Income or Net Loss.
"OFFICER" shall mean an officer of the Company appointed pursuant to
Section 3.5 below.
"OTHER MEMBER" shall have the meaning set forth in Section 10.2 below.
"PERCENTAGE" shall mean, as to a Member, the percentage represented by
(a) the number of Units held by such Member, divided by (b) the total number of
Units outstanding.
"PERMITTED TRANSFEREE" shall mean (a) in the case of a specified Member
that is an entity, such Member's Controlling (i) Affiliates, (ii) partners,
(iii) shareholders or (iv) members; and (b) in the case of a specified Person
that is either a Member or a Person described in clauses (a)(ii), (iii) or (iv)
above, such specified Person's Controlled Persons, spouse, descendant or parent,
or descendants of any of them, or a trust for the sole benefit, or any entity
owned solely by any one or more of the foregoing, including the specified
Person.
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"PERSON" shall mean any individual, partnership, corporation, limited
liability company, unincorporated organization or association, trust or other
entity.
"PRELIMINARY ANNUAL BUDGETS" shall have the meaning set forth in Section
5.1(c) below.
"RECORD" shall mean any device, which utilizes technology existing as of
the date hereof or devised hereafter, on or by which sound may be recorded or
reproduced with or without a visual reproduction, which is manufactured or
distributed primarily for home, consumer, and/or jukebox use and/or use in means
of transportation, including analog disc records, tape cassettes, compact discs,
audiovisual devices and Electronic Transmissions.
"RECORDINGS" shall mean every form of audio-only or audiovisual
recording of a musical performance, whether utilizing technologies now or
hereafter known.
"RECORD LABEL BUSINESS" shall mean the business of acquiring or
producing Recordings and manufacturing, distributing, marketing, selling,
promoting or otherwise exploiting Records.
"REGULATIONS" shall mean the Income Tax Regulations promulgated under
the Code, as such regulations may be amended from time to time (including the
corresponding provisions of any succeeding regulations).
"REGULATORY ALLOCATIONS" shall have the meaning set forth in Section 9.2
below.
"RESPONSE NOTICE" shall have the meaning set forth in Section 10.2(c)
below.
"SALE PROCEDURE" shall have the meaning set forth in Section 10.2 below.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
"SHORTFALL AMOUNT" shall have the meaning set forth in Section
6.2(e)(ii) below.
"SIDE LETTER" shall have the meaning ascribed to it in the preamble.
"SUBMISSION" shall have the meaning set forth in Section 2.6(b)(ii)(A)
below.
"SUBSEQUENT FIELD REPLACEMENT" shall have the meaning set forth in
Section 6.1 below.
"SUBSTITUTE FINANCIER" shall have the meaning set forth in Section
6.2(d) below.
"SUBSTITUTE FINANCIER PERCENTAGE" shall mean the Percentage of the total
Units of the Company issued to a Substitute Financier.
"SUBSTITUTE FINANCIER UNITS" shall have the meaning set forth in Section
6.2(e)(ii) below.
"SUBSTITUTE FINANCING" shall have the meaning set forth in Section
6.2(d) below.
"TAX MATTERS PARTNER" or "TMP" shall have the meaning set forth in
Section 13.5 below.
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"TRADITIONAL DISTRIBUTION CHANNELS" shall mean so-called "brick and
mortar" retail outlets and similar channels of traditional Record distribution.
"TRADITIONAL RECORD AGREEMENT" shall mean any agreement for the
acquisition or production of Recordings for the purpose of making Records for
sale through Traditional Distribution Channels.
"TRANSFER" shall mean, when used as a noun, any sale, hypothecation,
pledge, assignment, attachment, disposal, loan, gift, levy or other transfer,
and, when used as a verb, to sell, hypothecate, pledge, assign, attach, dispose,
loan, gift, levy or otherwise transfer.
"UNFUNDED AMOUNT" shall mean the excess, if any, of (A) $50,000,000 over
(B) the highest outstanding principal amount of Advances that shall have
achieved on or before the Default Date.
"UNIT" shall mean a unit of membership interest attributed to a Member
pursuant to the terms of this Agreement.
"VOLUNTARY WITHDRAWAL" shall mean a Member's resignation from the
Company.
"WITHDRAWAL" shall mean a Member's Voluntary Withdrawal or Involuntary
Withdrawal.
ARTICLE 2.
ORGANIZATION
2.1. FORMATION.
(a) The Company was formed on May 29, 2001 by the filing of the
Certificate of Formation with the Secretary of State of the State of Delaware in
accordance with and pursuant to the Act. On behalf of the Company, ADR shall
cause the execution, delivery and filing of any amendments or restatements
thereto, and any other certificates, notices, statements or other instruments
(and any amendments or statements thereof) necessary or advisable for the
formation of the Company and operation in all jurisdictions where the Company
may elect to do business.
(b) The name and mailing address of each Member and the initial
Capital Contribution of each Member shall be listed on Schedule 2.1 attached
hereto. On behalf of the Company, ADR shall update Schedule 2.1 from time to
time as necessary. No amendment or revision to Schedule 2.1 made in accordance
with this Agreement shall be deemed an amendment to this Agreement. Any
reference in this Agreement to Schedule 2.1 shall be deemed to be a reference to
Schedule 2.1 as amended and in effect from time to time.
2.2. NAME. The name of the limited liability company shall be
ARTISTdirect Records, L.L.C. or such other name as may be selected (a) during
the Field Term, by FieldCo and approved by ADR, which approval shall not be
unreasonably withheld or (b) after the Field Term, by ADR. If ADR disapproves of
a name proposed by FieldCo pursuant to the preceding clause (a), ADR shall
notify FieldCo of its objections within ten (10) business days from FieldCo's
written submission of such name, provided that ADR's inadvertent failure to do
so shall not be deemed a breach of this Agreement; provided, however, subject to
the next sentence, failure to timely object shall constitute approval.
Notwithstanding the preceding
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sentence, ADR may notify FieldCo of any legal objections at any time. If
approved by Majority in Interest, the Company may adopt one or more fictitious
business names.
2.3. PURPOSES. The general purpose of the Company shall be the
operation of a Record Label Business. In addition, the Company may engage in any
lawful act or activity, approved by a Majority in Interest, for which limited
liability companies may be formed under the Act, and may engage in any and all
activities necessary or incidental to the foregoing.
2.4. PRINCIPAL OFFICE; REGISTERED AGENT AND OFFICE. The location of
the principal office of the Company shall be in Los Angeles, California or at
such location as a Majority in Interest may from time to time agree. FieldCo
shall be entitled to select the initial location of the Company's principal
office within Los Angeles, California, subject to the reasonable approval of
ADR. The Company's registered agent and office in Delaware shall be that Person
and location reflected in the Company's Certificate of Formation as filed in the
office of the Delaware Secretary of State or such other agent and/or office as
ADR may from time to time designate.
2.5. DURATION. The term of the Company shall commence on the Effective
Date and shall continue in full force and effect until terminated in accordance
with the provisions of this Agreement.
2.6. MEMBERSHIP INTERESTS.
(a) Membership Interests. Each Member hereby agrees that his, her
or its interest in the Company shall be personal property for all purposes.
(b) Outside Businesses.
(i) Generally. Except as otherwise specifically provided in
Section 2.6(b)(ii) below, Section 14.3(b) below or an employment or other
agreement between the Company and a Member, any Member shall be entitled to
engage in and/or possess any interest in other businesses and investment
ventures or transactions of any nature or description, independently or with
others, whether existing as of the date hereof or hereafter coming into
existence, and whether or not directly or indirectly competitive with the
business of the Company, and no Member shall be obligated to present any
investment or business opportunity to the Company, even if such opportunity
involves a business similar to the Company's. Neither the Members nor the
Company, as such, shall have any rights in or to any such ventures or
transactions or the income or profits derived therefrom, by reason of such
Member's participation in the Company.
(ii) ADR Commitment to Exclusivity. During the Field Term,
except through the Company, none of ADR, AD or their respective Controlled
Persons shall enter into any Traditional Record Agreement without first
following the procedures outlined below in this Section 2.6(b)(ii). For the
avoidance of doubt, nothing in this Section 2.6(b)(ii) shall restrict ADR, AD or
their respective Affiliates from conducting other businesses in the music
industry independent of the Company, including, without limitation, a talent
agency; an Internet website; producing, acquiring and/or exploiting goods and
services, including Recordings for distribution through non-traditional
distribution channels (e.g., via Electronic Transmission or at live
performances); and merchandising.
(A) Prior to ADR, AD or any Controlled Person of either
of them (an "ADR CONTROLLED AFFILIATE") entering into a Traditional Record
Agreement or a Music
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Publishing Agreement in respect of a particular artist or other project (an "ADR
OPPORTUNITY"), it shall advise the Company in writing of its desire to do so (a
"SUBMISSION") and shall concurrently therewith furnish to the Company copies of
any demonstration recordings and other pertinent information in its possession
related to such ADR Opportunity. The Company shall thereafter have a period of
five (5) Business Days following the date of Submission during which to decide
whether or not the Company wishes to enter into a Traditional Record Agreement
or a Music Publishing Agreement, as applicable, in respect of such ADR
Opportunity. The Company shall indicate its desire to enter into such an
agreement by advising ADR, AD or the ADR Controlled Affiliate, as applicable, of
such desire in writing within such five (5) Business Day period, failing which,
the Company shall be deemed to have chosen not to enter into such an agreement
in respect of such ADR Opportunity and ADR, AD or the ADR Controlled Affiliate,
as applicable, shall be free to enter into such a Traditional Record Agreement
or Music Publishing Agreement, as the case may be.
(B) If the Company desires to enter into a Traditional
Record Agreement or a Music Publishing Agreement, as applicable, in respect of a
particular ADR Opportunity but is unable to consummate such agreement within
sixty (60) days from the date of Submission (other than as a result of the
Majority in Interest having withheld its approval of a Music Publishing
Agreement under Section 3.2(dd) below), then ADR, AD or the ADR Controlled
Affiliate, as applicable, may nevertheless enter into such an agreement in
respect of such ADR Opportunity so long as the material terms thereof are not
more favorable to the applicable artist or other third party than the material
terms last proposed the Company to such artist or other third party.
(C) In respect of any ADR Opportunity for which the
Company elects not to enter into a Traditional Record Agreement as aforesaid,
the Company shall have the right, exercisable by written notice to ADR, AD or
the ADR Controlled Affiliate, as applicable, within ten (10) Business Days
following the date of Submission, to elect to obtain the right to distribute
through Traditional Distribution Channels all Records subject to a Traditional
Record Agreement subsequently entered into by ADR, AD or the ADR Controlled
Affiliate, as applicable, in respect of that ADR Opportunity; on financial terms
no less favorable to ADR, AD or the ADR Controlled Affiliate, as applicable,
than those provided in the Company's distribution agreement(s) for the Company's
Records (except as set forth below in this Section 2.6(b)(ii)(C)), and otherwise
consistent with the terms and conditions of a distribution agreement to be
negotiated in good faith between the Company and AD, ADR, or the ADR Controlled
Affiliate, as applicable. Notwithstanding the foregoing: (1) in respect of a
"P&D" distribution agreement for the Company's Records (i.e., where the Company
rather than the distributor pays for manufacturing costs), the Company shall in
respect of all applicable Records have the right to retain for its own benefit a
fee equal to two percent (2%) of the base amount upon which the distributor
computes its distribution fee thereunder; and (2) in respect of a license
agreement for the manufacture and distribution of the Company's Records whereby
the Company is entitled to a royalty, the Company shall in respect of all
applicable Records remit to ADR, AD or the ADR Controlled Affiliate, as
applicable, ninety percent (90%) of the royalties paid or credited to the
Company under such agreement and shall retain the remaining ten percent (10%)
for its own benefit.
(iii) ADR Electronic Transmission Rights. Subject to the
rights granted any third-party distributor pursuant to an agreement approved by
a Majority in Interest pursuant to Section 3.2(h) below, the Company shall
exclusively license to ADR (or, at ADR's election, to AD or an ADR Controlled
Affiliate), until the closing of a sale of the Company pursuant to the Sale
Procedure described in Section 10.2 below, the right to distribute via
Electronic
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Transmission each Recording and Record owned, controlled and/or acquired by the
Company, throughout the world (or such lesser territories in which the Company
controls such rights); subject to the terms and conditions of an arm's length
licensing agreement to be negotiated in good faith between the Company and ADR,
AD or the ADR Controlled Affiliate, as applicable.
2.7. Limited Liability. The liability of each Member shall be limited
as set forth in this Agreement, the Act and other applicable law. No Member
shall be liable for any debts, obligations or liabilities of the Company or each
other, whether arising in tort, contract or otherwise, solely by reason of being
a Member or acting (or omitting to act) in such capacities or participating (as
an employee, consultant, contractor or otherwise) in the conduct of the business
of the Company, except that a Member shall remain personally liable for the
payment of such Member's Capital Contribution and as otherwise set forth in this
Agreement, the Act and other applicable law.
ARTICLE 3.
MANAGEMENT
3.1. MANAGEMENT AND CONTROL.
(a) By the Members. In accordance with Section 18-402 of the Act,
the management of the Company shall be vested in the Members. Except as
explicitly set forth herein, any decision to be made by the Members shall
require the approval of a Majority in Interest. There shall not be a "manager"
(within the meaning of the Act) of the Company.
(b) Day-to-Day Business and Affairs. The day-to-day business and
affairs of the Company shall be operated and managed by the Chief Executive
Officer. The Chief Executive Officer, and any Officer acting pursuant to
authority granted by the Chief Executive Officer, are authorized to take any
actions, to make any determinations and to provide any consents permitted to be
taken, made or provided by the Company under this Agreement; provided, however,
that no Officer shall take any action, make any determination or provide any
consent expressly reserved by this Agreement or the Field Employment Agreement
to any Member or Members. Except as explicitly set forth in this Agreement, no
Member shall, acting individually, take part in the day-to-day business and
affairs, operations or control of the Company, or have the power to sign or bind
the Company unless duly authorized to do so by the Members or the Chief
Executive Officer.
3.2. MAJORITY IN INTEREST DECISIONS. Notwithstanding anything to the
contrary contained herein, without the prior approval of a Majority in Interest,
which approval may, except as set forth herein, be withheld for any reason
whatsoever, neither the Company, nor the Chief Executive Officer on behalf of
the Company, shall take any of the following actions or enter into any agreement
that would result in any of the following actions:
(a) conduct any business other than a Record Label Business, or
engage in any transaction not substantially related thereto;
(b) dissolve, cause a Liquidation of, or otherwise terminate the
Company, other than pursuant to Section 10.2 below;
(c) join in any involuntary case, or commence any voluntary case,
under applicable bankruptcy, insolvency or other similar laws now or hereafter
in effect, or consent to
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the entry of an order for relief in any such involuntary case, or to the
conversion of any involuntary case to a voluntary case under any such law, or
consent to the appointment of or taking possession by a receiver, trustee or
other custodian of all or a substantial portion of the assets of the Company;
(d) adopt or amend any Annual Budget, subject to Article 5 below;
(e) incur any expenditure in an amount that (i) when taken
together with all other expenditures made during the applicable Fiscal Year,
would exceed 110% of the aggregate expenditures specified in the applicable
Annual Budget; or (ii) when taken together with all other expenditures made
during the applicable Fiscal Year in the same Expenditure Category, would exceed
125% of the aggregate expenditures specified for such Expenditure Category in
the applicable Annual Budget; provided, however, any expenditure for independent
marketing and promotion of a particular album in an amount that, when taken
together with all other such expenditures made during the applicable Fiscal
Year, would not exceed 20% of the aggregate amount the Company actually receives
during such Fiscal Year from Persons entitled to distribute such album in
respect of sales of such album shall be deemed approved;
(f) request an Advance before such time as it is reasonably
anticipated that such Advance will be required (provided that the foregoing
shall not be construed to limit the provisions of Section 5.1(d)(i) below);
(g) sell, transfer, lease, sublease, license or otherwise dispose
of to a third party any asset or property, real, personal or mixed (including
Recordings, leasehold interests and intangible assets) with a Fair Market Value
in excess of $500,000 individually or $2,500,000 in the aggregate, other than
pursuant to Section 10.2 below;
(h) enter into any agreement for the manufacture and/or
distribution of Records; provided, however, that during the Field Term, FieldCo
shall have the right to select the Person(s) with whom the Company shall enter
into any agreement for the manufacture and distribution of Records through
Traditional Distribution Channels, subject to the approval of ADR, not to be
unreasonably withheld;
(i) authorize, issue, sell, acquire, repurchase or redeem any
Units or other Equity Securities in or of the Company, other than pursuant to
Article 6 or Section 10.2 below;
(j) admit any new Members, subject to Section 4.3 below;
(k) merge or consolidate with any Person, other than pursuant to
Section 10.2 below;
(l) except as set forth in the applicable Annual Budget, acquire
a substantial portion of the assets or business of any Person or any division or
line of business thereof, or any assets with a Fair Market Value in excess of
$500,000 ($1,000,000 in the case of any acquisition or series of related
acquisitions of copyrights), other than pursuant to Section 10.2 below;
(m) acquire any securities of, or other ownership interest in any
Person, other than in accordance with Schedule 3.2(m);
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(n) encumber (whether by mortgage, lien, pledge, charge, security
interest, guarantee, or otherwise) any assets of the Company, other than
pursuant to Sections 6.2(d) or 10.2 below;
(o) incur, assume, guarantee or otherwise become directly or
contingently liable for any indebtedness in excess of $2,000,000, other than
pursuant to Sections 6.2(d) or 10.2 below;
(p) form any Affiliate;
(q) compromise, settle, or release any debt due the Company in
excess of $500,000;
(r) confess a judgment against the Company or the Company's
property;
(s) grant any power of attorney;
(t) enter into any joint venture, partnership or similar
arrangement with any Person, other than a recording artist, production company
or producer acting as a production company receiving no more than fifty percent
of the equity interests therein or 50% of the net profits thereof, and provided
the Company (i) is entitled to repayment of its funding commitment therein prior
to any profit distributions and (ii) is not committing to fund any expenditures
in excess of the limits set forth in Section 3.2(y) below;
(u) appoint, remove or change any of the Company's primary
external attorneys or accountants, if applicable;
(v) enter into any agreement, arrangement or transaction with any
Officer or Member, or any Affiliate, relative, beneficiary or employee of the
foregoing, or with any employee of the Company, that calls for aggregate payment
(other than payment of salary, bonus or reimbursement of reasonable expenses) in
excess of $10,000, except pursuant to Article 6 below;
(w) except as set forth in the applicable Annual Budget, incur or
commit to incur any capital expenditure (excluding those subject to Section
3.2(y) below) in excess of $500,000 ($1,000,000 in the case of any acquisition
or series of related acquisitions of copyrights);
(x) enter into any agreement, contract or arrangement (other than
an employment agreement) that has a term, or involves performance by the Company
over a period, exceeding (and cannot by its terms, be terminated at the option
of the Company without penalty within) one year; provided, however, that this
Section 3.2(x) shall not apply to agreements (i) involving a commitment by the
Company to pay less than $500,000 in the aggregate or (ii) entered into in the
ordinary course of business with (A) recording artists or (B) producers, talent
finders or other Persons customarily paid by record labels to acquire rights to
Recordings;
(y) unless such payment is specifically provided for in the
applicable Annual Budget, pay, or commit to pay, in one transaction or a series
of related transactions, recording costs, advances, guarantees or other
consideration, whether stated as a "fund" or otherwise, in connection with the
creation of, or acquisition of rights to, Recordings, (A) in amounts exceeding
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(1) $600,000 for any one album (measured, where stated as a "fund," by the
minimum amount of said fund) or (2) $2,000,000 in the aggregate for more than
one album, or (B) of which more than $100,000 is nonrecoupable; provided,
however, that this Section 3.2(y) shall not apply to the payment of earned
royalties, or to the amounts payable by reason of exercising an option;
(z) enter into any agreement, contract or arrangement that
provides for payment by the Company in any territory of: (i) royalties in excess
of 22% of the suggested retail price of the applicable Record, with customary
packaging and free goods or equivalent discounts; (ii) a "pennies per Record"
rate that exceeds that which would be computed in any territory applying the
royalty rate set forth in the preceding clause (i); or (iii) "non standard"
consideration, which shall mean consideration that does not meet at least one of
the following criteria: (A) such consideration is based upon a percentage of the
suggested retail price of the applicable Record, with customary packaging and
free goods or equivalent discounts, (B) such consideration is based upon a
percentage of the wholesale price, PPD or other customary equivalent, with
customary packaging and free goods or equivalent discounts, (C) such
consideration is based upon a set "pennies per Record" rate that does not
require approval pursuant to the preceding clause (ii) or (D) such consideration
is derived from a joint venture or partnership interest, or other similar
interest in net profits that does not require approval pursuant to Section
3.2(t) above;
(aa) enter into any agreement, contract or arrangement that
provides for an event of default, termination, acceleration or payment of any
other amount or penalty in the event (i) any Officer or employee of the Company
no longer performs a specified function or (ii) a change of control of the
Company;
(bb) create a so-called "Company A&R Points Plan";
(cc) except as provided in Section 3.5(a)(i) below, enter into or
amend any: (i) written employment agreement or contract, or employee benefit
plan or policy; or (ii) arrangement that would obligate the Company to pay any
employee (A) in excess of $400,000 in any one year or (B) any compensation based
upon net profits, revenues or gross sales of the Company, or any other
contingent basis, excluding any FieldCo Compensatory Transfer or participation
in the Company A&R Points Plan;
(dd) enter into any Music Publishing Agreement;
(ee) sell, transfer, license exclusively or otherwise dispose of
any intellectual property rights other than in the ordinary course of business
or pursuant to Section 10.2 below;
(ff) cause or permit any Controlled Person of the Company to take
any action if the Company could not take such action without approval pursuant
to this Section 3.2;
(gg) change the nature of the rights and/or obligations of ADR,
FieldCo, Field or the Company to one another as set forth in this Agreement or
any related agreement, except (i) pursuant to Article 6 below or (ii) such
changes to the rights and obligations of Field, subject to the limitations set
forth in Section 3.2(ii) below, as may be approved by a Substitute Financier
(other than FieldCo or an affiliate of FieldCo or Field) in connection with such
Substitute Financier's providing not less than $2,000,000 in Substitute
Financing;
(hh) take any action against a Member for a breach or alleged
breach of any obligation of such Member to the Company, or to terminate the
Chief Executive Officer's
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employment pursuant to Section 3.5(a)(i) below (subject to the limitations set
forth therein); provided, however, that such Member or the Chief Executive
Officer, as applicable, shall not be entitled to participate in any decision by
the Company regarding such an action;
(ii) enter into or modify the terms of any employment agreement
or arrangement with Field in a manner that increases Field's compensation,
benefits or perquisites; or
(jj) authorize any amendment to this Agreement, the Certificate
of Formation of the Company, the Loan and Security Agreement or any exhibits to
any of the aforesaid agreements, except as may be expressly permitted by this
Agreement.
3.3. TERMINATION OF VOTING RIGHTS.
(a) FieldCo. Subject to Section 3.3(c) below, following a
termination of the Field Term due to a Covered Field Termination, Field's
Disability or Field's death prior to the occurrence of a Funding Default,
notwithstanding anything to the contrary contained in this Agreement, FieldCo
shall have no further right to vote on, or give or withhold consents or
approvals with respect to any matters under or with respect to this Agreement,
the Company or in connection with the management of the Company, whether for
itself or its Permitted Transferees, and such rights shall not be subsequently
restored.
(b) ADR. ADR may similarly lose its voting, consent and approval
rights pursuant to Section 6.2(b) below.
(c) Limitation. No termination of a Founding Member's voting
rights pursuant to Section 3.3(a) above or 6.2(b) below, as applicable, shall
affect such Founding Member's right to vote on the matters addressed in Sections
3.2(v), 3.2(gg), 3.2(hh), 3.2(ii), or 3.2(jj) above, to vote pursuant to Section
3.2(ff) above to the extent the aforementioned Sections are implicated, to grant
approvals pursuant to Sections 10.2(e)(iii) or 10.2(e)(iv) below or as provided
in the last sentence of this Section 3.3(c); provided, however, that a Founding
Member that has lost its voting rights pursuant to Section 3.3(a) above or
6.2(b) below, as applicable, shall not be entitled to vote on any amendment to
this Agreement unless such amendment would adversely affect such Founding
Member's Membership Interest in a manner disproportionate to the manner in which
the other Founding Member's Membership Interest would also be adversely
affected, based upon the Founding Members' then respective Unit holdings. In the
event that only one Member has the right to vote or give or withhold consents or
approvals following the termination of a Founding Member's voting rights
pursuant to Section 3.3(a) above or 6.2(b) below, and such Member is restricted
by the terms of this Agreement from voting or giving or withholding consent or
approval on a particular matter (e.g., such Member is an interested or affected
party), then such Founding Member whose voting rights have so been terminated
shall nonetheless have the right to vote or give or withhold consent or approval
on such matter notwithstanding such termination.
3.4. MEETINGS. No regular meetings of the Members shall be required to
be held. Any meetings shall be noticed, held and conducted pursuant to this
Section 3.4. In any instance in which the approval of the Members is required
under this Agreement, such approval may be obtained in any manner permitted by
the Act.
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(a) Power to Call Meetings. Upon written demand of a Founding
Member entitled to vote hereunder, meetings may be called for the purpose of
addressing any matters on which the Members may vote hereunder.
(b) Notice of Meeting. Written notice of a meeting of Members
shall be sent or otherwise given to each Member not less than two (2) nor more
than sixty (60) days before the date of the meeting. The notice shall specify
the place, date and hour of the meeting. Upon written request to the Chief
Executive Officer by any person or persons entitled to call a meeting, the Chief
Executive shall promptly cause notice to be given to the Members entitled to
vote that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than two (2) nor more than sixty (60) days after
the receipt of the request. If the notice is not given within twenty (20) days
after the receipt of the request, the person or persons entitled to call the
meeting may give the notice.
(c) Manner of Giving Notice. Notice of any meeting of Members
shall be given either personally, by first-class mail, by overnight courier, by
facsimile, or by e-mail or other form of written communication, charges prepaid,
addressed to the Member at the address of that Member on the books of the
Company or given by the Member to the Company for the purpose of notice. If no
such address appears on the Company's books or is given, notice shall be deemed
to have been given if sent to that Member at the Company's principal executive
office. Notice shall be deemed to have been given when delivered personally,
deposited in the mail or with an overnight courier service, or sent by e-mail or
other means of written communication.
(d) Quorum. The presence in person or by proxy of a Majority in
Interest shall constitute a quorum at a meeting of Members. The Members present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the loss of a quorum, if any action
taken after loss of a quorum (other than adjournment) is approved by a Majority
in Interest.
(e) Waiver of Notice or Consent. The actions taken at any meeting
however called and noticed, and wherever held, have the same validity as if
taken at a meeting duly held after regular call and notice, if, either before or
after the meeting, each of the Members entitled to vote, who was not present in
person or by proxy, signs a written waiver of notice or consents to the holdings
of the meeting and approves the minutes of the meeting. All such waivers,
consents or approvals shall be filed with the Company records or made a part of
the minutes of the meeting. Attendance of a person at a meeting shall constitute
a waiver of notice of that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
(f) Telephonic Participation by Member at Meetings. Members may
participate in any Members' meeting through the use of any means of conference
telephones or similar communications equipment as long as all Members
participating can hear one another. A Member so participating is deemed to be
present in person at the meeting.
(g) Place of Meetings. Meetings of the Members shall be held at
the principal office of the Company, unless a Majority in Interest shall
designate some other appropriate and convenient location for that purpose from
time to time.
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3.5. OFFICERS.
(a) Chief Executive Officer.
(i) Appointment and Removal. The Chief Executive Officer
shall be chosen and may be removed by a Majority in Interest, subject to the
following three sentences. Field shall be the initial Chief Executive Officer in
accordance with the terms set forth in the Field Employment Agreement, and may
be removed as such only for Cause. FieldCo hereby agrees that it shall have no
right to participate in any decision by the Company whether to commence
arbitration proceedings in order to terminate Field's employment with the
Company for Cause. If, following a Funding Default, Field's employment with the
Company terminates due to a Covered Field Termination, Field's Disability or
Field's death, or due to a termination by Field for Good Reason, ADR shall have
the right to choose and remove any successor Chief Executive Officer of the
Company upon such arm's length terms as ADR shall determine in its reasonable
discretion.
(ii) Authority. The Chief Executive Officer shall have the
authority to act on behalf of the Company, subject to the terms and conditions
of this Agreement and the authority of the Members.
(b) Other Officers. Each other Officer shall be designated and
may be removed by the Chief Executive Officer.
(c) Reliance of Third Parties. Any Person dealing with the
Company may rely on a certificate signed by the Chief Executive Officer:
(i) as to the identity of the Members hereunder;
(ii) as to the existence or nonexistence of any fact or facts
which constitute conditions precedent to acts by the Members or in any other
manner germane to the affairs of the Company;
(iii) as to who is authorized to execute and deliver any
instrument or document on behalf of the Company;
(iv) as to the authenticity of any copy of this Agreement and
any amendments hereto; or
(v) as to the authority of any Officer or the Tax Matters
Partner to act.
3.6. OTHER AFFILIATIONS. The fact that a Member is employed by or is
directly or indirectly connected with any Person shall not prohibit the Company
from employing or otherwise dealing with such Person, provided that such
employment or dealing shall be on terms customary as between unaffiliated
parties for services or dealings similar to those of such employment or dealing.
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ARTICLE 4.
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; ADDITIONAL MEMBERS
4.1. CAPITAL CONTRIBUTIONS.
(a) Initial Capital Contributions and Unit Holdings. Each Member
has made contributions with a Gross Asset Value set forth under the heading
"Paid in Capital" on Schedule 2.1 to this Agreement. The Members initially hold
the number of Units set forth opposite their respective names on Schedule 2.1.
(b) Additional Capital Contributions. No Member shall have any
obligation to make any additional capital contributions to the Company.
(c) Withdrawal of Capital. No Member will be entitled to withdraw
all or any part of such Member's Capital Contribution or Capital Account from
the Company prior to the Company's Liquidation or, if such withdrawal is
permitted, to demand a distribution of property other than money.
(d) No Interest on Capital. No Member will be entitled to receive
interest on such Member's Capital Account or any Capital Contribution.
(e) Priority and Return of Capital. Except as specifically
provided in this Agreement, no Member shall have priority over any other Member,
whether for the return of a Capital Contribution or any portion of a Capital
Account or for a distribution or an allocation of Net Income or Net Loss;
provided, however, that this Section 4.1(e) shall not apply to Advances, loans
or other indebtedness (as distinguished from a Capital Contribution) made by a
Member to the Company.
4.2. CAPITAL ACCOUNTS. An individual capital account (the "CAPITAL
ACCOUNT") shall be maintained for each Member in accordance with the following
provisions. (The maintenance of such accounts, however, shall be for the
purposes of information only and shall not prevent or prohibit the intermingling
of all the funds of the Company in a common account):
(a) Each Member's Capital Account shall be credited with (1) the
amount of cash contributed by such Member to the Company; (2) the amount of such
Member's allocable share of Net Income (or items thereof); (3) the amount, if
any, of any Company liabilities that are assumed by such Member as provided in
Regulation Section 1.704-1(b)(2)(iv)(c)(1); and (4) the Gross Asset Value of any
property, other than cash, contributed to the Company by such Member (net of
liabilities secured by such contributed property that the Company is considered
to assume or take subject to under Code Section 752).
(b) Each Member's Capital Account shall be charged with (1) the
amount of cash distributed to such Member by the Company, (2) the amount of such
Member's allocable share of Net Loss and any items of Company loss and deduction
that are specially allocated to such Member pursuant to Section 9.2 below, and
(3) the Gross Asset Value of any property, other than cash, distributed to such
Member by the Company (net of liabilities secured by such distributed property
that such Member is considered to assume or take subject to under Code Section
752); and (4) the amount of any expenditures described in Code Section
705(a)(2)(B) allocated to such Member.
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(c) The foregoing provisions and the other provisions of the
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulation Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such Regulation.
4.3. ADDITIONAL MEMBERS. A Person may be admitted as a Member after
the Effective Date only upon the approval of a Majority in Interest, which
approval may be withheld for any reason whatsoever; provided, however, that such
approval shall not be unreasonably withheld with respect to the admission of a
Permitted Transferee and shall be deemed granted to any recipient of an ADR
Compensatory Transfer or a FieldCo Compensatory Transfer.
ARTICLE 5.
ADVANCES
5.1. ADR'S FUNDING COMMITMENT.
(a) Subject to the terms of the Loan and Security Agreement to be
entered into by the Company and ADR in accordance with Section 5.3 below, ADR
shall advance sums to the Company in the manner described in this Article 5.
(b) During the Initial Field Term and prior to a sale of the
Company pursuant to Section 10.2 below, ADR will advance the sums to operate the
Record Label Business of the Company in accordance with the terms and conditions
of this Agreement, including without limitation Section 5.1(c) below and the
applicable Annual Budget created pursuant thereto. Each sum advanced by ADR to
Company pursuant to this Section 5.1(b) or as otherwise contemplated by this
Agreement is sometimes herein referred to as an "ADVANCE." Notwithstanding
anything to the contrary contained herein, although it may in its sole
discretion choose to do so, ADR shall not be obligated to: (i) make any Advance
in any single Fiscal Year that would cause the outstanding principal amount of
all Advances to exceed the outstanding principal amount of all Advances on the
last day of the prior Fiscal Year by more than $15,000,000 (the "ANNUAL ADVANCE
LIMITATION"); (ii) make any Advance to the Company to the extent such Advance
would cause the outstanding principal amount of all Advances to exceed
$50,000,000 (the "AGGREGATE ADVANCE LIMITATION"); or (iii) make any Advances
following the Initial Field Term or a sale of the Company pursuant to Section
10.2 below.
(c) No later than forty-five (45) days before the end of each
Fiscal Year during the Field Term, FieldCo, on behalf of the Company, shall
prepare and provide to ADR, for ADR's reasonable approval, an annual budget for
the Company ("ANNUAL BUDGET") for the next Fiscal Year. At FieldCo's request,
ADR will, at no additional charge, assist FieldCo in the preparation of its
Annual Budget or, if FieldCo so requests, ADR shall prepare (or shall cause AD
to prepare) the Annual Budget subject to FieldCo's reasonable approval. Each
Annual Budget shall set forth in reasonable detail all anticipated expenditures
of the Company, organized into general categories (each, an "EXPENDITURE
CATEGORY") and line items within each such category, as well as all anticipated
revenues for the next Fiscal Year, and shall also include a schedule setting
forth the Advances projected to be required to fund the operations of the
Company in the next Fiscal Year. The projected draw and expenditure schedules of
each Annual Budget shall include at least the following cash Expenditure
Categories (with included subcategories noted in parentheses): Distribution
Fees; Cost of Goods Sold (including Manufacturing Cost of Goods Sold and Package
Design); Recording Expenses/Artist Advances (including Artist Advances -
Recording; Artist Advances - Other and Union/Guild Payments); Artist Royalties;
Mechanicals/Copyright Royalties; Advertising & Merchandising (including
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Customer Advertising, Trade & Consumer Advertising and Merchandising); Promotion
(including Independent Promotion, Public Relations, Promotional Product &
Shipping and Market Research); Promotional/Music Video Production; Tour Support;
General Payroll & Related (including Salaries & Benefits, Bonuses and Contract &
Temporary Labor); Travel & Entertainment (including Travel & Entertainment and
Conventions & Seminars); Office & Related Expenses (including Communications and
Computer & Office Supplies); Outside Services (including Legal Fees and Outside
Consulting); Other General & Administrative (including Relocation & Recruiting;
and Other General & Administrative); Allocated Overhead and Capital Expenditures
(including Inventory, Leasehold Improvements and Equipment). Attached hereto as
Schedule 5.1 are preliminary Annual Budgets for the Fiscal Years ending December
31, 2001 and December 31, 2002 (the "PRELIMINARY ANNUAL BUDGETS"). The Founding
Members shall endeavor in good faith to adopt the final Annual Budget for the
Fiscal Year ending December 31, 2001 (the "INITIAL ANNUAL BUDGET") as soon as
practicable following the execution of this Agreement. Each subsequent Annual
Budget shall be in a form substantially similar to the Initial Annual Budget,
or, if it has not yet been adopted, the Preliminary Annual Budget for the Fiscal
Year ending December 31, 2002. Each of the Founding Members shall have the
right, in its reasonable discretion, to approve or disapprove the Annual Budget;
provided, however, that ADR shall not withhold approval of any Annual Budget (i)
substantially similar to the Initial Annual Budget, or, if it has not yet been
adopted, the Preliminary Annual Budget for the Fiscal Year ending December 31,
2002 or (ii) solely due to its inclusion of annual expenditures in excess of
$15,000,000 where such excess expenditures will be covered by advances from
third parties or other operating income of the Company. For purposes of any
comparisons to be made to the Initial Annual Budget pursuant to the preceding
two sentences, the amounts set forth in the Preliminary Annual Budget shall be
deemed to be the amounts set forth in for the Fiscal Year ending December 31,
2002. Except as set forth in the first sentence of Section 5.1(d)(i) below, ADR
shall not be obligated to make any payments or incur any costs hereunder with
respect to the applicable Fiscal Year unless and until the Annual Budget for
that Fiscal Year has been approved or deemed approved by ADR. Until such time as
an Annual Budget is adopted for a particular Fiscal Year, the Annual Budget for
the preceding Fiscal Year shall be deemed to be the Annual Budget for that
Fiscal Year and deemed approved by ADR (a "DEEMED ANNUAL BUDGET"); provided,
however, that until an Annual Budget is adopted for the Fiscal Year ending
December 31, 2002, the amounts set forth in the Preliminary Annual Budget for
the Fiscal Year ending December 31, 2002 shall be deemed to be the Annual Budget
for such Fiscal Year and deemed approved by ADR. In connection with the process
of preparing and approving the Annual Budget, both of the Founding Members shall
act in good faith and shall endeavor to resolve any disputes in connection
therewith, in order to ensure that the Company will be able to fund its
necessary operations.
(d) Procedures for Drawing Advances.
(i) First Three Fiscal Years. Within five Business Days
following the Effective Date, ADR shall Advance the Company an amount equal to
$12,000,000. On the first Business Day of the Fiscal Year ending December 31,
2002, provided the Initial Field Term shall not have ended, ADR shall Advance
the Company an amount equal to 110% of the aggregate amount of Advances called
for in the Annual Budget for such Fiscal Year, or, if applicable, the Deemed
Annual Budget for such Fiscal Year, less the amount by which $12,000,000 exceeds
110% of the aggregate amount of Advances called for in the Initial Annual
Budget, or, if it has not yet been adopted, the Preliminary Annual Budget for
the Fiscal Year ending December 31, 2001. In addition, upon the first Business
Day of the Fiscal Year ending December 31, 2003, provided the Initial Field Term
shall not have ended, ADR shall Advance
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the Company an amount equal to 110% of the aggregate amount of Advances called
for in the Annual Budget for such Fiscal Year, or, if applicable, the Deemed
Annual Budget for such Fiscal Year. If ADR shall make such an Advance pursuant
to a Deemed Annual Budget, then, upon the actual approval of the applicable
Annual Budget in accordance with the terms of this Agreement, if the aggregate
amount of Advances called for in such Annual Budget exceed the aggregate amount
of Advances called for in such Deemed Annual Budget, ADR shall Advance the
Company an amount equal to 110% of the excess. Similarly, if the aggregate
amount of Advances called for in such Annual Budget are less than the aggregate
amount of Advances called for in such Deemed Annual Budget, then the Company
shall repay to ADR an amount equal to 110% of the shortfall. Notwithstanding
anything to the contrary contained in this Section 5.1(d), the aggregate amount
of Advances to be made pursuant to this Section 5.1(d) shall be subject to a
maximum of $33,000,000.
(ii) Succeeding Fiscal Years. For succeeding Fiscal Years
during the Initial Field Term and prior to a sale of the Company pursuant to
Section 10.2 below, the Chief Executive Officer shall notify ADR of each Advance
to be made pursuant to the applicable Annual Budget by delivering a notice to
ADR (the "ADVANCE NOTICE") specifying (A) the aggregate Advance required at such
time, (B) the date upon which such Advance is to be made (which date shall be no
earlier than ten (10) Business Days following the date of the Advance Notice,
and (C) and, if the applicable Annual Budget did not project that such Advance
would be required on or before the date of the Advance Notice, a brief
description of the intended use of the proceeds of said Advance, broken down by
Expenditure Category. Subject to the terms and conditions set forth in this
Agreement and the Loan and Security Agreement, ADR shall make the Advance
specified in the Advance Notice in such amount and on such date as is specified
in the Advance Notice. Each Advance to be made by ADR shall be made to the
Company in immediately available funds by wire transfer to a bank account
designated by the Company in the Advance Notice.
(e) ADR Provision of Overhead. On a monthly basis, ADR shall be
deemed to have made Advances to the Company in an amount equal to all reasonable
expenses incurred by ADR, AD or their respective Affiliates on behalf of the
Company for shared employees, real estate and other overhead, in each case
allocated on such reasonable basis as the Founding Members shall agree in
writing and in good faith.
5.2. NO FURTHER LOANS. Except as expressly provided in this Agreement
or in the Loan and Security Agreement: (a) no Member shall be required to loan
any funds of any kind to the Company and (b) without the consent of a Majority
in Interest, no Member or third party shall be entitled to loan any funds of any
kind to the Company.
5.3. LOAN AND SECURITY AGREEMENT. All Advances hereunder shall be
subject to the terms and conditions of the Loan and Security Agreement of even
date herewith between the Company and ADR, a copy of which is annexed hereto as
Exhibit B (the "LOAN AND SECURITY AGREEMENT").
5.4. REPAYMENT OF ADVANCES. The Members hereby authorize the Chief
Executive Officer to determine when and if the Company shall make any optional
prepayments of any Advances.
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ARTICLE 6.
POTENTIAL DIVESTITURE OF UNITS
6.1. POTENTIAL DIVESTITURE OF UNITS OF FIELDCO. Without limiting the
provisions of Section 3.3 above, if, prior to a sale of the Company pursuant to
Section 10.2 below or a Funding Default, Field's employment with the Company
ends due to a Covered Field Termination, Field's Disability or Field's death,
ADR shall have the right, but not the obligation, to cause the Company, without
the consent of FieldCo, to hire an individual to replace Field (the "INITIAL
FIELD REPLACEMENT") upon such arm's length terms as ADR shall determine in its
reasonable discretion. In the event that the employment of the Initial Field
Replacement is subsequently terminated, ADR shall have the right, but not the
obligation, to cause the Company, without the consent of FieldCo, to hire an
individual to replace the Initial Field Replacement upon such arm's length terms
as ADR shall determine in its reasonable discretion and to similarly hire any
replacement for such replacement (each replacement after the Initial Field
Replacement, a "SUBSEQUENT FIELD REPLACEMENT", and together with the Initial
Field Replacement, the "FIELD REPLACEMENTS" or each a "FIELD REPLACEMENT"). Upon
each issuance of any Units to a Field Replacement (the "FIELD REPLACEMENT
UNITS"), such number of Units of FieldCo and its Permitted Transferees as shall
equal the number of Units then issued to the Field Replacement (or, if less,
such number of Units then held by FieldCo and its Permitted Transferees) shall
be divested from FieldCo and its Permitted Transferees and issued to the Field
Replacement; provided, however, that the aggregate number of Units that shall be
divested from FieldCo and its Permitted Transferees and issued to the Field
Replacements may never exceed the applicable maximum set forth in Section 6.1(a)
or Section 6.1(b) below. In the event that Units divested from FieldCo and its
Permitted Transferees and issued to a Field Replacement are subsequently
divested from the Field Replacement, such Units shall be returned to FieldCo;
provided, however, that such Units shall be deemed to have never been divested
from FieldCo for purposes of determining the maximum amount subject to
divestiture hereunder. For the avoidance of doubt, the divestiture provided for
hereunder shall not apply to any Units transferred pursuant to a FieldCo
Compensatory Transfer.
(a) Maximum upon Covered Field Termination. If the issuance of
Field Replacement Units occurs following a Covered Field Termination, the
maximum number of Units to become subject to divestiture shall equal the sum of:
(i) the FieldCo Restricted Units and (ii) the FieldCo Penalty Amount. Two
examples of the application of this maximum are set forth on Schedule 6.1
attached hereto.
(b) Maximum upon Field's Disability or Death. If the issuance of
Field Replacement Units occurs following a termination of Field's employment due
to Field's Disability or death, the maximum number of Units to become subject to
divestiture shall equal the FieldCo Restricted Units.
Any divestiture of the FieldCo Restricted Units contemplated above shall occur
automatically upon the issuance of the Field Replacement Units, and the
effectiveness of such divestiture shall not depend upon any further action by
the Company, FieldCo, Field or the Permitted Transferees of FieldCo. FieldCo,
Field and the Permitted Transferees of FieldCo agree to execute any and all
documents reasonably requested by the Company to evidence such divestiture. Such
divestiture shall be made without any payment whatsoever to FieldCo, Field or
the Permitted Transferees of FieldCo. In no event shall such divestiture be
deemed a "forfeiture," but rather the possibility of such divestiture is part of
the bargained-for consideration to the Company and FieldCo in entering into this
Agreement.
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6.2. POTENTIAL DIVESTITURE OF UNITS OF ADR.
(a) Funding Default. If, prior to a sale of the Company pursuant
to Section 10.2 below, and prior to a termination of Field's employment with the
Company due to a Covered Field Termination, Field's Disability or Field's death,
ADR fails to make payment in full of any Advance on the date it is due and
payable pursuant to this Agreement (the "DEFAULTED ADVANCE"), then the Chief
Executive Officer, on behalf of the Company, shall promptly give ADR and the
other Members notice (a "DEFAULT NOTICE") indicating that if the Defaulted
Advance is not paid in full on or before the date fourteen (14) days following
such Default Notice, or such earlier date, not later than two Business Days
following such Default Notice, upon which the failure of ADR to make the
applicable Advance causes the Company to incur any material liability to a third
party for late payment, then ADR shall be deemed to have committed a funding
default (the "FUNDING DEFAULT"). Once ADR shall be deemed to have committed a
Funding Default, it shall have no further obligation to make Advances, but it
shall be subject to the consequences and penalties set forth in this Section
6.2. It is hereby agreed and acknowledged that the application of the
consequences and penalties set forth in this Section 6.2 shall be the sole
remedy available to the Company and the Members other than ADR upon a Funding
Default.
(b) Termination of Management and Other Rights. From and after
the Funding Default, notwithstanding anything to the contrary contained in this
Agreement (other than Section 3.3(c) above), ADR shall have no further right to
vote on or give or withhold consents or approvals with respect to any matters
under or with respect to this Agreement, the Company or in connection with the
management of the Company, and such rights shall not be subsequently restored
except as set forth in the final sentence of this Section 6.2(b), even if the
amount giving rise to the Funding Default is subsequently obtained from ADR or
otherwise. Except as set forth in the following sentence, from and after the
Funding Default, any consent, approval, determination or decision that otherwise
would have been made or given solely by ADR pursuant to this Agreement shall be
made by a Majority in Interest (excluding, for the avoidance of doubt, ADR).
Notwithstanding the preceding two sentences, if, following a Funding Default,
Field's employment with the Company terminates due to a Covered Field
Termination, Field's Disability or Field's death, or due to a termination by
Field for Good Reason, all of ADR's rights to vote on or give or withhold
consents or approvals with respect to matters under or with respect to this
Agreement shall automatically be restored, without the need for any further
action by any Person.
(c) Termination of Right to Obtain Electronic Transmission
Rights. From and after the Funding Default, ADR shall no longer have the right
to obtain Electronic Transmission Rights pursuant to Section 10.2(e)(v) below
and such right shall not be subsequently restored, even if the amount giving
rise to such Funding Default is subsequently obtained from ADR or otherwise.
(d) Right to Obtain Substitute Financing. Without limiting the
provisions of Section 6.2(b) above, from and after the Funding Default, FieldCo
shall have the right, but not the obligation, to cause the Company, without the
consent of ADR, to obtain debt or equity financing, as well as services or
support for which the Company would otherwise have had to pay cash, from any
Person(s) (including FieldCo or any Affiliate of FieldCo) in a single
transaction or multiple transactions, upon such arm's length terms as FieldCo
shall determine in its reasonable discretion; provided, however, that only such
portion of such financing that does not exceed the lower of (i) one hundred
twenty-five percent (125%) of the Unfunded Amount; or (ii) the maximum amount
that ADR could have been required to Advance to the Company
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following the Funding Default, based upon the Annual Advance Limitation, pro
rated on a monthly basis over the remainder of the Initial Field Term shall
constitute "SUBSTITUTE FINANCING" hereunder. (Each provider of Substitute
Financing is referred to herein as a "SUBSTITUTE FINANCIER").
(e) Consequences of Substitute Financing.
(i) Subordination of ADR Advances. From and after the Funding
Default, ADR's right of repayment of any and all Advances shall be subordinated
to the extent provided in the Loan and Security Agreement.
(ii) Divestiture of Units of ADR. If the Company obtains
Substitute Financing in an amount equal to or greater than the difference
between the Defaulted Advance and the amount paid in respect thereof by ADR on
or before the Default Date (the "SHORTFALL AMOUNT"), then, upon each issuance of
any Units to a Substitute Financier upon consummation of any Substitute
Financing (all such Units issued, the "SUBSTITUTE FINANCIER UNITS"), such number
of Units of ADR and its Permitted Transferees as shall equal the number of Units
then issued to the Substitute Financier in respect of the Substitute Financing
(or, if less, such number of Units then held by ADR and its Permitted
Transferees) shall be divested from ADR and its Permitted Transferees and issued
to the Substitute Financier; provided, however, that the aggregate number of
Units that shall be divested from ADR and its Permitted Transferees and issued
to the Substitute Financiers shall be subject to a maximum in an amount equal to
the sum of: (A) the ADR Restricted Units and (B) ADR Penalty Amount. If a
Substitute Financier is issued Units in respect of both Substitute Financing and
other financing, then the number of Units deemed issued in respect of the
Substitute Financing shall equal the product of (X) the total number of Units
issued in the Substitute Financing and (Y) a fraction, the numerator of which is
the amount of the Substitute Financing and the denominator of which is the sum
of the Substitute Financing and the other financing provided by the applicable
Substitute Financier. In the event that Units divested from ADR and its
Permitted Transferees and issued to a Substitute Financier in respect of the
Substitute Financing are subsequently forfeited by or divested from such
Substitute Financier, such Units shall be returned to ADR; provided, however,
that such Units shall be deemed to have never been divested from ADR for
purposes of determining the maximum amount of Units subject to divestiture
hereunder. For the avoidance of doubt, the divestiture provided for hereunder
shall not apply to any Units transferred pursuant to an ADR Compensatory
Transfer. Two examples of the application of this maximum are set forth on
Schedule 6.2 attached hereto.
Any divestiture of the ADR Restricted Units contemplated above shall occur
automatically upon the issuance of the Substitute Financier Units, and the
effectiveness of such divestiture shall not depend upon any further action by
either the Company, ADR or ADR's Permitted Transferees. ADR and ADR's Permitted
Transferees agree to execute any and all documents reasonably requested by the
Company to evidence such divestiture. Such divestiture shall be made without any
payment whatsoever to ADR or ADR's Permitted Transferees. In no event shall such
divestiture be deemed a "forfeiture," but rather the possibility of such
divestiture is part of the bargained-for consideration to the Company and ADR in
entering into this Agreement and the Loan and Security Agreement; it being
understood and acknowledged that ADR's commitment to provide Advances hereunder
is part of the consideration to be provided by ADR to the Company for the ADR
Restricted Units.
6.3. Binding Upon Transferees. The obligations of the Founding Members
pursuant to this Article 6 shall be binding on any transferee or assignee of any
Units and any Transfer of
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any Units shall be void unless a written commitment to be bound by such
provisions from such transferee or assignee is delivered to the Company and the
Founding Member prior to any Transfer. The obligations of the Founding Members
pursuant to this Article 6 shall apply to any Equity Securities received in
substitution or exchange for Units.
ARTICLE 7.
INDEMNIFICATION
7.1. INDEMNIFICATION BY COMPANY. Any Person who was or is a Member,
Officer, employee, or other agent of the Company, or was or is serving at the
request of the Company as a director, officer, employee, or other agent of
another limited liability company, corporation, partnership, joint venture,
trust, or other enterprise (any of the foregoing, including AD, an "INDEMNIFIED
PARTY") shall, in accordance with this Article 7, be indemnified and held
harmless by the Company from and against any and all losses, claims, damages,
liabilities, expenses (including legal and other professional fees and
disbursements), judgments, fines, settlements, and other amounts incurred
(collectively, the "INDEMNIFICATION OBLIGATIONS") in connection with any and all
claims, demands, actions, suits or proceedings (civil, criminal, administrative
or investigative), actual or threatened, in which such Indemnified Party may be
involved, as a party or otherwise, by reason of such Indemnified Party's service
to, or on behalf of, or management of the affairs of, the Company, or rendering
of advice or consultation with respect thereto, whether or not the Indemnified
Party continues to be serving in the above-described capacity at the time any
such Indemnification Obligation is paid or incurred. Notwithstanding the
foregoing, indemnification shall only be provided by the Company with respect to
any Indemnification Obligation if the Indemnified Party acted in good faith and
in a manner that the Indemnified Party reasonably believed to be in, or not
opposed to, the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such Indemnified
Party's conduct was unlawful. The termination of a proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not, of itself, create a presumption that the Indemnified
Party did not act in good faith and in a manner that the Indemnified Party
reasonably believed to be in, or not opposed to, the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe such Indemnified Party's conduct was unlawful. Expenses
(including legal and other professional fees and disbursements) incurred in any
proceeding will be paid by the Company, as incurred, in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
such Indemnified Party to repay such amount if it shall ultimately be determined
that such Indemnified Party is not entitled to be indemnified by the Company as
authorized hereunder.
7.2. INDEMNIFICATION NOT EXCLUSIVE. The indemnification provided by
Section 7.1 above shall not be deemed to be exclusive of any other rights to
which each Indemnified Party may be entitled under any agreement, or as a matter
of law, or otherwise, both as to action in such Indemnified Party's official
capacity and to action in another capacity, and shall continue as to such
Indemnified Party who has ceased to have an official capacity for acts or
omissions during such official capacity or otherwise when acting at the request
of the Company, or any Person granted authority thereby, and shall inure to the
benefit of the heirs, successors and administrators of such Indemnified Party.
7.3. INSURANCE ON BEHALF OF INDEMNIFIED PARTY. The Members hereby
authorize the Company to purchase and maintain insurance on behalf of each
Indemnified Party, at the expense of the Company, against any liability which
may be asserted against or incurred by him
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in any such capacity, whether or not the Company would have the power to
indemnify the Indemnified Parties against such liability under the provisions of
this Agreement.
7.4. NO AGENCY. No Member acting solely in the capacity of a Member is
an agent of the Company, nor can any Member acting solely in the capacity of a
Member bind the Company or execute any instrument on behalf of the Company.
Accordingly, each Member shall indemnify, defend, and hold harmless the Company,
each other Member and the Affiliates of each other Member from and against any
and all loss, cost, expense, liability or damage arising from or out of any
claim based upon any action by such Member in contravention of the first
sentence of this Section 7.4. The foregoing indemnification by a Member shall
not be deemed to be exclusive of any other rights to which the party indemnified
thereby may be entitled under any agreement, or as a matter of law, or
otherwise.
7.5. INDEMNIFICATION LIMITED BY LAW. Notwithstanding any of the
foregoing to the contrary, the provisions of this Article 7 shall not be
construed so as to provide for any indemnification for any liability to the
extent (but only to the extent) that such indemnification would be in violation
of applicable law or that such liability may not be waived, modified or limited
under applicable law, but shall be construed as to effectuate the provisions of
this Article 7 to the fullest extent permitted by law.
7.6. AMENDMENT OF AGREEMENT. The indemnification provided for in this
Article 7 shall apply as written here to acts occurring prior to any amendment
of this Agreement, notwithstanding such amendment to this Agreement.
ARTICLE 8.
DISTRIBUTIONS
8.1. DISTRIBUTIONS.
(a) Generally. Subject to Section 8.1(b) below, the Company shall
make distributions annually to the Members, pro rata in proportion to their
respective Percentages, but only to the extent that Company has Available Cash.
(b) Tax Distributions. Notwithstanding Section 8.1(a) above,
before any distributions are made pursuant to Section 8.1(a) above for the
current Fiscal Year, and, in any event, on or before the date seventy-five (75)
days following the end of each Fiscal Year, the Company shall distribute to each
Member an amount in cash of Available Cash, if any, equal to the product of (i)
the amount of taxable income allocable to such Member for the preceding Fiscal
Year (net of cumulative tax losses previously allocated to such Member in all
prior Fiscal Years and not used in prior Fiscal Years to reduce the taxable
income of such Member; provided, however, that such calculation shall be made on
the assumption that taxable income or tax loss from the Company is such Member's
only taxable income or tax loss) and (ii) the Combined Marginal Rate for such
preceding Fiscal Year; provided, however, that such distribution shall be made
only to the extent that the amount otherwise required to be distributed to such
Member pursuant to this Section 8.1(b) exceeds distributions made to such Member
pursuant to Section 8.1(a) above in the preceding Fiscal Year. In addition,
distributions made pursuant to this Section 8.1(b) shall be treated as being
made pursuant to Section 8.1(a) above and shall be taken into account in making
subsequent distributions pursuant to Section 8.1(a) above. If the Company has
insufficient Available Cash to make tax distributions pursuant to this Section
8.1(b) for a particular Fiscal Year, then ADR shall Advance the additional
amount
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required to fund the applicable tax distributions, in accordance with and
pursuant to the terms and conditions of Section 5.1 above and the Loan and
Security Agreement; provided; however, that (A) the Annual Advance Limitation
shall be disregarded for purposes of determining whether ADR shall Advance the
additional amount required to fund the applicable tax distributions and (B) if,
due to the application of the Aggregate Advance Limitation, the maximum amount
of Advances so permitted to be made is not sufficient to cover the additional
amount required to fund the applicable tax distributions, the computation of
Available Cash shall be made without regard to whether there are any outstanding
Advances.
8.2. WITHHOLDING. The Company shall be entitled to withhold from any
payment or distribution made pursuant to this Agreement all amounts required to
be withheld by the Code or any state or local law. Any amount so withheld shall
be treated as having been distributed to the applicable Member.
8.3. LIMITATION. Notwithstanding any provision to the contrary
contained in this Agreement, the Company shall not make a distribution to any
Member on account of its interest in the Company if such distribution would
violate Section 18-607 of the Act or any other applicable law.
8.4. OFFSET. The Company may offset all amounts owing to the Company
by a Member against any distribution to be made to such Member.
ARTICLE 9.
ALLOCATIONS
9.1. GENERALLY. Each Member agrees that, subject to Section 9.2 below,
Net Income, Net Loss, and all other items of income, gain, loss and deduction of
the Company for each Fiscal Year shall be allocated as follows:
(a) NET INCOME. Net Income and other items of income and gain
shall be allocated among the Members in the following order and priority, in
each instance taking into account prior allocations of Net Income pursuant to
this Section:
(i) First, to the Members, pro rata in accordance with, and
to the extent of, prior allocations of Net Losses pursuant to Section
9.1(b)(iii) below;
(ii) Second, to ADR, to the extent of prior allocations of
Net Losses pursuant to Section 9.1(b)(ii) below; and
(iii) Thereafter, to the Members, pro rata in accordance with
their respective Percentages.
Notwithstanding clauses (i), (ii) and (iii) above, in the event that, upon a
sale of the Company pursuant to Section 10.2(e) below, ADR is entitled to
receive the Minimum Amount pursuant to Section 10.2(e)(i)(A) below or
$75,000,000 pursuant to Section 10.2(e)(i)(B) below, and the Members agree to
distribute the proceeds from such sale other than in accordance with their
respective Percentages, allocations of Net Income shall be made in proportion to
and to the extent of the amount of distributions to be received by each Member.
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(b) NET LOSSES. Net Losses and other items of deduction and loss
shall be allocated among the Members, in each instance taking into account prior
allocations of Net Losses pursuant to this Section:
(i) First, to the Members, pro rata in accordance with, and
to the extent of, prior allocations of Net Income pursuant to Section
9.1(a)(iii) above;
(ii) Second, to ADR, until the amount of Net Losses allocated
to ADR from inception equals the amount of Advances made by ADR (taking into
account any repayments to ADR in respect thereof); provided, however, that no
amounts shall be allocated to ADR under this Section 9.1(b)(ii) to the extent
that such amounts would be duplicative of items of loss or deduction allocated
to ADR pursuant to Section 9.2(d) below and not previously offset by other
Regulatory Allocations; and
(iii) Thereafter, to the Members, pro rata in accordance with
their respective Percentages.
(c) INTENT OF THE PARTIES. Subject to the last sentence of
Section 9.1(a) above, the parties intend that, on liquidation of the Company,
liquidation proceeds shall be distributed to the Members in accordance with
their respective Percentages after making the payments or provisions provided
for in Sections 11.4(a)(i) and (ii) below. Therefore, notwithstanding anything
to the contrary in this Agreement but subject to the last sentence of Section
9.1(a) above, in the event of a liquidation or planned liquidation of the
Company, items of income, gains, loss, deduction and credit will be allocated
among the Members to the extent necessary to effect the parties' intent.
9.2. REGULATORY ALLOCATIONS.
(a) Notwithstanding any other provision of this Agreement, Net
Loss (or items of deduction as computed for book purposes) shall not be
allocated to a Member to the extent that the Member has or would have, as a
result of such allocation, an Adjusted Capital Account Deficit. As used herein,
a Member's "ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean and refer to such
Member's Capital Account, increased by any amounts which such Member is
obligated to restore pursuant to the terms of this Agreement or is deemed to be
obligated to restore pursuant to the penultimate sentences of Regulation
Sections 1.704-2(g)(1) and 1.704-2(i)(5), and reduced by any adjustments,
allocations or distributions described in Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6). Any Net Loss (or items of deduction as
computed for book purposes) which otherwise would be allocated to a Member, but
which cannot be allocated to such Member because of the application of the
immediately preceding sentence, shall instead be allocated to the other Members,
in accordance with their respective Percentages, subject to the limitation
imposed by the immediately preceding sentence.
(b) In order to comply with the "qualified income offset"
requirement of the Regulations under Code Section 704(b), if a Member for any
reason (whether or not expected) has an Adjusted Capital Account Deficit, items
of Net Income (consisting of a pro rata portion of the items thereof) shall be
allocated to such Member in an amount and manner sufficient to eliminate as
quickly as possible the Adjusted Capital Account Deficit; provided, however,
that an allocation pursuant to this Section 9.2(b) shall be made only if and to
the extent that such Member would have an Adjusted Capital Account Deficit after
all other allocations provided for in this Agreement have been made.
(c) In order to comply with the "minimum gain chargeback"
requirements of Regulation Sections 1.704-2(f)(1) and 1.704-2(i)(4), and
notwithstanding any other provision of this
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Agreement to the contrary, in the event there is a net decrease in a Member's
share of Company minimum gain (as defined in Regulation Section 1.704-2(d)(1))
and/or Member nonrecourse debt minimum gain (as defined in Regulation Section
1.704-2(i)(2)) during a Company taxable year, such Member shall be allocated
items of income and gain for that year (and if necessary, for other years) as
required by and in accordance with Regulation Sections 1.704-2(f)(1) and
1.704-2(i)(4) before any other allocation is made.
(d) Notwithstanding any other provision of this Agreement, all
items of deduction and loss that, pursuant to Regulation Section 1.704-2(i), are
attributable to a nonrecourse debt for which a Member (or a Person related to
such Member under Treasury Regulation Section 1.752-4(b)) bears the economic
risk of loss (within the meaning of Regulation Section 1.752-2), shall be
allocated to such Member as required by Regulation Section 1.704-2(c). The
Members acknowledge and agree that all items of deduction or loss attributable
to funds advanced or loaned by ADR to the Company shall be allocated to ADR.
(e) Curative Allocations. The allocations set forth above in this
Section 9.2 (the "REGULATORY ALLOCATIONS") are intended to comply with certain
requirements of the Regulations. It is the intent of the Members that, to the
extent possible, all Regulatory Allocations shall be offset either with other
Regulatory Allocations or with special allocations of other items of Company
income, gain, loss or deduction pursuant to this Section 9.2(e). Therefore,
notwithstanding any other provision of this Agreement (other than the Regulatory
Allocations), the Members shall make such offsetting special allocations of
Company income, gain, loss or deduction in whatever manner they determine
appropriate so that, after such offsetting allocations are made, each Member's
Capital Account balance is, to the extent possible, equal to the Capital Account
balance such Member would have had if the Regulatory Allocations were not part
of this Agreement and all Company items were allocated pursuant to this
Agreement without regard to the Regulatory Allocations. In exercising their
discretion under this Section 9.2(e), the Members shall take into account future
Regulatory Allocations that, although not yet made, are likely to offset other
Regulatory Allocations previously made under this Section 9.2.
9.3. OTHER ALLOCATION RULES.
(a) Each separate item of income, deduction, credit, gain and
loss of the Company shall be allocated among the Members in the same proportion
as the portion of the total Net Income or Net Loss for the period which is
credited or charged to the Capital Account of each Member bears to the total Net
Income or Net Loss for such period. Notwithstanding anything to the contrary
herein, FieldCo shall not be allocated any Net Income on a cumulative basis,
taking into account prior allocations of Net Income and Net Loss, in excess of
the amount of cumulative Net Income that would have been allocated to FieldCo if
the Advances were treated as Capital Contributions. Nothing in the preceding
sentence shall cause the Advances to be treated as Capital Contributions for any
purpose other than calculating the limitation set forth in the preceding
sentence.
(b) If the Membership Interests of the Members change during a
year, Net Income or Net Loss for such year shall be allocated among the Members
on the basis of the computation method which in the reasonable discretion of ADR
is in the best interests of the Company, provided that such method is in
conformity with the methods prescribed by Code Section 706 and Regulation
Section 1.706-1(c)(2)(ii). Any transferee or assignee of a Membership Interest
shall succeed to the Capital Account of the transferor Member to the extent it
relates to the transferred interest.
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(c) Income, gain, loss and deductions of the Company shall,
solely for income tax purposes, be allocated among the Members in accordance
with Code Section 704(c) so as to take account of any difference between the
adjusted basis of the assets of the Company for federal income tax purposes and
their respective adjusted book values, and otherwise shall be allocated in the
same manner as the related book items were allocated pursuant to Section 9.1
above, any allocations required by Code Section 704(c) shall be effectuated
using any method chosen by ADR and described in Regulation Section 1.704-3.
ARTICLE 10.
TRANSFER RESTRICTIONS
10.1. TRANSFERS OF INTERESTS GENERALLY.
(a) Subject to Section 10.2 below, no Member may Transfer all or
any part of such Member's Membership Interest without the consent a Majority in
Interest (excluding for this purpose the proposed transferor), which consent may
be withheld for any reason whatsoever; provided, however, that:
(i) a Member may Transfer, without consent, all or any of
such Member's Membership Interest to a Permitted Transferee, provided such
Member retains all voting rights with respect to such Membership Interest and
provided, further, that such Permitted Transferee shall not be permitted to
further Transfer its Membership Interest unless such Permitted Transferee's
transferee would be deemed a Permitted Transferee of the original transferor;
(ii) on behalf of the Company, FieldCo may Transfer, without
consent, Units held by FieldCo and representing an aggregate Percentage not
greater than 20% to one or more Officers or other employees of the Company (the
identity of each of whom shall be subject to the reasonable approval of ADR), by
way of granting Units and/or options to purchase Units, which options become
exercisable during the term of employment (any such Transfer, a "FIELDCO
COMPENSATORY TRANSFER"); provided, however, that the foregoing shall not
obligate FieldCo to make any FieldCo Compensatory Transfers; and provided,
further, that no recipient of a FieldCo Compensatory Transfer shall have any
right to vote under this Agreement unless ADR shall approve, in its sole
discretion, the granting of voting rights to such recipient.
(iii) on behalf of the Company, ADR may Transfer, subject to
the reasonable consent of FieldCo, Units held by ADR and representing an
aggregate Percentage not greater than 20% to Persons providing the Company with
financing or services or support for which the Company would otherwise have had
to pay cash, by way of granting Units subject to divestiture upon failure to
provide financing, services or support and/or options to purchase Units, which
options become exercisable based upon provision of financing, services or
support (any such Transfer, an "ADR COMPENSATORY TRANSFER"); provided, however,
that the foregoing shall not obligate ADR to make any ADR Compensatory
Transfers; and provided, further, that no recipient of an ADR Compensatory
Transfer shall have any right to vote under this Agreement unless FieldCo shall
approve, in its sole discretion, the granting of voting rights to such
recipient.
(b) No assignee of Units shall have voting rights or any other
voice in the management of the Company unless such assignee shall have been
admitted as a Member. Any Transfer of any Membership Interest in violation of
this Article 10 shall be null and void and of no effect for any purpose.
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(c) Notwithstanding anything to the contrary contained in this
Agreement, no Transfer of a Membership Interest, or Transfer of an indirect
interest in the Company shall be made if such Transfer, or the transferee's, as
the case may be, ownership of such Membership Interest or indirect interest in
the Company, would:
(i) result by itself, or in combination with any other
previous Transfers, in the termination of the Company as a partnership for
federal income tax purposes;
(ii) result in the violation of the Securities Act, or any
other applicable federal or state laws;
(iii) be a violation of or a default (or an event that, with
notice or the lapse of time or both, would constitute a default) under, or
result in an acceleration of any indebtedness under, any note, mortgage, loan
agreement or similar instrument or document to which the Company is a party;
(iv) result in or create a "prohibited transaction" or cause
the Company or a Member to be or become a "party in interest", as such terms are
defined in Section 3(3) of ERISA, or a "disqualified person", as defined in
Section 4975 of the Code, with respect to any "plan", as defined in Section
3(14) of ERISA and/or Section 4975 of the Code; or result in or cause the
Company or any Member to be liable for tax under Chapter 42 of the Code;
(v) be a Transfer to an individual who is not legally
competent or who has not achieved his or her majority under the law of the state
(excluding trusts for the benefit of minors);
(vi) cause the Company or any Member (other than the
transferee) to be subject to any excise tax pursuant to Chapter 42A of Subtitle
D of the Code; or
(vii) be a Transfer to a "tax-exempt entity" or a "tax-exempt
controlled entity" within the meaning of Sections 168(h)(2) and
168(h)(6)(F)(ii), respectively, of the Code.
(d) Notwithstanding anything in this Agreement to the contrary,
no Transfer shall be permitted unless the Units to be transferred are (i) not
subject to the Securities Act, (ii) registered pursuant to the Securities Act
and registered or qualified under applicable state law, or (iii) Transferred in
a transaction that is exempt from such registrations and qualification. The
Company may require an opinion of counsel, in a form reasonably acceptable to
the Company, to the effect that such Transfer may be made pursuant to clauses
(i) or (iii) above, describing the applicable rationale, the cost of which
opinion should shall be an expense borne by the transferor.
The Company shall not Transfer on its books any Membership Interest, unless, in
the opinion of counsel to the Company, there has been compliance with all of the
material conditions hereof affecting the Membership Interest.
10.2. SALE OF THE COMPANY. Notwithstanding Section 10.1(a) above, each
Founding Member shall have the right to initiate the sale procedure set forth in
this Section 10.2 (the "SALE PROCEDURE"), subject to the procedures and
limitations set forth in this Section 10.2. The applicable Founding Member
initiating the Sale Procedure is referred to herein as the "INITIATING MEMBER,"
and the other Founding Member participating in said procedure is referred to
herein as the "OTHER MEMBER."
(a) Initiating Member Eligibility.
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(i) FieldCo as Initiating Member. So long as the Field Term
shall not have terminated due to a Covered Field Termination, Field's Disability
or Field's death, or a termination by Field for Good Reason following a Funding
Default, FieldCo shall have the right to be the Initiating Member at any time
during which the Sale Procedure is not otherwise in effect and:
(A) after the third anniversary of the Effective Date
but before the Buy/Sell Date;
(B) after the Buy/Sell Date; or
(C) following a Funding Default.
(ii) ADR as Initiating Member. ADR shall have the right to be
the Initiating Member at any time during which the Sale Procedure is not
otherwise in effect and
(A) after the Buy/Sell Date, so long as ADR shall not
have committed a Funding Default, or
(B) following the date Field's employment with the
Company terminates due to a Covered Field Termination, Field's Disability or
Field's death, or due to a termination by Field for Good Reason following a
Funding Default.
(b) Early Initiation by FieldCo. If FieldCo is the Initiating
Member prior to the Buy/Sell Date but not following a Funding Default, FieldCo
shall first be required to comply with the first offer procedure set forth in
this Section 10.2(b).
(i) FieldCo first shall give written notification (the "EARLY
INITIATION NOTICE") to the Company and ADR indicating that FieldCo desires to
sell all of its Units and is initiating the Sale Procedure pursuant to this
Section 10.2(b). Within thirty (30) days of the date the Early Initiation Notice
is given, ADR shall have the right to make an offer to purchase all (but not
less than all) of the Units of FieldCo, which offer shall include the price and
the material terms upon which ADR is willing to make such purchase (the "EARLY
OFFER"). If ADR fails to deliver the Early Offer within such thirty (30) day
period, ADR shall be deemed to have waived its right to make the Early Offer and
FieldCo may seek a forced sale of the Company pursuant to Section 10.2(e) below.
(ii) FieldCo shall have ninety (90) days from the date the
Early Offer is given to agree, by giving notice to ADR, to sell all (but not
less than all) of the Units of FieldCo for the price and upon the terms of the
Early Offer. If FieldCo does not accept the Early Offer within such ninety (90)
day period, it shall be deemed to have rejected the Early Offer. If FieldCo
rejects or is deemed to have rejected the Early Offer, it may seek a forced sale
of the Company pursuant to Section 10.2(e) below.
(c) Unless Section 10.2(b) above shall be applicable, the
Initiating Member first shall give written notification (the "INITIATION
NOTICE") to the Company and the Other Member indicating that the Initiating
Member is initiating the Sale Procedure pursuant to this Section 10.2(c). If
FieldCo is the Initiating Member pursuant to Section 10.2(a)(i)(B) above or ADR
is the Initiating Member pursuant to Section 10.2(a)(ii)(A) above, the
Initiating Member shall include in the Initiation Notice a proposed valuation of
the entire Company (the "BASE VALUE"). If FieldCo is the Initiating Member
pursuant to Section 10.2(a)(i)(C) above, or ADR is the Initiating Member
pursuant to Section 10.2(a)(ii)(B) above, then the Initiating Member's
Initiation Notice need not include the Base Value, and the Other Member shall,
within thirty (30) days after the Initiation Notice is given, give
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notice to the Initiating Member (the "RESPONSE NOTICE") setting forth the Base
Value. If the Other Member fails to deliver the Response Notice within such
thirty (30) day period, the Initiating Member may seek a forced sale of the
Company pursuant to Section 10.2(e) below. The notice containing the Base Value
is referred to herein as the "BASE VALUE NOTICE;" the Founding Member that gives
the Base Value Notice is referred to herein as the "BASE VALUE NOTICE
DELIVERER;" and the Founding Member that receives the Base Value Notice is
referred to herein as "BASE VALUE NOTICE RECIPIENT."
The Base Value Notice Recipient shall have the right, by giving notice
(the "ELECTION NOTICE") to the Base Value Notice Deliverer, within ninety (90)
days after the Base Value Notice is given, to elect to do one of the following:
(i) Purchase all (but not less than all) of the Units held by
the Base Value Notice Deliverer (and its Permitted Transferees) for a purchase
price equal to the Base Value times 100% of the Base Value Notice Deliverer's
Percentage (plus the Percentages held by its Permitted Transferees);
(ii) Sell all (but not less than all) of the Units held by
the Base Value Notice Recipient (and its Permitted Transferees) for a purchase
price equal to the Base Value times the Percentage of the Base Value Notice
Recipient (and its Permitted Transferees); or
(iii) Reject the Base Value Notice, which shall allow the
Initiating Member (which may be the Base Value Notice Recipient) to seek a
forced sale of the Company pursuant to Section 10.2(e) below.
If the Base Value Notice Recipient fails to deliver the Election Notice
within the ninety (90) day period following receipt of the Base Value Notice,
the Base Value Notice Recipient shall be deemed to have rejected the Base Value
Notice and the Initiating Member (which may be the Base Value Notice Recipient)
shall be entitled to seek a forced sale of the Company pursuant to Section
10.2(e) below.
(d) Conditions to Transfers of Units between Founding Members.
Any Transfer of Units between the Founding Members pursuant to this Section 10.2
shall be subject to the following terms and conditions:
(i) The Founding Member that has the right to purchase Units
may assign this right, in whole or in part, to the Company, to the extent the
Company's exercise of such right would be permitted by applicable law (including
any fraudulent conveyance law), in which case any decision to be made by the
Company pertaining to such right shall be made without the vote or approval of
the Member seeking to sell Units.
(ii) Unless the Founding Members shall agree otherwise, the
closing of any Transfer between the Founding Members pursuant to this Section
10.2 shall occur no more than sixty (60) days following (A) the acceptance of
the Early Offer or (B) the date the Election Notice is given, as applicable.
(iii) In connection with the closing of any Transfer between
the Founding Members pursuant to this Section 10.2, the purchaser shall have the
right, but not the obligation, to purchase the Units of all other Members (and
their assignees) for the price and upon the terms applicable to the sale by the
applicable Founding Member.
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(e) Right to Seek Forced Sale. If (A) ADR shall waive or be
deemed to have waived its right to make the Early Offer pursuant to Section
10.2(b)(i) above, (B) FieldCo shall reject or be deemed to have rejected the
Early Offer pursuant to Section 10.2(b)(ii) above, (C) the Other Member shall
fail to deliver the Response Notice pursuant to Section 10.2(c) above; or (D)
the Base Value Notice Recipient shall reject or be deemed to have rejected the
Base Value Notice pursuant to Section 10.2(c) above, then the Initiating Member
(which may be the Base Value Notice Recipient) shall be entitled to cause a sale
of the entire Company pursuant to the procedure set forth in this Section
10.2(e) at any time prior to the date one hundred eighty (180) days following
the date the Initiating Member becomes so entitled. If the Initiating Member
fails to consummate such a sale prior to said date, if applicable, the
procedures set forth in Section 10.2(b) above and/or Section 10.2(c) above, as
applicable, shall again apply. In this regard, after complying with the
applicable procedure set forth in Sections 10.2(b) or 10.2(c) above, if
applicable, the Initiating Member may cause a sale of the entire Company
(whether by way of purchase of assets or Units, merger or other form of
transaction) to any Person so long as the procedures and conditions set forth in
this Section 10.2(e) are satisfied (or the satisfaction thereof is waived by the
applicable Founding Member).
(i) If FieldCo is seeking to cause a sale of the entire
Company after delivering an Early Initiation Notice pursuant to Section 10.2(b)
above, then each of the following conditions must be satisfied:
(A) The price applicable to such sale must be sufficient
to cause ADR to receive, in respect of each of its Units, an amount (the
"MINIMUM AMOUNT") equal to the per Unit consideration specified in the Early
Offer, if applicable; provided, however, that the satisfaction of this condition
may be waived by ADR; and provided, further, that, if FieldCo is receiving, in
respect of its Units, less than the Minimum Amount, then ADR must have the right
to elect to receive, in lieu of the Minimum Amount, the same consideration in
respect of its Units (subject only to such proportionate adjustment as shall be
required to reflect any difference between the number of Units held by ADR and
the number of Units held by FieldCo). In comparing the price applicable to such
sale to the price set forth in the Early Offer, any non-financial terms that
cannot be performed as readily by ADR as any other potential purchaser shall be
disregarded.
(B) ADR must receive not less than $75,000,000 in respect
of its Units if: (1) ADR shall have waived or be deemed to have waived its right
to make the Early Offer pursuant to Section 10.2(b) above; (2) such sale is to
occur prior to the fifth anniversary of the Effective Date; and (3) ADR shall
not have committed a Funding Default; provided, however, that the satisfaction
of these conditions may be waived by ADR.
(ii) Regardless of who is the Initiating Member, if ADR is
selling it Units, it must receive payment in full under the Loan and Security
Agreement; provided, however, that the satisfaction of this condition may be
waived by ADR.
(iii) Regardless of who is the Initiating Member, the Other
Member must have the right to reasonably approve terms of sale to the extent
they would afford the Initiating Member or its Affiliates any advantage not
shared by the Other Member (including, if FieldCo is the Initiating Member, the
terms of any continued employment of Field).
(iv) Regardless of who is the Initiating Member, the Other
Member must have the right to reasonably approve the payment terms and
conditions if the consideration in such sale includes anything other than cash
paid in full upon closing; provided, however, that the satisfaction of this
condition may be waived by the Other Member.
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(v) Regardless of who is the Initiating Member, subject to
Section 6.2(c) above, ADR must have the right to obtain, upon arm's length terms
negotiated with the acquiror in good faith, the nonexclusive right to exploit
via Electronic Transmissions those Recordings to which the Company has rights
immediately prior to such sale, as well as any Recordings subsequently created
by any recording artist that is a party to a recording agreement with the
Company immediately prior to such sale ("ELECTRONIC TRANSMISSION RIGHTS");
provided, however, that ADR may be obligated to waive Electronic Transmission
Rights as set forth below.
If each of the above conditions is satisfied, or waived by the applicable Person
(in its sole discretion, except as set forth below), then at the request of the
Initiating Member, the Other Member and all other Members (and their assignees)
shall sell or otherwise Transfer all of their respective Units to the acquiror
on the same terms and conditions that apply to the sale or other Transfer by the
Initiating Member. Notwithstanding the preceding sentence, if ADR's obtaining
Electronic Transmission Rights causes a reduction in the amount received by
FieldCo and its Permitted Transferees for their respective Units, then, subject
to the final sentence of this paragraph, upon receipt of all consideration due
to ADR in connection with such sale, ADR shall pay FieldCo and its Permitted
Transferees, pro rata in proportion to their respective Percentages, an amount
(the "COMPENSATORY PAYMENT") equal to the product of (x) the aggregate
Percentage of FieldCo and its Permitted Transferees immediately prior to such
sale and (y) the amount, if any, by which said reduction exceeds 7.5% of the
aggregate amount that FieldCo and its Permitted Transferees would receive in the
absence of ADR's having the right to obtain Electronic Transmission Rights.
Furthermore, subject to the final sentence of this paragraph, if ADR shall not
have sufficient funds to make the Compensatory Payment, or if ADR's right to
obtain Electronic Transmission Rights would altogether prevent a sale of the
Company, then ADR shall be obligated to waive said right. Notwithstanding the
preceding two sentences, if the acquiror is a Direct AD Competitor, then, (1)
ADR shall have no obligation to make the Compensatory Payment and (2) if ADR's
right to obtain Electronic Transmission Rights would altogether prevent a sale
of the Company to said Direct AD Competitor, ADR shall have the right, in its
sole discretion, to prevent such sale.
All Members shall agree to timely take such other actions as the
Initiating Member reasonably requests in connection with the approval of the
consummation of a sale or other Transfer in which they are obligated to
participate pursuant to this Section 10.2(e), including, voting all of their
Units in favor of such sale, waiving any dissenters' rights, and executing such
agreements, powers of attorney, voting proxies or other documents and
instruments as may be necessary or desirable to consummate such sale or other
Transfer; provided, however, that in connection with any such sale or other
Transfer, the Members: (A) shall be required to make only such substantially
similar representations and warranties, and agree to such substantially similar
covenants and indemnities, as the Initiating Member is required to make or agree
to; (B) shall make representations, warranties, covenants and indemnities
pertaining to themselves severally, and not jointly; and (C) shall be liable
only severally, and not jointly, with other Members, for breaches of
representations, warranties, covenants and agreements of or (in the case of
representations and warranties) pertaining to the Company and its subsidiaries,
and for indemnification obligations arising out of or relating to any such
breach or otherwise pertaining to the Company and its subsidiaries, on a pro
rata basis with respect to those Members making representations and warranties,
such liability of each Member not to exceed such Member's pro rata portion of
the gross proceeds of such sale.
(f) Condition to Closing of any Sale. Upon the closing of any
transaction pursuant to this Section 10.2: (i) ADR, or AD, as applicable, shall
repay to FieldCo or Field, as applicable, 100% of any sums then owing by ADR or
AD and due to FieldCo or Field under this Agreement, the Field Employment
Agreement, the AD Employment Agreement or any other agreement between ADR and/or
AD, on the one hand, and FieldCo and/or Field, on the other hand or their
respective
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Affiliates; and (ii) FieldCo or Field, as applicable, shall repay to ADR or AD,
as applicable, 100% of any sums then owing by FieldCo or Field and due to ADR or
AD, under this Agreement, the Field Employment Agreement, the AD Employment
Agreement or any other agreement between ADR and/or AD, on the one hand, and
FieldCo and/or Field, on the other hand or their respective Affiliates.
Repayment of the foregoing sums shall be a condition precedent to any such
closing. If the Other Member is purchasing the Initiating Member's Units, the
Other Member shall have the right to offset and deduct any amounts owing and due
as described in this Section 10.2 from the amount of the purchase price for such
Units.
10.3. SUBSTITUTE MEMBERS.
(a) Notwithstanding anything to the contrary herein, the assignee
or purchaser of a Membership Interest shall have the right to become a
substituted Member in the Company only if (1) the assignor or seller so provides
in an instrument of assignment, (2) the assignee or purchaser agrees in writing
to be bound by the terms of this Agreement, (3) the Members consent to such
admission pursuant to Section 4.3 above and (4) the assignee or purchaser pays
the reasonable costs incurred by the Company in preparing and recording any
necessary amendments to this Agreement and the Certificate of Formation unless
the Company consents to waiving such costs.
(b) Any transferee who is not admitted as a Member in accordance
with Sections 4.3 and 10.3 above shall be considered an assignee for purposes of
this Agreement. An assignee shall be deemed to have had assigned to it, and
shall be entitled to receive, distributions from the Company and the shares of
income, gain, loss, deduction and credit of the Company attributable to the
Membership Interest assigned to such transferee as provided in this Agreement.
No assignee shall be deemed to be a Member for any other purpose under this
Agreement, and shall not be entitled to vote such Membership Interest in any
matter presented to the Members for a vote unless such assignee is admitted to
the Company as a Member. In the event any such transferee desires to make a
further assignment of any such Membership's Interest, such transferee shall be
subject to the provisions of this Article 10 to the same extent and in the same
manner as any Member desiring to make an assignment of his or her Membership
Interest.
ARTICLE 11.
DISSOLUTION; WITHDRAWAL; LIQUIDATION
11.1. DISSOLUTION.
(a) The Company shall dissolve, without further action of the
Members, upon, but not before, the first to occur of the following:
(i) The affirmative vote of a Majority in Interest;
(ii) The disposition of all or substantially all of the
assets of the Company in a transaction other than a sale-leaseback or an
installment sale transaction; or
(iii) A decree of judicial dissolution pursuant to Section
18-802 of the Act.
(b) The Withdrawal of any Member shall not cause a dissolution of
the Company.
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(c) Upon dissolution of the Company, the Company shall
immediately commence to wind up its affairs and a liquidator appointed by a
Majority in Interest shall proceed with reasonable promptness to liquidate the
business of the Company.
(d) During the period of the winding up of the affairs of the
Company, the rights and obligations of the Members shall continue.
11.2. NOTICE AND EFFECTIVE DATE OF WITHDRAWAL.
(a) Within ten (10) days after the Withdrawal of any Member, such
Person (or such Person's legal representative or other successor in interest)
shall give notice to the Company of such Withdrawal. For the avoidance of doubt,
subject to Section 15.8 below, if an individual Member dies or is judged legally
incompetent, then, such Member's executor, administrator, guardian or other
legal representative may exercise such Member's rights hereunder for the purpose
of settling the estate or administering such Member's property. Similarly,
subject to Section 15.8 below, if a Member that is a corporation, trust or other
entity is dissolved or terminated, then such Member's rights hereunder may be
exercised by its legal representatives or successor.
(b) Except for the Bankruptcy of a Member, which shall result in
an immediate Withdrawal thereof, any other Withdrawal shall, in the absence of
notice of such Withdrawal as required in this Section 11.2(b), be deemed to
occur upon the date the Company has actual notice of such Withdrawal.
11.3. WITHDRAWAL OF A MEMBER.
(a) No Voluntary Withdrawal. No Member shall have the right or
power to Voluntarily Withdraw from the Company without the prior consent of a
Majority in Interest. Notwithstanding the preceding sentence, the Members shall
not withhold consent to the withdrawal of any Member if such Member has
transferred all of its Membership Interest to a Person who has been admitted to
the Company as a substitute Member in accordance with Section 10.3 above.
(b) Consequences of Bankruptcy. Immediately upon the Bankruptcy
of a Member, unless the Company is dissolved and not continued pursuant to the
provisions of this Agreement, the successor of the withdrawn Member shall
thereupon become an assignee but not have the right to vote or exercise any
other rights of a Member unless admitted as a Member pursuant to the terms of
this Agreement.
11.4. LIQUIDATION.
(a) The Company shall terminate after its affairs have been wound
up and its assets fully distributed in liquidation (the "LIQUIDATION") as
follows:
(i) first, to the payment of the debts and liabilities of the
Company (whether to any Member or its Affiliates, as in the case of Advances and
interest to ADR, or otherwise) and the expenses of Liquidation;
(ii) second, to the setting up of any reserves that a
Majority in Interest may deem reasonably necessary for any contingent or
unforeseen liabilities or obligations of the Company; and
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(iii) third, to the Members in accordance with their
respective positive Capital Account balances. The Company will make liquidating
distributions prior to the end of the taxable year in which the Liquidation
occurs, or, if later, within ninety (90) days of the date of Liquidation.
(b) No Member shall have any right to demand property other than
cash upon dissolution and termination of the Company. No Member shall have the
right to demand the dissolution or termination of the Company.
(c) If a Majority in Interest determines that any assets should
be distributed in kind, such assets shall be distributed to the Members entitled
thereto in the same amounts, sequence and priority as if the distribution were
in cash. Such assets shall be valued at their then Fair Market Value.
11.5. DEFICIT CAPITAL ACCOUNT. Upon a liquidation of the Company within
the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations, if any Member
has a negative Capital Account (after giving effect to all contributions,
distributions, allocations and other adjustments for all Fiscal Years, including
the Fiscal Year in which such liquidation occurs), such Member shall have no
obligation of make any Capital Contribution, and the negative balance of any
Capital Account shall not be considered a debt owed by such Member to the
Company or to any other Person for any other purpose.
11.6. CANCELLATION OF CERTIFICATE OF FORMATION OF THE COMPANY. Upon the
completion of the Liquidation, the liquidator appointed by a Majority in
Interest shall cause the cancellation of the Certificate of Formation.
ARTICLE 12.
COMPANY PROPERTY
12.1. COMPANY PROPERTY. The Company's property shall consist of all its
assets and funds. Title to the Company's property may be taken and held only in
the name of the Company or in such other name or names as shall be determined by
a Majority in Interest; provided, however, that if title is held other than in
the name of the Company, the Person or Persons who hold title shall certify by
instrument duly executed and acknowledged, in form for recording or filing, that
title is held as nominee and/or trustee for the benefit of the Company pursuant
to the terms of this Agreement and an executed copy of such instrument shall be
delivered to each Member. All property now or hereafter owned by the Company
shall be deemed owned by the Company as an entity and no Member, individually,
shall have any ownership of such property.
12.2. PROHIBITION AGAINST PARTITION. Each Member hereby permanently
waives and relinquishes any and all rights it may have to cause all or any part
of the Company's property to be partitioned, it being the intention of the
Members to prohibit any Member from bringing a suit for partition against the
other Members.
ARTICLE 13.
RECORDS AND ACCOUNTING; FISCAL AFFAIRS
13.1. BANK ACCOUNTS. All of the Company's funds shall be deposited in
such bank or accounts as shall be designated by a Majority in Interest.
Withdrawals from any such bank account
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shall be made upon the signature of the Chief Executive Officer, or the
designees of the Chief Executive Officer, and shall be made only for the
purposes of the Company.
13.2. BOOKS AND RECORDS.
(a) The Company shall cause to be maintained full and accurate
books and records, in accordance with the Company's accounting policies
consistently applied, at the principal place of business of the Company or such
other place as a Majority in Interest so agrees, showing all receipts and
expenditures, assets and liabilities, Net Income or Net Loss, and all other
records necessary for recording the Company's business and affairs, including
those sufficient to record the allocations and distributions provided for in
this Agreement. The books and records shall, upon reasonable prior notice to the
Company, be open for inspection and copying by any Member or such Member's duly
authorized representatives during regular business hours at such principal place
of business. Any expense for any inspection or copying shall be borne by the
Member causing such inspection or copying to be conducted. Any information
obtained by a Member with respect to the affairs of the Company shall, except as
may be required by law, be kept strictly confidential.
(b) The Company shall deliver to each Member, as soon as
practicable, but in any event within ninety (90) days after the end of each
fiscal year of the Company, financial statements, including an income statement
of the Company for such period and a balance sheet and statement of the Units
held by each Member or assignee as of the end of such period.
(c) The Company will endeavor to provide each Member, within
seventy-five (75) days after the end of each Fiscal Year, but in any event on or
before the due date for filing the federal return of income for the Company,
with all necessary tax reporting information, a copy of the Company's
informational federal income tax return for such Fiscal Year and such other
information as is reasonably necessary to enable the Members to comply with
their tax reporting requirements.
13.3. TAX STATUS. Each Member hereby recognizes and intends that the
Company will be treated as a partnership for federal and state income tax
purposes and will be subject to all provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code. No Member shall take any action or make any election,
which would be inconsistent with the foregoing intention.
13.4. TAX RETURNS; ELECTIONS.
(a) The Company shall use all reasonable efforts to cause the
Company's accountants to prepare and make timely filings of all tax returns and
statements, which the accountants determine, must be filed on behalf of the
Company with any taxing authority. Copies of such returns shall be kept at the
Company's principal place of business or at such other place as the ADR shall
determine and shall be available for inspection by the Members or their duly
authorized representatives during regular business hours.
(b) The TMP may make such elections required or permitted to be
made by the Company for tax purposes, including an election under Section 754 of
the Code, in such a manner as the TMP, in consultation with the Company's
attorneys or accountants, shall determine.
(c) No Member shall take any action or refuse to take any action
that would cause the Company to forfeit the benefits of any tax election
previously made or agreed to be made by the Company.
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13.5. TAX MATTERS PARTNER. Pursuant to Section 6231(a)(7)(A) of the
Code, ADR is hereby designated as the "TAX MATTERS PARTNER" or "TMP" of the
Company for all purposes of the Code and for the corresponding provision of any
state or local statute. Upon a Funding Default, ADR shall be removed as the TMP
and FieldCo shall be designated as the TMP. The TMP shall have all of the powers
and obligations of a tax matters partner pursuant to the Code or under this
Agreement. Consistent with this Agreement, at the Company's expense, the Tax
Matters Partner shall make all decisions for the Company relating to federal,
state and local tax matters including, without limitation, whether to make any
tax elections, the positions to be taken on the Company's tax returns and the
settlement or further contest or litigation on any audit matters raised by the
Internal Revenue Service or any other taxing authority; and ADR shall consult
with FieldCo in connection therewith, provided that ADR's inadvertent failure to
do so shall not be deemed a breach hereof, and ADR's final decision shall be
binding in the event of a dispute. The Tax Matters Partner shall incur no
liability to the Company or the other Members for actions taken in its capacity
as Tax Matters Partner including, but not limited to, liability for any
additional taxes, interest or penalties owed by the other Members due to
adjustments of Company items of income, gain, loss or deduction at the Company
level. The Tax Matters Partner shall furnish to each other Member a copy of all
notices or other written communications received by the Tax Matters Partner from
the Internal Revenue Service or any state or local taxing authority (except such
notices or communications as are sent directly to the Members). Each Member
agrees with respect to each Company income tax return that is prepared and filed
in compliance with the provisions of this Agreement that such Member shall not
(a) treat on its income tax returns any item of income, gain, loss, deduction or
credit relating to its interest in the Company in a manner inconsistent with the
treatment of such item by the Company reflected on Form K-1 or any other
information statement furnished by the Company to such Member for use in
preparing such Member's income tax returns or (b) file any claim for refund
relating to any such item based on, or which would result in, such inconsistent
treatment. This Section 13.5 shall survive any termination of this Agreement and
any Transfer by or Withdrawal of a Member.
ARTICLE 14.
REPRESENTATIONS AND COVENANTS
14.1. GENERAL MEMBER REPRESENTATIONS. Each Member hereby represents and
warrants to the Company and each other Member that: (i) that the Member is
acquiring the Member's interest in the Company for the Member's own account as
an investment and without an intent to distribute the interest in violation of
applicable securities laws; and (ii) the Member acknowledges that the Membership
Interests have not been registered under the Securities Act, or any state
securities laws, and may not be resold or transferred by the Member without
appropriate registration or the availability of an exemption from such
requirements.
14.2. ADR REPRESENTATIONS.
(a) ADR represents and warrants, as of the execution hereof and
subject to the satisfaction of the conditions set forth in the Side Letter, each
of the following: (i) ADR and AD are duly organized, validly existing
corporations, in good standing under the laws of the State of Delaware, and ADR
has all necessary power and authority to enter into, and to perform its
obligations under, this Agreement; (ii) this Agreement has been duly authorized
by ADR and, upon execution, will constitute a legal, valid and binding
obligation of ADR, enforceable against ADR in accordance with its terms, except
(A) as such enforceability may be limited by or subject to any bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally, (B) as such obligations are subject to general
principles of equity and (C) as rights to
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indemnity may be limited by federal, state or local securities laws or by public
policy; and (iii) the execution, delivery and performance of this Agreement by
ADR does not and will not (A) violate, conflict with or result in the breach of
any provision of ADR's or AD's Certificate of Incorporation or Bylaws or any law
or order of any court or other governmental authority applicable to ADR, AD or
any of their respective assets, properties or business; or (B) conflict with,
result in any breach of, constitute a default (or event which with the giving of
notice or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in the
creation of any encumbrance on any of the capital stock or on any of the assets
or properties of ADR or AD pursuant to any note, bond, mortgage or indenture,
contract, agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which ADR or AD is a party or by which any of such
interests or any of such assets or properties are bound or affected.
(b) ADR further represents and warrants that, as of the date
hereof, AD and/or its Permitted Transferees own (directly or beneficially) 100%
of the outstanding shares of capital stock of ADR, which, absent the prior
consent of FieldCo for so long as FieldCo shall remain a Member, which consent
may be withheld for any reason whatsoever, the foregoing shall remain true for
so long as AD, ADR and/or their respective Permitted Transferees have any direct
or beneficial interest in the Company; provided, however, that AD may transfer
shares of capital stock of ADR, and ADR may issue shares of capital stock of ADR
or interests derivative thereof (e.g., options to acquire shares of capital
stock of ADR or "phantom" interests in the net profits of ADR) to employees of
AD, ADR or their respective Permitted Transferees, so long as such shares or
interests do not entitle the holders thereof to an interest in more than 20% of
the capital or profits of ADR.
14.3. FIELDCO REPRESENTATIONS, COVENANTS AND AGREEMENTS.
(a) FieldCo represents and warrants that, as of the date hereof:
FieldCo is a duly organized, validly existing limited liability company, in good
standing, under the laws of the State of Delaware. Field is an individual with
his current principal place of residence in the State of California, and FieldCo
and Field have all necessary power and authority to enter into, and to perform
their obligations under this Agreement. This Agreement has been duly authorized
by FieldCo and, upon execution, subject to the satisfaction of the conditions
set forth in the Side Letter, will constitute a legal, valid and binding
obligation of FieldCo and Field, as the case may be, enforceable against each of
them in accordance with their respective terms except (i) as such enforceability
may be limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally, (ii) as
such obligations are subject to general principles of equity and (iii) as rights
to indemnity may be limited by federal, state or local securities laws or by
public policy. The execution, delivery and performance of this Agreement and all
related agreements by FieldCo and Field, as the case may be, do not and will
not: (A) violate, conflict with or result in the breach of any provision of
FieldCo's Certificate of Formation or limited liability company agreement or any
law or order of any court or other governmental authority applicable to FieldCo
or Field, or any of their respective assets, properties or business; or (B)
conflict with, result in any breach of, constitute a default (or event which
with the giving of notice or lapse of time, or both, would become a default)
under, require any consent under, or give to others any rights of termination,
amendment, acceleration, suspension, revocation or cancellation of, or result in
the creation of any encumbrance on any of the Membership Interests or other
equity interests or on any of the assets or properties of FieldCo or Field
pursuant to any note, bond, mortgage or indenture, contract, agreement, lease,
sublease, license, permit, franchise or other instrument or arrangement to which
FieldCo or Field is a party or by which any of such interests or any of such
assets or properties are bound or affected. FieldCo and Field have provided ADR
with copies of all written contracts and have disclosed to ADR the terms of all
material oral agreements to which any of them or any Affiliate is a party or has
any
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obligation (1) with composers, lyricists, singers, musicians, or any other
Person, in each case, directly relating to the production, manufacture or
distribution of musical Recordings, (2) related to any indebtedness for borrowed
money of FieldCo, or for which FieldCo is liable for repayment, (3) that limit
or purport to limit the ability of FieldCo, Field or any of their respective
Affiliates to compete in the Record Label Business, or (4) the performance of
which would, or could reasonably be expected to have a material adverse effect
on the business or financial condition of FieldCo, the Company, ADR or AD (all
such contracts and pre-existing obligations are listed on Schedule 14.3).
(b) FieldCo further warrants, represents and covenants that:
(i) As of the date hereof, FieldCo engages in no business or
activity (and has no assets), other than the investment in the Company and cash
investments (or cash equivalents, money market accounts or publicly traded
securities), and, absent the prior consent of ADR, which may be withheld for any
reason whatsoever, the foregoing shall remain true for so long as Field, FieldCo
and/or its Permitted Transferees have any direct or beneficial interest in the
Company;
(ii) As of the date hereof, Field and/or his Permitted
Transferees own (directly or beneficially) 100% of the membership interests in
FieldCo, which membership interest provides Field and/or his Permitted
Transferees with a 100% ownership and economic interest in FieldCo and, absent
the prior consent of ADR for so long as ADR shall remain a Member, which consent
may be withheld for any reason whatsoever, the foregoing shall remain true for
so long as Field, FieldCo and/or its Permitted Transferees have any direct or
beneficial interest in the Company; provided, however, that FieldCo may issue
membership interests in FieldCo or other interests derivative thereof (e.g.,
"phantom" interests in the net profits of FieldCo) to employees of the Company,
so long as such interests do not entitle the holders thereof to an interest in
more than 20% of the capital or profits of FieldCo; and provided, further, that
FieldCo may convert into a corporation so long as it notifies ADR promptly
following the occurrence of such a conversion. In the event FieldCo is converted
into a corporation, the covenants and restrictions set forth in this Section
14.3(b) shall remain applicable, all references to FieldCo shall be deemed to
refer to said corporation, and all references to membership interests of FieldCo
shall be deemed to refer to stock of said corporation;
(iii) As of the date hereof, Field's membership interest in
FieldCo is validly issued, fully paid and non-assessable; and
(iv) As of the date hereof, Field and his Permitted
Transferees have the sole control over, and all voting rights with respect to
the exercise by FieldCo of, all voting rights, consent rights, rights of
approval and like rights and power under this Agreement and all related
agreements, and, absent the prior consent of ADR for so long as ADR shall remain
a Member, which consent may be withheld for any reason whatsoever, neither
FieldCo nor Field shall voluntarily cause or allow the foregoing to cease to
remain true for so long as Field, FieldCo and/or its Permitted Transferees have
any direct or indirect interest in the Company;
14.4. ADDITIONAL AGREEMENTS. Each of ADR and FieldCo shall further act
in good faith with respect to all matters covered by this Agreement and the
Exhibits hereto. Neither ADR nor FieldCo, or any party deriving rights from any
of them, shall at any time hereunder do, or authorize any person to do, anything
inconsistent with the agreements contained herein or which might diminish or
impair any party's rights hereunder. Neither ADR nor any party deriving rights
from ADR shall become liable by reason of any representation, act or omission of
FieldCo that is contrary to the provisions hereof. Similarly, neither FieldCo
nor or any party deriving rights from FieldCo shall
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become liable by reason of any representation, act or omission of ADR that is
contrary to the provisions hereof.
ARTICLE 15.
MISCELLANEOUS
15.1. NOTICE. The addresses for notices are as set forth on Schedule
2.1 and may be changed by notice given to the Members, as aforesaid, by the
party whose address for notice is to be changed. Except as expressly stated
otherwise in this Agreement, all notices, requests, demands, approvals,
consents, waivers and other communications under this Agreement shall be made in
writing and shall be deemed to have been given (a) upon delivery, if delivered
by hand, (b) upon receipt, if delivered by facsimile transmission to the fax
number of the receiving party listed on Schedule 2.1, if receipt is confirmed
electronically or by the addressee by return fax, (c) three days after being
mailed first class, certified mail, return receipt requested, postage and
registry fees prepaid, to the address set forth on Schedule 2.1, or (d) one
Business Day after being delivered to a reputable overnight courier service,
prepaid, marked for next day delivery, to the address set forth on Schedule 2.1,
if the courier service obtains a signature acknowledging receipt.
15.2. AMENDMENTS. This Agreement may be amended only with the approval
of a Majority in Interest and in accordance with the provisions set forth
herein.
15.3. EXPENSES. Upon the Effective Date, the Company shall pay or
reimburse the Members for the professional fees incurred in connection with this
Agreement, subject to a maximum amount equal to $500,000 with respect to each
Member. The foregoing payments shall constitute Advances thereunder.
15.4. SEVERABILITY.
(a) It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, to the extent that a restriction contained
in this Agreement is more restrictive than permitted by the laws of any
jurisdiction where this Agreement may be subject to review and interpretation,
the terms of such restriction, for the purpose only of the operation of such
restriction in such jurisdiction, shall be the maximum restriction allowed by
the laws of such jurisdiction and such restriction shall be deemed to have been
revised accordingly herein.
(b) If, notwithstanding the provisions of the foregoing
paragraph, any provision of this Agreement or the application hereof is held to
be wholly invalid, such invalidity shall not affect any other provisions or
application of this Agreement that can be given effect without the invalid
provisions or application, and to this end the provisions of this Agreement are
hereby declared to be severable.
15.5. GOVERNING LAW. This Agreement shall be interpreted and construed
in accordance with the laws of the State of Delaware, without regard to choice
of law principles. Any conflict or apparent conflict between this Agreement and
the Act will be resolved in favor of this Agreement except as otherwise required
by the Act. In any action or proceeding arising out of, related to, or in
connection with this Agreement, the parties consent to be subject to the
jurisdiction and venue of the Superior Court of the State of California in and
for the County of Los Angeles and the United States
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District Court for the Central District of California. Each of the parties
consents to the service of process in any action commenced hereunder by
certified or registered mail, return receipt requested, or by any other method
or service acceptable under federal law or the laws of the State of California.
AS TO ANY ACTION OR PROCEEDING ARISING OUT OF, RELATED TO OR IN CONNECTION WITH
THIS AGREEMENT, THE PARTIES HEREBY AGREE TO WAIVE THEIR RIGHTS TO A TRIAL BY
JURY.
15.6. ENTIRE AGREEMENT. This Agreement, the Side Letter, the Loan and
Security Agreement and the Field Employment Agreement are intended by the
parties hereto as a final expression of their agreement, and are intended to be
a complete and exclusive statement of the parties hereto and thereto in respect
of the subject matter contained herein and therein.
15.7. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement. The signatures of any Member to a counterpart shall be
deemed to be a signature to, and may be appended to, any other counterpart.
15.8. BINDING EFFECT. This Agreement shall be binding upon, and shall
inure to the benefit of, the Members and their respective successors, heirs,
executors, administrators, legal representatives, and permitted assigns.
15.9. WAIVER. No consent or waiver, express or implied, by any Member
to or of any breach or default by any other Member in the performance by such
other Member of its obligations hereunder shall be deemed or construed to be a
consent to or waiver of any other breach or default in the performance by such
other Member of the same or any other obligation of such other Member hereunder.
Failure on the part of a Member to complain of any act or failure to act of any
other Member or to declare such other Member in default, irrespective of how
long such failure or default continues, shall not constitute a waiver by such
Member of its rights hereunder.
15.10. CONFIDENTIALITY.
(a) The Company and the Members acknowledge and agree that each
Member and the Company's customers may from time to time make certain of their
confidential business information available to the Company. The Company and each
Member agrees that it shall not disclose to any third party, except the
disclosing party's attorneys or financial advisors, any information concerning
the clients and customers (including their identities), trade secrets, methods,
information about the Company's costs, profits, markets, sales, plans or
strategies for development of the business of the Company, processes or
procedures or other technical information, or any other confidential business
information of the Company or any other party to this Agreement which it learns
during the course of its performance of this Agreement, without the prior
written consent of the other Members. Notwithstanding the preceding sentence, in
the event a Member desires to Transfer its Units in accordance with this
Agreement, such Member and/or its Controlling Affiliates may disclose
confidential business information of the Company to a potential transferee,
without consent, provided the transferee enters into a nondisclosure agreement
reasonably acceptable to the Company prior to receiving such confidential
business information. Each Member shall advise its attorneys and financial
advisors that such information is confidential and that by receiving such
information such attorneys and financial advisors are agreeing to be bound by
this Section 15.10. Each Member agrees to be responsible for any breach of this
Section 15.10 by its attorneys or financial advisors.
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(b) The parties further acknowledge and agree that in the event
of a breach or threatened breach of this Section 15.10, the Company would have
no adequate remedy in money damages and, accordingly, shall be entitled to
appropriate injunctive relief against such breach or threatened breach. The
obligations contained in this Section 15.10 will survive the cancellation or
other termination of this Agreement.
(c) This Section 15.10 shall not prevent any disclosure of
information to the extent required by applicable law or regulation. Any party
required to make such disclosure, to the extent reasonably practicable, shall
(i) afford the Company the opportunity to seek to prevent such disclosure or
obtain an appropriate protective order or other relief and (ii) cooperate with
the Company's efforts to do so.
15.11. NO RELIANCE BY THIRD PARTIES. The provisions of this Agreement
are not for the benefit of any creditor or other Person other than a Member to
whom any losses, debts, claims, expenses or encumbrances are owed by, or who
otherwise has any claim against, the Company or any Member.
15.12. SCHEDULES AND EXHIBITS. All schedules and exhibits of this
Agreement are incorporated herein in their entirety.
15.13. TERMS. Terms used with initial capital letters will have the
meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. All pronouns (and any variation) will be deemed to
refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word include (and any variation) is used in an illustrative sense
rather than in a limiting sense. The word day means a calendar day, unless
otherwise specified.
15.14. TITLES. Titles and captions in this Agreement have been inserted
as a matter of convenience only and do not define, limit or describe the scope
of this Agreement of the intent of any of its provisions not control or affect
the meaning or construction of any of the terms or provisions hereof.
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15.15. NO DRAFTING PRESUMPTION. In interpreting the provisions of this
Agreement, no presumption shall apply against any Member that otherwise would
operate against such Member by reason of such document having been drafted by
such Member or at the direction of such Member or an Affiliate of such Member.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amended
and Restated Operating Agreement as of the date set forth above.
"FIELDCO" "ADR"
Radar Records Holdings, LLC ARTISTdirect Recordings, Inc.
By: /s/ FREDERICK W. FIELD By: ARTISTdirect, Inc.
--------------------------- Its: Sole Shareholder
Frederick W. Field
Its: Member
By: /s/ MARC GEIGER
------------------------------
Marc Geiger
Its: Chief Executive Officer
THE "COMPANY"
ARTISTdirect RECORDS, L.L.C.
By: ARTISTdirect Recordings, Inc.
Its: Member
By: ARTISTdirect, Inc.
Its: Sole Shareholder
By: /s/ MARC GEIGER
-------------------------------
Marc Geiger
Its: Chief Executive
Officer
By: Radar Records Holdings, LLC
Its: Member
By: /s/ FREDERICK W. FIELD
-------------------------------
Frederick W. Field
Its: Member
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APPENDIX C
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT"), dated May 31, 2001,
is made and entered into between ARTISTdirect Records, L.L.C., a Delaware
limited liability company (the "BORROWER") and ARTISTdirect Recordings, Inc., a
Delaware corporation (the "LENDER"), and shall be effective upon the date that
all of the conditions set forth in that certain side letter agreement of even
date (the "Side Letter") among the Borrower, the Lender, ARTISTdirect, Inc. a
Delaware corporation that is ADR's parent corporation ("AD"), Radar Records
Holdings, LLC, a Delaware limited liability company ("FieldCo") and Frederick W.
Field ("Field") shall have been satisfied or waived pursuant thereto (the
"Effective Date").
RECITALS
WHEREAS, the Lender and FieldCo ("FIELDCO"), are the sole members of the
Borrower pursuant to an Operating Agreement (the "OPERATING AGREEMENT") dated
the date hereof; and
WHEREAS, pursuant to the Operating Agreement, the Lender has agreed to
provide certain loans to the Borrower, subject to and in accordance with the
terms and conditions of the Operating Agreement and this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
ARTICLE 1.
DEFINITIONS AND ACCOUNTING TERMS
1.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined). Capitalized terms used herein
but not specifically defined shall have the meaning ascribed to them in the
Operating Agreement:
"ACCOUNTS" means all of the Borrower's accounts, as such term is defined
in the California UCC, whether now or hereafter acquired.
"ADDITIONAL SUBSTITUTE FINANCING" shall mean the amount of debt or
equity financing, if any, that the Company obtains in connection with a Funding
Default in excess of the Substitute Financing, which, when added to the
Substitute Financing, equals the lesser of:
(a) the amount by which $50,000,000 exceeds the outstanding
Advances, plus interest, at the time of the Funding Default; or
(b) the maximum amount that ADR could have been required to
Advance to the Company following the Funding Default, based upon the Annual
Advance Limitation, pro rated on a monthly basis over the remainder of the
Initial Field Term.
"ARBITRABLE DISPUTE" has the meaning specified in Section 5.2(c)(i)
below.
"AVAILABLE CASH" means, as of the last Business Day of the calendar
quarter preceding the date payment is to be made pursuant to Section 2.3(a)
below, the cash held by the Borrower in excess of the sum of (a) fifty percent
(50%) of the total annual expenditures that the Annual Budget for such Fiscal
Year projects will be covered by Advances during the entire such Fiscal Year and
(b) the amount necessary to cover those expenditures that the Borrower is then
required to make within the next thirty (30) days.
"CALIFORNIA UCC" means the Uniform Commercial Code as adopted and in
force in the State of California, as from time to time in effect.
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"CAPITAL EXPENDITURES" means expenditures made or liabilities incurred
for the acquisition of any fixed assets or improvements, replacements,
substitutions or additions thereto which have a useful life of more than one
year, including the total principal portion of Capitalized Lease Obligations.
"CAPITALIZED LEASE OBLIGATION" means any Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.
"COLLATERAL" has the meaning specified in Section 6.1(a) below.
"COPYRIGHT MORTGAGE" means the Copyright Mortgage, dated the Effective
Date, granted by the Borrower to the Lender, as amended, supplemented or
otherwise modified from time to time, a copy of which is attached hereto as
Exhibit 1.
"CUMULATIVE NET ANNUAL ADVANCE" shall mean the excess, if any, as of the
applicable determination date, of the aggregate amount of Advances made pursuant
to Section 5.1(d)(i) of the Operating Agreement, over the aggregate amount of
expenditures made by the Borrower.
"DEFAULT" means any Event of Default or any event that would constitute
an Event of Default but for the requirement that notice be given or time elapse
or both.
"DISTRIBUTOR" means any Person that becomes entitled to distribute
Borrower's Records.
"DISTRIBUTOR OBLIGATIONS" has the meaning set forth in Section 6.4(b)
below.
"EQUIPMENT" means all of the Borrower's equipment as defined in the
California UCC, whether now or hereafter acquired.
"EVENTS OF DEFAULT" has the meaning specified in Section 5.1 below.
"EXCESS CASH FLOW" means, as of the last Business Day of the calendar
quarter preceding the date payment is to be made pursuant to Section 2.3(a)
below, the cash held by the Borrower in excess of the sum of the Cumulative Net
Annual Advance plus the greater of:
(a) the total annual expenditures that the Annual Budget for
such Fiscal Year projects will be covered by Advances during the entire such
Fiscal Year; or
(b) $12,000,000.
"GAAP" means United States generally accepted accounting principles
applied on a consistent basis.
"GENERAL INTANGIBLES" means all personal property of the Borrower
(including things in action) other than goods, Accounts, chattel paper,
documents, instruments and money, whether now owned or hereafter created or
acquired by the Borrower.
"INDEBTEDNESS" means, as applied to a Person, without duplication:
(a) all items which in accordance with GAAP would be included
in determining total liabilities as shown on the liability side of a balance
sheet of such Person as at the date as of which Indebtedness is to be
determined, including, without limitation, Capitalized Lease Obligations;
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(b) all obligations of other Persons that such Person has
guaranteed;
(c) all reimbursement obligations in connection with letters
of credit or letter of credit guaranties issued for the
account of such Person; and
(d) in the case of the Borrower (without duplication), the
Obligations.
"INVENTORY" means all of the Borrower's inventory, as such term is
defined in the California UCC, whether now or hereafter acquired.
"INVESTMENT PROPERTY" means all of the Borrower's investment property,
as such term is defined in the California UCC, whether now or hereafter
acquired.
"LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest 1/32 of one percent) as determined on the basis of the offered rates for
three (3) month deposits in U.S. dollars appearing on the Telerate page 3750 as
of 11:00 a.m. (London Time) (a) on the Effective Date, and (b) thereafter on the
first Business Day of each calendar month. If the rate described above does not
appear on the Telerate System as of 11:00 a.m. (London Time) on the first
Business Day of a particular calendar month, LIBOR shall mean the rate (rounded
upwards as described above, if necessary) for three (3) month deposits in U.S.
dollars on the Reuters Page "LIBO" (or such other page as may replace the LIBO
Page on that service for the purpose of displaying such rates), as of 11:00 a.m.
(London Time), on said date. If both the Telerate and Reuters system are
unavailable, then the rate for said date will be determined on the basis of the
offered rates for three (3) month deposits in U.S. dollars that are offered by
four major banks in the London interbank market at approximately 11:00 a.m.
London time on said date, as selected by the Lender. The principal London office
of each of the major London Banks so selected will be requested to provide a
quotation of its U.S. dollar deposit offered rate. If at least two such
quotations are provided, the rate for said date will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for said date will be determined on the basis of the rates quoted for three (3)
month loans in U.S. dollars to leading European banks offered by major banks in
New York City at approximately 11:00 a.m. New York City time, on said date. In
the event that the Lender is unable to obtain any such quotation as provided
above, the rate will be deemed to be the rate effective immediately prior to
said date. In the event that the Board of Governors of the Federal Reserve
System shall impose a Reserve Percentage with respect to LIBOR deposits of any
such bank then for any period during which such Reserve Percentage shall apply,
LIBOR shall be equal to the amount determined above divided by an amount equal
to 1 minus the Reserve Percentage.
"LIEN" means any lien, security interest or other charge or encumbrance
of any kind, or any other type of preferential arrangement, including, without
limitation, the lien or retained security title of a conditional vendor and any
easement, right of way or other encumbrance on title to real property.
"MACHINERY" means all of the Borrower's machinery, as such term is
defined in the California UCC, whether now or hereafter acquired.
"MATURITY DATE" means the earliest of (a) the date upon which the Lender
shall Transfer all of its Units in the Borrower pursuant to Section 10.2 of the
Operating Agreement, (b) the date of the Liquidation of the Borrower pursuant to
Section 11.4 of the Operating Agreement or (c) December 31, 2015.
"OPERATING AGREEMENT" has the meaning set forth in the Recitals, as it
may be amended, supplemented or otherwise modified from time to time.
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"NOTE" has the meaning specified in Section 2.1 below.
"OBLIGATIONS" means all Advances, together with all interest thereon.
"POTENTIAL EVENT OF DEFAULT" has the meaning specified in Section 5.2(b)
below.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible, including, without
limitation, all Accounts, Equipment, General Intangibles, Inventory, Investment
Property and Machinery.
"PROPOSED ACTION" has the meaning specified in Section 5.2(b) below.
"PROPOSED ACTION NOTICE" has the meaning specified in Section 5.2(b)
below.
"PURCHASE MONEY INDEBTEDNESS" means and includes (a) Indebtedness (other
than the Obligations) for the payment of all or any part of the purchase price
of any fixed assets, (b) any Indebtedness (other than the Obligations) incurred
at the time of or within 10 days prior to or after the acquisition of any fixed
assets for the purpose of financing all or any part of the purchase price
thereof, and (c) any renewals, extensions or refinancings thereof, but not any
increases in the principal amounts thereof outstanding at the time.
"QUALIFIED INTEREST" means the stated amount of interest on the
principal amount of a loan, subject to a maximum in an amount equal to the
interest that is reasonable and customary under the circumstances, and not more
in the nature of disguised equity.
"RESPONSE NOTICE" has the meaning specified in Section 5.2(b) below.
"SENIOR FINANCIER(S)" has the meaning specified in Section 6.4 below.
"SENIOR OBLIGATIONS" has the meaning specified in Section 6.4 below.
"SPECIFIED RATE" means a rate equal to LIBOR plus four percent (4%);
provided, however, that upon the occurrence and during the continuance of an
Event of Default, such rate shall be increased by an additional two percent
(2%).
"SUBSIDIARY" means any Person more than fifty percent (50%) of the
voting interest of which is owned, directly or indirectly, by the Borrower or
any Subsidiary of the Borrower.
"TRANSACTION DOCUMENTS" means, collectively, this Agreement, the Note,
the Field Employment Agreement, the Operating Agreement, the Exhibits to the
Operating Agreement, and all other documents, certificates or instruments
related to any of the foregoing.
1.2. COMPUTATION OF TIME PERIODS. In this Agreement, in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
ARTICLE 2.
AMOUNTS AND TERMS OF THE ADVANCES
2.1. ADVANCES. The Lender agrees to make Advances available to the
Borrower from time to time subject to, and in accordance with, the terms and
conditions set forth herein and in the Operating Agreement. The Advances shall
be evidenced by the promissory note in the form
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of Exhibit 2 hereto (the "NOTE"), which shall be executed and delivered by the
Borrower prior to or simultaneously with borrowing any amounts hereunder.
2.2. INTEREST ACCRUAL AND COMPUTATION.
(a) Generally. Interest on Advances shall accrue and compound
quarterly at the Specified Rate with respect to the principal amount of each
Advance from the date such Advance is drawn until the date such Advance is
repaid.
(b) Limitation. In no event whatsoever shall the aggregate of
all amounts deemed interest hereunder or under the Note and charged or collected
pursuant to the terms of this Agreement or pursuant to the Note exceed the
highest rate permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto. If any provisions of
this Agreement or the Note are in contravention of any such law, such provisions
shall be deemed amended to conform thereto.
(c) Computation of Interest. Interest hereunder shall be
calculated daily and shall be computed on the actual number of days elapsed over
a year of 360 days.
2.3. PAYMENTS OF INTEREST; REPAYMENT.
(a) Repayment of Advances; Payment of Interest. On the first
Business Day of each calendar quarter prior to January 1, 2004, the Borrower
shall repay the Advances, plus interest thereon, in an amount equal to the
Borrower's then Excess Cash Flow. On the first Business Day of each calendar
quarter commencing on January 1, 2004, the Borrower shall pay all accrued
interest to the extent of the Borrower's then Available Cash and shall repay the
Advances, in an amount which when added to the interest then paid, is equal to
the Borrower's then Excess Cash Flow. In the event that the Borrower fails to
pay interest to the extent of Available Cash as provided in the preceding
sentence, then (i) the Borrower shall be deemed to have paid interest to the
Lender to the extent of Available Cash and (ii) the Lender shall be deemed to
have made an Advance to the Borrower in such amount. Any deemed Advances made by
the Lender pursuant to the foregoing shall be treated as an Advance; provided,
however, that the amount of such deemed Advance shall be disregarded for
purposes of the Annual Advance Limitation.
(b) Application of Payments and Collections. All payments
received by the Lender by 12:00 noon, Pacific Time, on any Business Day shall be
deemed received on that Business Day. All items of payment received after 12:00
noon, Pacific Time, on any Business Day, or at any time on a day that is not a
Business Day, shall be deemed received on the following Business Day.
(c) FINAL REPAYMENT. The Borrower shall repay all outstanding
Obligations to the Lender on the Maturity Date.
(d) USE OF PROCEEDS. The proceeds of the Advances shall be
used by the Borrower only as required or permitted under the Operating
Agreement.
ARTICLE 3.
CONDITIONS OF LENDING
3.1. CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the
Lender to make its initial Advance is subject to the delivery to the Lender by,
or on behalf of the Borrower, of each of the following:
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(a) This Agreement, the Note and each other Transaction
Document, duly executed by the applicable parties hereto and thereto;
(b) The Copyright Mortgage, duly executed by the Borrower;
(c) Executed copies of proper financing statements on Form
UCC-1 or otherwise, to be filed under the Uniform Commercial Code of each
jurisdiction as may be necessary or desirable to perfect the security interests
granted to the Lender hereunder; and
(d) Any other documents or instruments reasonably required or
requested by the Lender.
3.2. CONDITIONS PRECEDENT TO EACH LOAN. The obligation of the Lender
to make each Advance (including the initial Advance) shall be subject to the
fulfillment of the following conditions precedent on the date of such Advance:
(a) The Note, the Operating Agreement and the other
Transaction Documents shall be in full force and effect; and
(b) The Lender shall have received such documents or
instruments as it may reasonably request or as may be required to create,
perfect or continue the Lender's security interests in the Collateral; provided,
that the parties hereto acknowledge that the confirmation of the perfection of
any security interest in intellectual property may be received following the
date hereof and that the failure to receive such confirmation shall not, in and
of itself, affect the Lender's obligation to make any Advance.
ARTICLE 4.
COVENANTS OF THE BORROWER
4.1. AFFIRMATIVE COVENANTS. During the term of this Agreement, and
thereafter for so long as there are any Obligations to the Lender, the Borrower
covenants that, unless otherwise consented to by the Lender in writing, it
shall:
(a) At any time during which the Lender shall not be entitled
to vote as a Member under the Operating Agreement, permit representatives of the
Lender, from time to time, as often as may reasonably be requested by the
Lender, but only during normal business hours and with prior notice, to visit
and inspect the Properties of the Borrower, inspect, audit and make extracts
from its books and records, and discuss with its officers, its employees and its
certified public accountants (who shall be of recognized standing and selected
by the Borrower but acceptable to the Lender), the Borrower's business, assets,
liabilities, financial condition, business prospects and results of operations.
(b) Promptly notify the Lender in writing of the occurrence of
any Event of Default, or any event or the existence of any fact, which renders
any representation, warranty or covenant in this Agreement or any of the other
related agreements inaccurate, incomplete or misleading.
(c) At any time during which the Lender shall not be entitled
to vote as a Member under the Operating Agreement, keep adequate records and
books of account with respect to its business activities in which proper entries
are made in accordance with GAAP reflecting all its financial transactions; and
cause to be prepared and furnished to the Lender the following (all to be
prepared in accordance with GAAP, unless the Borrower's certified public
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accountants concur in any change therein and such change is disclosed to the
Lender and is consistent with GAAP):
(i) not later than 90 days after the close of each
fiscal year of the Borrower, unaudited financial statements of the Borrower as
of the end of such year, certified by the principal financial officer of the
Borrower as prepared in accordance with GAAP and fairly presenting the financial
position and results of operations of the Borrower for such fiscal year;
(ii) not later than 60 days after the end of each
calendar quarter hereafter, including the last quarter of the Borrower's fiscal
year, unaudited interim financial statements of the Borrower as of the end of
such quarter and of the portion of the Borrower's financial year then elapsed,
certified by the principal financial officer of the Borrower as prepared in
accordance with GAAP and fairly presenting the financial position and results of
operations of the Borrower for such quarter subject only to changes from audit
and year-end adjustments and except that such statements need not contain notes;
(iii) such other data and information (financial and
otherwise) as the Lender, from time to time, may reasonably request, bearing
upon or related to the Collateral or the Borrower's financial condition or
results of operations.
Concurrently with the delivery of the financial statements described in the
preceding clause (i), the Borrower shall forward to the Lender a copy of the
accountants' letter to the Borrower's management that is prepared in connection
with such financial statements.
(d) Comply in all material respects with all applicable laws,
rules, regulations and orders;
(e) Preserve and maintain its existence, rights (as contained
in its constitutive documents and statute), business, and franchises;
(f) If any of the Collateral at any time consists of
instruments, documents, chattel paper or letters of credit, immediately upon
receipt or creation of such Collateral, deliver such Collateral in its original
form to the Lender, duly endorsed to the Lender or in blank or accompanied by
appropriate stock or bond powers. Subject to Section 5.2 below, after an Event
of Default, in its discretion, the Lender may, at any time and from time to
time, in its name or the Borrower's, notify any account debtor or obligor of any
Account included in the Collateral to make payment directly to the Lender.
(g) At its sole cost and expense, perform all acts and execute
and file all documents reasonably requested by the Lender from time to time to
evidence, perfect, maintain or enforce the full benefits of this Agreement to
the Lender, including the Lender's security interests granted under this
Agreement and in the Copyright Mortgage and to effectuate or maintain the
priority thereof or otherwise to carry out the provisions and purposes contained
therein.
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4.2. NEGATIVE COVENANTS. At any time during which (w) the Lender shall
not be entitled to vote as a Member under the Operating Agreement, (x) there
shall have been achieved during the term of this Agreement aggregate outstanding
Obligations equal to or in excess of $20,000,000, (y) there shall be Obligations
in excess of $5,000,000; and (z) the term of this Agreement shall be continuing,
the Borrower covenants that, unless the Lender has first consented thereto in
writing, it will not:
(a) Acquire, repurchase or redeem any Units or other Equity
Securities in or of the Borrower, except pursuant to Articles 6 or 10 of the
Operating Agreement or equity repurchases on established terms from employees
other than Field;
(b) Make any distributions upon any Units, other than minimum
tax distributions pursuant to Section 8.1(b) of the Operating Agreement;
(c) Merge or consolidate with any Person not engaged in the
Record Label Business, except in a transaction in which all Obligations are paid
in full, including without limitation, pursuant to Article 10 of the Operating
Agreement; provided, however, that the Borrower shall promptly notify the Lender
of the occurrence of any merger or consolidation of the Borrower for which the
aforementioned consent of the Lender is not required;
(d) Acquire a substantial portion of the assets or business of
any Person, or any division or line of business thereof, if such assets,
business, division or line of business is outside of the Record Label Business,
or any assets with a Fair Market Value in excess of $5,000,000, except pursuant
to Article 10 of the Operating Agreement;
(e) Acquire any securities of, or other ownership interest in
any Person, other than in accordance with Schedule 5.2(e), which is hereby
incorporated herein;
(f) Create or suffer to exist any Lien on or with respect to
any of its Properties, whether now owned or hereafter acquired, including all or
any part of the Collateral, or assign any right to receive income, other than
(i) the Liens granted in favor of the Lender herein and in the Copyright
Mortgage, (ii) as contemplated in Article 6 of the Operating Agreement, (iii)
any Lien upon Borrower's Inventory or accounts receivable granted to the
Distributor (iv) to secure Purchase Money Indebtedness or (iv) any Lien that by
its terms is subordinated to the Liens granted in favor of the Lender herein and
in the Copyright Mortgage;
(g) At any time create, incur, assume or suffer to exist any
Indebtedness other than (i) the Indebtedness evidenced hereby, (ii) as
contemplated in Article 6 of the Operating Agreement, (iii) to the Distributor,
(iv) Purchase Money Indebtedness or (v) Indebtedness that by its terms is
subordinated to the Indebtedness evidenced hereby.
(h) Enter into any agreement, arrangement or transaction with
any Officer or Member, or any Affiliate, relative, beneficiary or employee of
the foregoing, or with any employee of the Borrower, that calls for aggregate
payment (other than payment of salary, bonus or reimbursement of reasonable
expenses) in excess of $10,000, except pursuant to Article 6 of the Operating
Agreement;
(i) Enter into or modify the terms of any employment agreement
or arrangement with Field in a manner that increases Field's compensation,
benefits or perquisites; or
(j) Cause or permit any Controlled Person of the Borrower to
take any action if the Borrower could not take such action without the consent
of the Lender.
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ARTICLE 5.
EVENTS OF DEFAULT
5.1. EVENTS OF DEFAULT. If any of the following events (each, an
"EVENT OF DEFAULT") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of, or
interest upon, any Advance when due;
(b) The Borrower shall fail to perform or observe any term,
representation, warranty, covenant or agreement contained in this Agreement to
be performed or observed by the Borrower (i) in the case of any failure not
susceptible to cure, upon written notice by the Lender to the Borrower of such
failure and (ii) in the case of any failure susceptible to cure, at any time
after thirty (30) days following written notice by the Lender to the Borrower of
such failure, if such failure is not cured within said thirty (30) day period;
provided, however, that if such failure susceptible to cure cannot be cured
within such thirty (30) day period, it shall not be an Event of Default
hereunder if Borrower shall commence such cure within such thirty (30) day
period and thereafter diligently pursue such cure and cause its completion
within a reasonable period thereafter.
(c) The Borrower shall generally not pay its debts as such
debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Borrower, seeking to
adjudicate either of them a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief, or
composition of either of them or their debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for either of them or for any substantial
part of either of their property and, in the case of any such proceeding
instituted against either of such parties (but not instituted by the particular
party), either such proceeding shall remain undismissed or unstayed for a period
of ninety (90) days, or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the appointment
of a receiver, trustee, custodian or other similar official for, the particular
party or for any substantial part of its property) shall occur; or the Borrower
shall take any action to authorize any of the actions set forth above in this
Section 5.1(c);
(d) This Agreement, the Copyright Mortgage or any other
similar or related agreement shall for any reason (other than pursuant to the
respective terms hereof, including without limitation Section 6.4 below, or
thereof) cease to create valid and perfected first priority liens on, and
security interests in, the Collateral purported to be covered thereby, and
Borrower shall fail to cause such liens and security interests to be replaced
within thirty (30) days following written notice by the Lender to the Borrower
of such event;
(e) Any event of default shall occur and be continuing under
any Senior Obligation;
(f) Any final judgment or order for the payment of money in
excess of Fifty Thousand Dollars ($50,000) shall be rendered against the
Borrower, and such judgment or order remain unsatisfied or unbonded for a period
of sixty (60) days;
then, and in any such event, subject to Section 5.2 below, the Lender, in
addition to any rights and remedies it may have under Sections 4.1(f) above or
6.2 below, may, by notice to the
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Borrower at any time thereafter, suspend or terminate its obligation to make
further Advances hereunder, and declare the Note and the Obligations to be
forthwith due and payable, whereupon the Note and the Obligations shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower; provided, however, that, notwithstanding anything to the contrary
contained in this Agreement, in the event of an actual or deemed entry of an
order for relief with respect to the Borrower or FieldCo under the Federal
Bankruptcy Code, the Lender's obligation to make further Advances hereunder
shall automatically be terminated and the Note and the Obligations shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
5.2. THE LENDER'S ACTIONS.
(a) No Event of Default shall be deemed to have occurred if
the act or omission that would otherwise constitute an Event of Default by the
Borrower hereunder is caused by an act or omission by the Lender which
constitutes a breach or default by the Lender of the Lender's obligations as a
Member under the Operating Agreement.
(b) In the event that (i) prior to a termination of the Field
Term due to a Covered Field Termination, Field's Disability or Field's death,
FieldCo desires that the Borrower take a particular reasonable action (the
"PROPOSED ACTION") in order to avoid an Event of Default (the "POTENTIAL EVENT
OF DEFAULT") and (ii) the Borrower's taking the Proposed Action requires the
consent of the Lender as a Member pursuant to the Operating Agreement, then
FieldCo shall provide the Lender a notice (the "PROPOSED ACTION NOTICE")
containing a description of the Potential Event of Default, the Proposed Action
and the reason(s) that FieldCo believes it appropriate for the Borrower to take
the Proposed Action. Within five (5) Business Days of its receipt of the
Proposed Action Notice the Lender shall send a notice to FieldCo (the "RESPONSE
NOTICE") indicating either (A) that the Lender will consent (in the Lender's
capacity as a Member) to the Borrower's taking the Proposed Action or (B) the
reason(s) that the Lender does not believe it appropriate for the Borrower to
take the Proposed Action. In the event that the Lender indicates in the Response
Notice that the Lender does not believe it appropriate for the Borrower to take
the Proposed Action, and the Borrower's not taking the Proposed Action causes
the Potential Event of Default to become an Event of Default, then FieldCo (on
behalf of the Borrower) shall have the right to institute an arbitration
proceeding pursuant to Section 5.2(c) below within five (5) Business Days
following such Event of Default, in which case such Event of Default (and only
such Event of Default) shall be deemed not to constitute an Event of Default
unless and until the arbitrator shall determine that, under the circumstances
(including without limitation the likelihood or possibility that, although the
Borrower's taking the Proposed Action may forestall the applicable Potential
Event of Default from becoming an Event of Default, other Events of Default are
likely to occur), the Lender (in its capacity as a Member) was acting reasonably
in not approving the Borrower's taking the Proposed Action.
(c) (i) In the event of a dispute between FieldCo (on
behalf of the Borrower) and the Lender as to whether the Lender acted reasonably
in not approving the Borrower's taking a particular Proposed Action (an
"ARBITRABLE DISPUTE"), then solely as to such Arbitrable Dispute (and not as to
any other disputes under this Agreement, as such other disputes shall be settled
in accordance with Section 7.8 below), the Arbitrable Dispute shall be settled
exclusively by arbitration, before a single arbitrator, in accordance with this
Section 5.2(c) and the then most applicable rules of the American Arbitration
Association. Judgment upon any award rendered by the arbitrator may be entered
by any state or federal court having jurisdiction thereof. Such arbitration
shall be decided within ninety (90) days of the filing of a petition to
arbitration. Such arbitration shall be administered by the American Arbitration
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Association and shall be the exclusive remedy for determining any Arbitrable
Dispute. The arbitrator shall be instructed to determine whether the Lender
acted unreasonably in not approving the Approved Action, taking into account all
relevant facts and circumstances, including without limitation the circumstances
giving rise to the Potential Event of Default, whether the Potential Event of
Default involves nonpayment to the Lender or any other Person, the magnitude of
the Proposed Action compared to the magnitude of the nonpayment, and the
potential for or likelihood of future breaches.
(ii) If FieldCo and the Lender are unable to agree upon
an arbitrator, they shall select a single arbitrator from a list of fifteen
arbitrators drawn by them at random from the "Independent" (or "Gold Card") list
of retired judges or, at the Lender's option, from a list of fifteen persons
(which shall be retired judges or litigation attorneys experienced in lending
matters) provided by the American Arbitration Association. If FieldCo and the
Lender are unable to agree upon an arbitrator from the list so drawn, then they
shall each strike names alternately from the list, with the first to strike
being determined by lot. After each of FieldCo and the Lender has used seven
strikes, the remaining name on the list shall be the arbitrator. If such person
is unable to serve for any reason, FieldCo and the Lender shall repeat this
process until an arbitrator is selected.
(iii) In the event of an Arbitrable Dispute, FieldCo (on
behalf of the Borrower) and the Lender shall be entitled to reasonable discovery
subject to the discretion of the arbitrator. The remedial authority of the
arbitrator shall be the same as, but no greater than, would be the remedial
power of a court having jurisdiction over the parties in respect of the specific
Arbitrable Dispute, and shall be expressly limited to such Arbitrable Dispute
and shall not extend to any other matters or disputes. The arbitrator shall,
upon an appropriate motion, dismiss any claim without an evidentiary hearing if
the party bringing the motion establishes that it would be entitled to summary
judgment if the matter had been pursued in court litigation. In the event of a
conflict between the applicable rules of the American Arbitration Association
and these procedures, the provisions of these procedures shall govern.
(iv) Unless mutually agreed by the parties otherwise,
any such arbitration shall take place in the City of Los Angeles, California.
(v) During the continuance of any arbitration pursuant
to this Section 5.2(c), Borrower shall not enter into or modify the terms of any
agreement, contract or arrangement without the prior written approval of the
Lender, except an agreement, contract or arrangement that:
(A) is required for the Borrower to honor its then
existing contractual obligations; or
(B) previously was approved by the Lender (in its
capacity as a Member) pursuant to the Operating Agreement.
ARTICLE 6.
SECURITY
6.1. GRANT OF SECURITY INTEREST.
(a) In consideration of the Advances and as collateral
security for the prompt and complete payment and performance when due (whether
at stated maturity, by acceleration or otherwise) of the Obligations, the
Borrower hereby grants to the Lender a continuing first
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priority security interest in (subject to Section 6.4 below), and the Borrower
assigns as security to the Lender, all of the Borrower's right, title and
interest in, to and under, the following, whether now owned or later acquired,
including all of the following Property and interests in Property of the
Borrower, whether now owned or existing or hereafter created, acquired or
arising and wheresoever located (the "COLLATERAL"):
(i) Accounts;
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
(v) Investment Property;
(vi) Machinery;
(vii) All monies and other Property of any kind now or at
any time or times hereafter in the possession or under the control of the Lender
or a bailee or Affiliate of the Lender;
(viii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i) through (vi) above,
including, without limitation, proceeds of and unearned premiums with respect to
insurance policies insuring any of the Collateral; and
(ix) All books and records (including, without
limitation, customer lists, credit files, computer programs, print-outs, and
other computer materials and records) of the Borrower pertaining to any of (i)
through (vii) above.
(b) Subject to Sections 4.2(f) above and 6.4 below, the
Borrower, without the written consent of the Lender, shall not sell, assign (by
operation of law or otherwise) or otherwise dispose of any of the Collateral, or
create or suffer to exist any Lien upon or with respect to any of the Collateral
to secure the indebtedness of any Person, other than in the ordinary course of
business.
(c) Subject to Sections 4.2(f) above and 6.4 below, the Lender
shall have continuing first priority security interests with respect to all of
the Collateral and such first priority security interests shall (i) remain in
full force and effect until the Obligations have been satisfied in full, (ii) be
binding upon the Borrower, its successors and assigns and (iii) inure to the
benefit of the Lender and its successors, transferees and assigns. Upon the
indefeasible satisfaction in full of all of the Obligations, the Lender shall
return to the Borrower such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
6.2. REMEDIES WITH RESPECT TO COLLATERAL. Subject to Section 5.2
above, if any Event of Default shall have occurred and be continuing, in
addition to any other rights and remedies of the Lender under this Agreement or
any of the Transaction Documents or applicable law, all such rights and remedies
being cumulative, not exclusive, and enforceable alternatively, successively or
concurrently:
(a) The Lender may exercise in respect of the Collateral, all
the rights and remedies of a secured party upon default under the California UCC
(whether or not the California UCC applies to the affected Collateral) and also
may enter upon any premises on which any Collateral may be located and, without
resistance or interference by the Borrower,
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take possession of the Collateral or dispose of any Collateral on any such
premises. Additionally, the Lender may (i) require the Borrower to, and the
Borrower hereby agrees that it will at its expense and upon request of the
Lender forthwith, assemble all or part of the Collateral as directed by the
Lender and make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) remove any
Collateral from any premises on which it is located and, without notice except
as specified below, sell, resell, lease, assign, deliver, or otherwise dispose
of the Collateral or any part thereof in one or more parcels at public or
private sale, at any of the Lender's offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as are commercially
reasonable. The Borrower agrees that, to the extent notice of sale shall be
required by law, at least ten days' notice to the Borrower of the time and place
of any public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Lender shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefore and such sale may, without further notice,
be made at the time and place to which it was so adjourned. Nothing set forth
herein shall be deemed to prevent the Lender from purchasing the Collateral in
accordance with the terms set forth herein.
(b) All cash proceeds received by the Lender in respect of any
sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, and then or at any time thereafter applied (after reimbursement
to the Lender of any costs incurred in such sale or in otherwise enforcing its
rights under this Agreement) in whole or in part by the Lender against, all or
any part of the Obligations in such order as the Lender shall elect. Any surplus
of such cash or cash proceeds held by the Lender and remaining after payment in
full of all the Obligations shall be paid over to the Borrower or to whomsoever
may be lawfully entitled to receive such surplus.
(c) The Lender may exercise any and all rights and remedies of
the Borrower under or in connection with the Collateral, including, without
limitation, any and all rights of the Borrower to demand or otherwise require
payment of any amount under, or performance of any provision of, any agreement
related to such Collateral and executed by the parties hereto or by the Borrower
in favor of the Lender.
(d) All payments received by the Borrower under or in
connection with any agreement or otherwise in respect of any of the other
Collateral shall be received in trust for the benefit of the Lender, shall be
segregated from other funds of the Borrower and shall be forthwith paid over to
the Lender in the same form as so received (with any necessary endorsement).
6.3. THE LENDER APPOINTED ATTORNEY-IN-FACT. The Borrower hereby
irrevocably appoints the Lender and each of its designees or agents, the
Borrower's attorney-in-fact, with full authority in the place and stead of the
Borrower and in the name of the Borrower or otherwise, from time to time in the
Lender's discretion, solely to take any commercially reasonable action and to
execute any instrument that is commercially reasonable and/or appropriate to
accomplish the purposes of this Agreement and the Note, including, without
limitation:
(a) To ask for, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become due under
or in respect of any of the Collateral;
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(b) To receive, endorse and collect any drafts or other
instruments, documents and chattel paper;
(c) To file any claims or take any action or institute any
proceedings that the Lender may deem necessary or desirable for the collection
of any of the Collateral or otherwise to enforce compliance with the terms and
conditions of, or the rights of the Lender with respect to, any of the
Collateral; and
(d) To execute and file any and all documents required to
evidence, perfect, maintain or enforce the Lender's security interests in the
Collateral.
6.4. SUBORDINATION.
(a) Upon Substitute Financing. Notwithstanding anything to the
contrary contained in this Agreement, upon the occurrence of a Substitute
Financing that takes the form of debt financing, or equity financing with a
first priority payment preference (whether or not upon Liquidation): (i) all of
the Obligations shall be fully subordinated in all respects to any and all
obligations of the Borrower to repay principal or Qualified Interest or return
the amount invested to the provider(s) of such financing (the "SENIOR
FINANCIER(S)") in respect of the Substitute Financing and the Additional
Substitute Financing (the principal, Qualified Interest or invested amount of
such Substitute Financing or Additional Substitute Financing, the "SENIOR
OBLIGATIONS"); (ii) the Lender's Security Interest in the Collateral shall be
fully subordinated in all respects to any security interest granted to the
Senior Financiers in connection with the Senior Obligations; (iii) unless the
Senior Financiers agree otherwise, no payments may be made in respect of the
Obligations until all such Senior Obligations have been repaid in full; and (iv)
upon any distribution to creditors of the Borrower in a liquidation,
receivership or similar proceeding relating to the Borrower or its assets or
property, the Senior Financier(s), as the holder(s) of the Senior Obligations,
shall be entitled to payment in full of the Senior Obligations before the Lender
shall be entitled to receive any payment in respect of the Obligations. For the
avoidance of doubt, any debt financing or equity financing received by Borrower
in excess of the Senior Obligations shall be fully subordinated in all respects
to the Obligations.
(b) To a Distributor. Notwithstanding anything to the contrary
contained in this Agreement, to the extent that a Distributor shall require that
the Obligations be subordinated to the obligations of Borrower to such
Distributor pursuant to the distribution agreement between Borrower and such
Distributor ("DISTRIBUTOR OBLIGATIONS"), the Obligations shall be so
subordinated. Furthermore, to the extent that a Distributor requires a first
priority security interest in Borrower's accounts receivable and/or Inventory,
the security interest of Lender in Borrower's accounts receivable and/or
Inventory shall be subordinated to the security interest granted to such
Distributor. Upon receipt by the Lender of a notice accurately indicating that
an event of default has occurred with respect to any Distributor Obligations,
and during the continuance of such default, no payments may be made in respect
of the Obligations until all such Distributor Obligations have been repaid in
full; and upon any distribution to creditors of the Borrower in a liquidation,
receivership or similar proceeding relating to the Borrower or its assets or
property, the applicable Distributor, as the holder of Distributor Obligations,
shall be entitled to payment in full of such Distributor Obligations before the
Lender shall be entitled to receive any payment in respect of the Obligations.
(c) Intercreditor Agreement. In connection with any
transaction contemplated by this Section 6.4, upon the reasonable request of the
Borrower, the Lender shall enter into a customary intercreditor agreement in a
form reasonably acceptable to the Lender.
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(d) Further Assurances. The Lender agrees that at any time and
from time to time, it will promptly execute and deliver all further instruments
and documents and take all further action, that may be necessary or reasonably
desirable or that the Borrower may reasonably request, in order to carry out and
consummate the matters contemplated in this Section 6.4.
ARTICLE 7.
MISCELLANEOUS
7.1. AMENDMENTS, ETC. No amendment or waiver of any provision of this
Agreement, nor consent to any departure by the Borrower herefrom, shall in any
event be effective unless the same shall be in writing and signed by the Lender
and the Borrower and then such waiver of consent shall be effective only in the
specific instance and for the specific purpose for which given.
7.2. NOTICES, ETC. Except as expressly stated otherwise in this
Agreement, all notices, requests, demands, approvals, consents, waivers and
other communications under this Agreement shall be made in writing and shall be
deemed to have been given (a) upon delivery, if delivered by hand, (b) upon
receipt, if delivered by facsimile transmission to the fax number of the
receiving party set forth below, if receipt is confirmed electronically or by
the addressee by return fax, (c) three days after being mailed first class,
certified mail, return receipt requested, postage and registry fees prepaid, to
the address set forth below, or (d) one Business Day after being delivered to a
reputable overnight courier service, prepaid, marked for next day delivery, to
the address set forth below, if the courier service obtains a signature
acknowledging receipt. Notices to the Borrower shall be sent to: c/o
ARTISTdirect Recordings, Inc., 5670 Wilshire Boulevard, Suite 200, Los Angeles,
California 90036, Facsimile: (323) 634-4299, Attn: Chief Executive Officer; and
c/o Radar Records Holdings, LLC, 10900 Wilshire Boulevard, Suite 1400, Los
Angeles, CA 90024, Facsimile: (310) 208-1197, Attn: Frederick W. Field. Courtesy
copies of all notices to Borrower to: Legal & Business Affairs Department,
ARTISTdirect, Inc., 5670 Wilshire Boulevard, Suite 200, Los Angeles, California
90036, Facsimile: (323) 634-4299, Attn: Angie Rho; Lenard & Gonzalez LLP, 1801
Century Park West, 6th Floor, Los Angeles, California 90067, Facsimile: (310)
552-0740, Attn: Allen D. Lenard, Esq.; Ziffren Brittenham Branca & Fischer LLP,
1801 Century Park West, 6th Floor, Los Angeles, California 90067, Facsimile:
(310) 553-7068, Attn: Gary S. Stiffelman, Esq. Notices to the Lender shall be
sent to: ARTISTdirect Recordings, Inc., 5670 Wilshire Boulevard, Suite 200, Los
Angeles, California 90036, Attn: Chief Executive Officer, with courtesy copies
to: Legal & Business Affairs Department, ARTISTdirect, Inc., 5670 Wilshire
Boulevard, Suite 200, Los Angeles, California 90036, Attn: Angie Rho, and Allen
D. Lenard, Esq., Lenard & Gonzalez LLP, 1801 Century Park West, 6th Floor, Los
Angeles, California 90067.
7.3. NO WAIVER; REMEDIES. No failure on the part of the Lender to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
7.4. COSTS, EXPENSES AND TAXES.
(a) The Borrower agrees to pay on demand all losses, costs and
expenses, if any (including reasonable counsel fees and expenses), in connection
with the negotiation, execution and/or enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement or the Note and
any other instruments and documents delivered in connection herewith or
therewith, including, without limitation, reasonable counsel fees and expenses
in
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connection with the enforcement of rights. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable in
connection with the execution, delivery or filing of this Agreement, the Note or
any other instruments and documents delivered in connection herewith, and agrees
to save the Lender harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes.
(b) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 7.4 shall survive the payment in full of the principal
and all other amounts payable under this Agreement or the Note.
7.5. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of the
Lender.
7.6. SEVERABILITY.
(a) It is the desire and intent of the parties hereto that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, to the extent that a restriction contained
in this Agreement is more restrictive than permitted by the laws of any
jurisdiction where this Agreement may be subject to review and interpretation,
the terms of such restriction, for the purpose only of the operation of such
restriction in such jurisdiction, shall be the maximum restriction allowed by
the laws of such jurisdiction and such restriction shall be deemed to have been
revised accordingly herein.
(b) If, notwithstanding the provisions of the foregoing
paragraph, any provision of this Agreement or the application hereof is held to
be wholly invalid, such invalidity shall not affect any other provisions or
application of this Agreement that can be given effect without the invalid
provisions or application, and to this end the provisions of this Agreement are
hereby declared to be severable.
7.7. NO DRAFTING PRESUMPTION. In interpreting the provisions of this
Agreement, no presumption shall apply against any party that otherwise would
operate against such party by reason of such document having been drafted by
such party or at the direction of such party or an Affiliate of such party.
7.8. GOVERNING LAW, JURISDICTION, WAIVER OF JURY TRIAL, ETC.
(a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California, without regard to any
principles of choice of law.
(b) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the exclusive
jurisdiction of any California state court or federal court of the United States
of America sitting in the Central District of the State of California, situated
in Los Angeles County, and any appellate court from any thereof, in any action
or proceeding arising out of or relating to this Agreement or the Note, or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such California
state court or, to the extent permitted by law, in such federal court. Each of
the parties hereto agrees that a final judgment in any such action or
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proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
(c) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or the Note in
any California state court or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
(d) Each of the Borrower and the Lender hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
(whether based on contract, tort or otherwise) arising out of or relating to
this Agreement or the Note or the actions of the Lender in the negotiation,
administration, performance or enforcement thereof.
7.9. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement. The signatures of any party to a counterpart shall be
deemed to be a signature to, and may be appended to, any other counterpart.
7.10. FURTHER ASSURANCES. The Borrower agrees that at any time and from
time to time, at the expense of the Borrower, the Borrower will promptly execute
and deliver all further instruments and documents (including, without
limitation, any financing statements and any amendments to financing statements)
and take all further action, that may be necessary or reasonably desirable or
that the Lender may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby, to enable the
Lender to exercise and enforce its rights and remedies hereunder with respect to
any Collateral or to carry out and consummate the matters contemplated herein
and in the Transaction Documents.
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IN WITNESS WHEREOF, each of the Borrower and the Lender has caused this
Agreement to be executed by its officer thereunto duly authorized, as of the
date first above written.
"BORROWER" "LENDER"
ARTISTdirect Records, L.L.C. ARTISTdirect Recordings, Inc.
By: ARTISTdirect Recordings, Inc. By: ARTISTdirect, Inc.
Its: Member Its: Sole Shareholder
By: ARTISTdirect, Inc. By: /s/ MARC GEIGER
Its: Sole Shareholder ----------------------------
Marc Geiger
Its: Chief Executive Officer
By: /s/ MARC GEIGER
-------------------------
Marc Geiger
Its: Chief Executive
Officer
By: Radar Records Holdings, LLC
Its: Member
By: /s/ FREDERICK W. FIELD
------------------------------
Frederick W. Field
Its: Member
ACCEPTED AND AGREED INSOFAR
AS THE FOREGOING CONCERNS
RADAR RECORDS HOLDINGS, LLC:
Radar Records Holdings, LLC
By: /s/ FREDERICK W. FIELD
---------------------------
Frederick W. Field
Its: Member
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EXHIBIT 1
MORTGAGE OF COPYRIGHTS
KNOW ALL MEN BY THESE PRESENTS THAT, for good and valuable
consideration, receipt whereof is hereby acknowledged, the undersigned,
ARTISTdirect Records, L.L.C. (the "Mortgagor"), does hereby collaterally
mortgage and assign for collateral security to ARTISTdirect Recordings, Inc., a
Delaware corporation (the "Mortgagee"), its successors and assigns, all of
Mortgagor's right, title and interest in and to any and all copyrights which
Mortgagor now has or may acquire in the future. This mortgage is executed for
collateral security to Mortgagee to the extent and for purposes set forth in
connection with the Advances made pursuant to the terms of the Loan and Security
Agreement dated May 31, 2001 between Mortgagor and Mortgagee.
Upon the final and indefeasible payment to Mortgagee of the obligation
secured hereby, this Mortgage shall automatically terminate.
IN WITNESS WHEREOF, the undersigned has executed this Mortgage on this
___ day of______, 2001.
ARTISTdirect RECORDS, L.L.C.
By: /s/ FREDERICK W. FIELD
------------------------------
Frederick W. Field
Its: Chief Executive Officer
STATE OF CALIFORNIA
ss.:
COUNTY OF LOS ANGELES
On the ____ day of ___________, 2001 before me personally came
_________________, to me known to be the ___________ of Mortgagor described in
and who executed the foregoing instrument, and acknowledged that he executed the
same.
_____________________
Notary Public
126
REVOLVING CREDIT NOTE
$50,000,000
Los Angeles, California _______, 2001
FOR VALUE RECEIVED, the undersigned, ARTISTdirect Records, L.L.C., a
Delaware limited liability company (the " Borrower"), hereby unconditionally
promises to pay to the order of ARTISTdirect Recordings, Inc., a Delaware
corporation (the "Lender"), in lawful money of the United States of America and
in immediately available funds, on the dates and in the location and manner
provided in the Loan and Security Agreement dated May 31, 2001 between the
Borrower and the Lender (as amended, supplemented or otherwise modified from
time to time, the "Loan and Security Agreement") and the Operating Agreement of
the Borrower dated May 31, 2001 (as amended, supplemented or otherwise modified
from time to time, the "Operating Agreement"), the principal sum of $50,000,000
or, if less, the aggregate unpaid principal amount of all Advances made by the
Lender to the Borrower pursuant to the Loan and Security Agreement and the
Operating Agreement. Capitalized terms not otherwise defined herein shall have
the meanings specified in the Loan and Security Agreement.
Advances shall be made to the Borrower as described in the Loan and
Security Agreement and the Operating Agreement. The holder of this Note shall
endorse on the schedule annexed hereto and made a part hereof the date and
amount of each Advance made pursuant to the Loan and Security Agreement and the
date and amount of each payment or prepayment of principal thereof. Each such
endorsement constitutes prima facie evidence of the accuracy of the information
endorsed. The failure to make any such endorsement will not affect the
obligations of the Borrower in respect of such Advance.
This Note (a) is the Note referred to in Section 2.1 of the Loan and
Security Agreement and (b) is subject to the provisions of the Loan and Security
Agreement and the Operating Agreement. This Note is secured as provided in the
Loan and Security Agreement. Reference is hereby made to the Loan and Security
Agreement for a description of the properties and assets in which a security
interest has been granted, the nature and extent of the security, the terms and
conditions upon which the security interests were granted and the rights of the
holder of this Note in respect thereof.
Advances under this Note shall bear interest at the Specified Rate as
set forth in the Loan and Security Agreement. The principal amount of all such
Advances, and interest thereon, shall be payable as set forth in the Loan and
Security Agreement.
Upon the occurrence of any one or more of the Events of Default set
forth in the Loan and Security Agreement, all amounts then remaining unpaid on
this Note will become, or may be declared to be, immediately due and payable,
all as provided in the Loan and Security Agreement. The terms of this Note shall
be conclusive and binding on the Borrower absent manifest error.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
It is the desire and intent of the parties hereto that the provisions of
this Note shall be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, to the extent that a restriction contained
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in this Note is more restrictive than permitted by the laws of any jurisdiction
where this Agreement may be subject to review and interpretation, the terms of
such restriction, for the purpose only of the operation of such restriction in
such jurisdiction, shall be the maximum restriction allowed by the laws of such
jurisdiction and such restriction shall be deemed to have been revised
accordingly herein.
If, notwithstanding the provisions of the foregoing paragraph, any
provision of this Note or the application hereof is held to be wholly invalid,
such invalidity shall not affect any other provisions or application of this
Note that can be given effect without the invalid provisions or application, and
to this end the provisions of this Note are hereby declared to be severable.
In interpreting the provisions of this Note, no presumption shall apply
against any party that otherwise would operate against such party by reason of
such document having been drafted by such party or at the direction of such
party or an Affiliate of such party.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO ANY PRINCIPLES OF
CHOICE OF LAW.
ARTISTdirect RECORDS, L.L.C.
By: _____________________________
Frederick W. Field
Its: Chief Executive Officer
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SCHEDULE OF REVOLVING LOANS
PRINCIPAL OUTSTANDING
AMOUNT BORROWED PRINCIPAL
DATE OR REPAID* BALANCE SIGNATURE BY HOLDER
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
------------- ---------------- --------------- ---------------------------------
--------------------------------------
* + indicates principal amounts borrowed
- indicates principal amounts repaid
-
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APPENDIX D
130
APPENDIX D
CERTIFICATE OF AMENDMENT
OF THE
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ARTISTDIRECT, INC.
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
ARTISTdirect, Inc., (the "Corporation"), a corporation organized and
existing under the laws of the State of Delaware, by its duly authorized
officers, does hereby certify that:
FIRST: That the Board of Directors of the Corporation has duly adopted
resolutions (i) authorizing the Corporation to execute and file with the
Secretary of State of the State of Delaware an amendment of the Corporation's
Third Amended and Restated Certificate of Incorporation to reclassify, change,
and convert each ten (10) outstanding shares of the Corporation's Common Stock,
par value $0.01 per share, into one (1) share of Common Stock, par value $0.01
per share; (ii) declaring such amendment to be advisable and (iii) directing
that such amendment be considered at the 2001 Annual Meeting of Stockholders.
SECOND: That upon the effectiveness of this Certificate of Amendment of
the Third Amended and Restated Certificate of Incorporation, the Third Amended
and Restated Certificate of Incorporation is hereby amended by adding a new
Article TENTH to read as follows:
"ARTICLE X
Each ten shares of the Common Stock, par value $0.01 per share,
of the Corporation issued and outstanding or held in treasury as of
12:01 a.m. Pacific Daylight Savings Time on June 29, 2001 (the
"Effective Time") shall be reclassified as and changed into one (1)
share of Common Stock, par value $0.01 per share, of the Corporation,
without any action by the holders thereof. Each stockholder who,
immediately prior to the Effective Time, owns a number of shares of
Common Stock which is not evenly divisible by ten shall, with respect
to such fractional interest, be entitled to receive from the
Corporation cash in an amount equal to such fractional interest
multiplied by the average of the closing bid and closing asked prices
of the Common Stock as last reported on The Nasdaq National Market
immediately prior to the Effective Time."
THIRD: That, in accordance with the provisions of the Delaware General
Corporation Law, the holders of a majority of the outstanding Common Stock of
the Corporation entitled to vote thereon affirmatively voted in favor of the
amendment at the 2001 Annual Meeting of Stockholders held on June 29, 2001.
FOURTH: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law by the Board
of Directors and stockholders of the Corporation.
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131
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of the Third Amended and Restated Certificate of Incorporation to be
executed by Marc P. Geiger, its Chairman and Chief Executive Officer, and
attested to by James B. Carroll, its Executive Vice President, Chief Financial
Officer and Secretary, this 29th day of June, 2001.
ARTISTDIRECT, INC.
By:
-----------------------------
Marc P. Geiger
Chairman and Chief Executive
Officer
ATTEST:
-----------------------------------
James B. Carroll
Executive Vice President, Chief
Financial Officer and Secretary
D-2
132
EXHIBIT 1
133
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated May 31, 2001, is
entered into between ARTISTdirect, Inc., a Delaware corporation ("Company") and
Frederick W. Field ("Employee"), and shall be effective upon the date that all
of the conditions set forth in that certain side letter agreement of even date
(the "Side Letter") among Company, ARTISTdirect Recordings, Inc. ("ADR"),
Employee, Radar Records Holdings, LLC, a Delaware limited liability company
("FieldCo"), and ARTISTdirect Records, L.L.C. (the "Label") shall have been
satisfied (the "Effective Date").
RECITALS
WHEREAS, Company desires to employ Employee to serve Company and its
subsidiaries, and Employee desires to be so employed by Company, on the terms
and subject to the conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set
forth herein, Company hereby employs Employee, and Employee agrees to be
employed by Company, as Chairman and Chief Executive Officer. Employee shall be
Company's most senior executive. Employee shall report solely and directly to
Company's Board of Directors (the "Board"). During the Term, Employee shall
faithfully perform to the best of his ability all services and acts as both (a)
are consistent with his title and position and (b) may reasonably be assigned to
him by the Board.
2. Devotion.
(a) During the Term, Employee shall devote his business time, skill and
energies exclusively to the business of Company and its subsidiaries from time
to time (the "Subsidiaries"), which shall include Sno-Core, LLC, notwithstanding
that Company has less than a fifty percent (50%) interest therein.
(b) It is hereby acknowledged that, concurrently with the execution of
this Agreement, Employee and the Label, which is a Subsidiary, are entering into
an employment agreement whereby, subject to the satisfaction of the conditions
set forth in the Side Letter, Employee shall become the Chief Executive Officer
of the Label (the "Label Employment Agreement") and that, subject to the Side
Letter, FieldCo, which is an affiliate of Employee, is being issued units of
membership interest in the Label. In light of the foregoing, it is specifically
acknowledged and agreed that the performance of Employee's services to the Label
pursuant to the Label Employment Agreement shall not be deemed to be a breach of
this Agreement so long as the performance by Employee of his duties hereunder
are not materially and adversely affected thereby. In addition, provided such
activities do not unreasonably interfere with the performance by Employee of his
duties hereunder, Employee shall be entitled to devote not more than twenty
percent (20%) of his total business time, measured upon a yearly basis, to the
motion picture and television activities of Radar Pictures, LLC and service on
the board of directors of each of the following companies: Huge Click,
Interland, Load Media, Omnipod, Strategic Data Corporation and E-Vox (such
activities and service, collectively, the "Permitted Outside Activities").
Employee shall
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be entitled to retain for his own account the proceeds earned by Employee from
the Permitted Outside Activities.
3. Limitation on Authority. Employee shall not make or give on behalf of
Company and/or ADR, any approval, vote, consent, decision or determination
concerning the Label that the Operating Agreement of the Label explicitly
reserves to ADR, the Founding Members or a Majority in Interest, but rather,
Employee shall refer each such approval, vote, consent, decision or
determination to the Board, in order that the Board may make or give such
approval, vote, consent, decision or determination on behalf of Company and/or
ADR. Furthermore, Employee shall abstain from voting in any such decision or
determination of the Board; provided, however, that Employee need not abstain
from giving his consent as a director in any unanimous written consent of the
Board.
4. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of Company in the Los Angeles area;
provided, however, it is agreed that Employee will be expected to travel from
time to time at Company's expense in accordance with the provisions of Section
7(c) below.
5. Term. The term of Employee's employment shall commence on the Effective
Date and continue for five years (the "Term"), unless terminated sooner as
provided in Section 8 below.
6. Compensation. For all services to be rendered by Employee hereunder
(other than to the Label), Employee shall be paid by Company the amounts set
forth in this Section 6. Except as specifically provided in the Label Employment
Agreement, Employee shall not be entitled to additional compensation for
performing any services consistent with his duties hereunder for any Subsidiary.
(a) Base Salary. Company shall pay Employee a base salary at the annual
rate of Five Hundred Thousand Dollars ($500,000), payable in accordance with
Company's standard payment schedule for employees.
(b) Participation in Executive Bonus Pool. Employee shall be entitled to
participate in Company's executive performance bonus pool, the details of which
participation and plan shall be determined by the Compensation Committee of the
Board.
(c) Stock Options. Pursuant to Notices of Grant of Stock Option
substantially in the forms attached hereto as Exhibits 1, 2 and 3, Company shall
issue Employee three options to acquire shares of common stock in Company.
Amounts payable to Employee pursuant to this Section 6 shall be subject to
required withholdings and reviewed for any increases annually by the
Compensation Committee of the Board, provided that any increases shall be in the
sole discretion thereof.
7. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company
retirement, profit sharing and pension plans and life and other insurance
programs, as well as other benefit programs (other than employee bonus plans),
which are available to the other most senior executives of Company, subject to
Company's policies with respect to all of such benefits or insurance programs or
plans, and the terms thereof, which policies and terms may include limitations
on the eligibility of a Company employee to participate simultaneously in both
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Company benefit plans and Subsidiary benefit plans; provided, however, that
notwithstanding anything herein to the contrary, Company shall not be obligated
to institute or maintain any particular benefit or insurance program or plan or
aspect thereof.
(b) Employee shall be entitled to not less than four (4) weeks' vacation
during each year of the Term hereof to be scheduled at mutually agreeable times
and accrued and taken in accordance with Company policy. For the avoidance of
doubt, any vacation to be taken by Employee pursuant to this Agreement shall be
taken simultaneously with any vacation to be taken by Employee pursuant to the
Label Employment Agreement.
(c) Company agrees to reimburse Employee for such reasonable and
necessary out-of-pocket expenses incurred by Employee during the Term in the
performing of services for Company, including but not limited to for
business-related travel (first class), hotel, meals, telephone calls and
entertainment. If Employee shall travel in respect of both any Permitted Outside
Activity and Company business, Employee shall only seek and be entitled to those
expenses reasonably allocable to his pursuit of Company business. As a condition
to the reimbursement of such expenses by Company to Employee, Employee shall
provide Company with copies of invoices, receipts or other satisfactory
documentation in sufficient detail to allow Company to confirm the business
nature of the expenses and claim an income tax deduction for such paid items, if
such items are deductible. The obligations of Company to make the reimbursements
specified hereunder for approved expenses accrued prior to the effective date of
termination of this Agreement shall survive any termination of the Term.
8. Termination.
(a) Company may terminate Employee's employment hereunder after the
occurrence and during the continuance of any Disability of Employee, upon thirty
(30) days' prior written notice to Employee. For purposes of this Agreement,
"Disability" means Employee's incapacity to perform substantially all of his
then current duties as required hereunder for one hundred eighty (180) days or
more within any period of three hundred sixty-five (365) consecutive days
because of mental or physical condition, illness or injury, consistent with
applicable state and federal law. In the event of any dispute regarding the
existence of Employee's Disability, the matter will be resolved by the
determination of a physician qualified to practice medicine in the State of
California, selected by Employee and reasonably approved by Company, or, failing
such approval, by a majority of three physicians qualified to practice medicine
in the State of California, one to be selected by Company, one to be selected by
Employee and the third to be selected by the two designated physicians. For this
purpose, Employee will submit to appropriate medical examinations.
(b) Company may terminate Employee's employment hereunder for Cause. For
the purposes of this Agreement, "Cause" shall mean Employee shall have (i) been
convicted of, or pleaded nolo contendere to, any felony or any lesser crime
involving fraud, embezzlement, or misappropriation of the property of Company or
any Subsidiary, (ii) engaged in gross negligence or willful misconduct in the
performance of Employee's duties hereunder, (iii) materially breached any of the
provisions of Sections 1, 2 or 3 above, or 9, 10, 11 or 17 below, (iv)
misappropriated for his own purpose and benefit any (A) material property of
Company or any Subsidiary or (B) any material opportunity of Company or any
Subsidiary, (v) had his employment with the Label terminated by the Label for
"Cause" (as defined in the Label Employment Agreement) or (vi) terminated his
employment with the Label without "Good Reason" (as defined in the Label
Employment Agreement). Notwithstanding anything to the contrary contained
herein, no event or circumstance described in any of the preceding clauses
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(ii), (iii) or (iv)(B) above shall constitute "Cause" for purposes of this
Agreement unless Company gives Employee written notice delineating the claimed
event or circumstance and setting forth Company's intention to terminate
Employee's employment if such claimed event or circumstance is not duly remedied
within thirty (30) days) following such notice, if susceptible to remedy, and
Employee fails to remedy such event or circumstance within such thirty (30) day
period; provided, however, that if such failure susceptible to remedy cannot be
remedied within such thirty (30) day period, it shall not constitute Cause
hereunder if Employee shall commence such remedy within such thirty (30) day
period and thereafter diligently pursue such remedy and cause its completion
within a reasonable period thereafter. In addition, the first breach by Employee
of either the commitment contained in the second sentence of Section 2(b) above
(regarding Employee's performance of services to the Label under the Label
Employment Agreement) or the commitment contained in the third sentence of
Section 2(b) above (regarding the Permitted Outside Activities) shall not be
grounds for termination for Cause. For the avoidance of doubt, Employee's
resignation from the Board, and his consequential loss of the title of
"Chairman," shall not in and of themselves constitute breaches of this
Agreement.
(c) The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
(d) Employee may terminate his employment hereunder forthwith at any
time for Good Reason upon written notice to Company. For purposes of this
Agreement, "Good Reason" shall mean the occurrence of any of the following: (i)
a material and substantial reduction in Employee's title, responsibilities,
duties or reporting (although Employee shall cease to hold the title of
"Chairman" if he ceases to be chairman of the Board); (ii) a reassignment of
Employee without Employee's consent to a geographic location in excess of
thirty-five (35) miles from Company's current principal offices; (iii) a
material breach by Company of any of its material obligations to Employee
hereunder; (iv) the failure of Employee to be re-elected to the Board following
the expiration of his initial service thereon, so long as Employee shall not
previously have resigned or been removed from the Board, or such failure is not
due to Employee's suffering from a disability that, if it continues, could
reasonably be expected to constitute a Disability hereunder; (v) Company's
materially altering the nature of its business; or (vi) Employee's termination
of his employment with the Label for "Good Reason" (as defined in the Label
Employment Agreement). Notwithstanding anything to the contrary contained
herein, none of the foregoing events or circumstances (other than clause (vi)
above) shall constitute "Good Reason" for purposes of this Agreement unless
Employee gives Company written notice delineating the claimed event or
circumstance and setting forth Employee's intention to terminate Employee's
employment if such claimed event or circumstance is not duly remedied within
thirty (30) days following such notice, if susceptible to remedy, and Company
fails to remedy such event or circumstance (or cause such remedy) within such
thirty (30) day period; provided, however, that if such failure susceptible to
remedy cannot be remedied within such thirty (30) day period and does not
involve a payment of compensation or a reimbursement of expenses, it shall not
constitute Good Reason hereunder if Company shall commence such remedy within
such thirty (30) day period and thereafter diligently pursue such remedy and
cause its completion within a reasonable period thereafter.
(e) Employee may terminate his employment with Company at any time with
"Justification" upon written notice to Company. For purposes of this Agreement,
"Justification" shall mean: (i) Company shall have committed any act or omission
(over the objection of Employee, if Employee is afforded the opportunity to
participate in the decision whether to commit such act or omission) and Employee
reasonably believes such act or omission constitutes a material violation of any
law or governmental regulation, provided Employee first
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gives Company written notice delineating the claimed event or circumstance and
setting forth Employee's intention to terminate Employee's employment if such
claimed event or circumstance is not duly remedied within thirty (30) days
following such notice, if susceptible to remedy, and Company fails to remedy
such event or circumstance within such thirty (30) day period; ; provided,
however, that if such failure susceptible to remedy cannot be remedied within
such thirty (30) day period, it shall not constitute Justification hereunder if
Company shall commence such remedy within such thirty (30) day period and
thereafter diligently pursue such remedy and cause its completion within a
reasonable period thereafter; or (ii) the commencement of any legal proceeding
in which (A) the Label and/or ADR alleges that FieldCo materially breached the
Label Operating Agreement or (B) the Label and/or FieldCo alleges that ADR
materially breached the Label Operating Agreement; provided, however, that any
termination by Employee of his employment with Company arising from the
commencement of any arbitration proceeding pursuant to Section 7(h) of the Label
Employment Agreement shall be subject to Section 8(f) below.
(f) Employee may terminate his employment with Company forthwith upon
written notice upon the commencement of any arbitration proceeding pursuant to
Section 7(h) of the Label Employment Agreement. Notwithstanding that Employee
terminates his employment with Company pursuant to this Section 8(f), the nature
of the termination of Employee's employment with the Label shall determine the
nature of the termination of Employee's employment with Company. If Employee
terminates his employment pursuant to this Section 8(f), and: (i) Employee's
employment with the Label is terminated by the Label for "Cause" (as defined in
the Label Employment Agreement), then Employee's employment with Company shall
be deemed to have been terminated by Company for Cause pursuant to Section
8(b)(v) above; (ii) Employee remains employed at the Label because the
arbitrator determines that the Label was not entitled to terminate Employee's
employment for "Cause" (as defined in the Label Employment Agreement), then
Employee's employment with Company shall be deemed to have been terminated by
Employee with Justification pursuant to Section 8(e) above; (iii) Employee's
employment with the Label is terminated for "Good Reason" (as defined in the
Label Employment Agreement), then Employee's employment with Company shall be
deemed to have been terminated by Employee for Good Reason pursuant to Section
8(d) above; or (iv) Employee's employment with the Label is terminated by
Employee without "Good Reason" (as defined in the Label Employment Agreement),
then Employee's employment with Company shall be deemed to have been terminated
by Employee other than pursuant to Sections 8(d) or 8(e) above.
(g) If Employee's employment is terminated pursuant to this Section 8, Employee
shall be entitled to, and Company's obligation hereunder shall be limited to,
(i) the payment of any unpaid compensation accrued under Section 6(a) above
through the effective date of such termination; (ii) any unreimbursed expenses
incurred, and other accrued employee benefits (as described above) accrued,
through the date of termination; and (iii) the additional compensation provided
in Section 8(h) below, if any.
(h) If Employee's employment is terminated (or deemed terminated in
accordance with Section 8(f) above):
(i) by Company pursuant to Section 8(a) above, Employee will receive
the benefit of any Company disability plans; or
(ii) (A) by Company other than pursuant to Sections 8(a), 8(b) or
8(c) above, (B) by Employee pursuant to Section 8(d) above, or (C) deemed
terminated as set forth in
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clause (B) above in accordance with Section 8(f)(iii) above, Company shall pay
Employee a lump sum in an amount equal to the aggregate amount of Employee's
base salary payable at the annualized level being paid to Employee pursuant to
Section 6 above at the time of such termination, less required withholdings,
during the Payment Period specified below. As used herein, the "Payment Period"
shall mean (I) fifty percent (50%) of the remainder of the scheduled Term if
such termination occurs during the first three (3) years of the Term, (II)
twelve (12) consecutive months after the effective date of such termination if
such termination occurs during the fourth (4th) year of the Term, or (III) the
full remainder of the scheduled Term if such termination occurs during the fifth
(5th) year of the Term. Employee shall have no duty of mitigation and shall not
be subject to any right of offset with respect to any other compensation
received by Employee during the Payment Period. If, pursuant to Section 8(f)(ii)
above, Employee's employment shall be deemed to have been terminated by Employee
with Justification pursuant to Section 8(e) above, then the terms of this
Section 8(h)(ii) shall apply to such termination; provided, however, that the
Payment Period shall be reduced by fifty percent (50%). The parties hereto agree
that the payment set forth in this Section 8(h)(ii) constitutes fair
compensation and the sole remedy for damages for any termination addressed in
this Section 8(h)(ii).
(i) Nothing in this Agreement shall be deemed a release or waiver of
right to any medical or other employee benefits available to Employee on or
after the effective date of termination of the executive's employment by Company
under any federal, state or local law that provides for the continuation of any
medical or other employee benefits after employment.
(j) (i) In the event of a dispute between Employee and Company as to
whether any termination of Employee's employment constituted a termination by
Company for Cause, a termination by Employee for Good Reason, or a termination
by Employee with Justification, and, consequently, as to whether any payment is
due to Employee pursuant to Section 8(h)(ii) above and/or which provisions of
Section 10 below shall be applicable (an "Arbitrable Dispute"), then solely as
to such Arbitrable Dispute (and not as to any other disputes under this
Agreement, as such other disputes shall be settled in accordance with Section 14
below), the Arbitrable Dispute shall be settled exclusively by arbitration,
before a single arbitrator, in accordance with this Section 8(j) and the then
most applicable rules of the American Arbitration Association for employment
dispute resolution. Judgment upon any award rendered by the arbitrator may be
entered by any state or federal court having jurisdiction thereof. Such
arbitration shall be decided within ninety (90) days of the filing of a petition
to arbitration. Such arbitration shall be administered by the American
Arbitration Association and shall be the exclusive remedy for determining any
Arbitrable Dispute (as opposed to any other disputes between the parties
hereto). If a party desires to submit an Arbitrable Dispute to arbitration
pursuant to this Section 8(j) when the arbitration proceeding set forth in
Section 7(h) of the Label Employment Agreement already is in effect, such
Arbitrable Dispute shall be determined in the same arbitration proceeding as
that which is already so in effect.
(i) If the parties are unable to agree upon an arbitrator, the
parties shall select a single arbitrator from a list of fifteen arbitrators
drawn by the parties at random from the "Independent" (or "Gold Card") list of
retired judges or, at Employee's option, from a list of fifteen persons (which
shall be retired judges or litigation attorneys experienced in labor matters)
provided by the American Arbitration Association. If the parties are unable to
agree upon an arbitrator from the list so drawn, then the parties shall each
strike names alternately from the list, with the first to strike being
determined by lot. After each party has used seven strikes, the remaining name
on the list shall be the arbitrator. If such person is unable to serve for any
reason, the parties shall repeat this process until an arbitrator is selected.
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(iii) In the event of an Arbitrable Dispute, the parties shall be
entitled to reasonable discovery subject to the discretion of the arbitrator.
The remedial authority of the arbitrator shall be the same as, but no greater
than, would be the remedial power of a court having jurisdiction over the
parties in respect of the specific Arbitrable Dispute, and shall be expressly
limited to such Arbitrable Dispute and shall not extend to any other matters or
disputes. The arbitrator shall, upon an appropriate motion, dismiss any claim
without an evidentiary hearing if the party bringing the motion establishes that
he or it would be entitled to summary judgment if the matter had been pursued in
court litigation. In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.
(iv) Unless mutually agreed by the parties otherwise, any such
arbitration shall take place in the City of Los Angeles, California. Any filing
or administrative fees related to such arbitration initially shall be borne by
the party requesting arbitration, and the parties shall bear equally the cost of
the arbitrator's compensation; provided, however, that the arbitrator shall be
entitled to award the prevailing party in such arbitration all of such party's
filing or administrative fees related to such arbitration, as well as require
the nonprevailing party to bear the entire cost of the arbitrator's
compensation. Each party hereto shall be responsible all of its own attorneys'
fees and costs related to such dispute and arbitration proceedings.
9. Rights to Works. In return for the consideration described herein,
Employee agrees as follows:
(a) All inventions, trade secrets, ideas, recordings, original works of
authorship or other work product of any kind that Employee conceives, develops,
discovers or makes in whole or in part pursuant to this Agreement or in the
scope of Employee's employment hereunder and Employee's contributions thereto
(hereinafter referred to as "Works") shall belong solely and exclusively to
Company. Company shall have the perpetual and exclusive right to use, exhibit,
distribute, or license throughout the universe, any Work or part thereof in
which Employee's services for Company are utilized by all forms of audio,
visual, textual, digital, electronic or other distribution that are now known or
may hereafter exist, and otherwise exploit such Works in such media, forums and
for such uses throughout the universe as it deems appropriate; provided,
however, that no likeness of Employee shall be used during or after the Term
without Employee's written consent and no quote of Employee shall be attributed
to Employee during or after the Term without Employee's written consent. All
revenues derived by Company from the use, exhibition, distribution, licensing,
or other exploitation of such Works shall be the sole and exclusive property of
Company.
(b) To the extent that the Works are considered: (i) contributions to
collective works and/or (ii) as parts or components of audiovisual works, the
parties hereby expressly agree that the Works shall be considered "works made
for hire" under the United States Copyright Act of 1976, as amended (17 U.S.C.
Section 101 et seq.). In accordance therewith, the sole right of copyright in
and to the Works shall belong exclusively to Company in perpetuity. To the
extent that the Works are deemed works other than contributions to collective
works and/or parts or components of audiovisual works, Employee hereby
irrevocably assigns and transfers to Company to the maximum extent permitted by
law all right, title and interest in the Works, including but not limited to all
copyrights, patents, trade secret rights, and other proprietary rights in or
relating to the Works. At Company's reasonable written request and sole expense,
Employee shall execute, verify, acknowledge, deliver and file any and all formal
assignments, recordations and any and all other documents that Company may
prepare and reasonably call for to give effect to the provisions of this
Agreement. If Employee fails to execute any such
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document or instrument, or perform any such act, within ten (10) business days,
Employee shall be deemed to have irrevocably constituted and appointed Company,
with full power of substitution, to be Employee's true and lawful attorney, in
Employee's name, place, and stead, solely to execute, acknowledge, swear to, and
file all instruments, conveyances, certificates, agreements, and other
documents, and to take any action which may be necessary or appropriate to
effect the provisions of this Section 9. The powers of attorney granted herein
shall be deemed to be coupled with an interest and shall be irrevocable.
(c) It is understood that the rights granted to Company in this Section
9 shall continue in effect after the termination or expiration of this Agreement
to the extent necessary for Company's full enjoyment of such rights.
(d) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to either (A) the business of Company or any of its Subsidiaries at
the time of conception or reduction to practice of the invention, or (B) actual
or demonstrably anticipated research or development of Company or any of its
Subsidiaries; or (ii) result from any work performed by Employee for Company or
any of its Subsidiaries. A copy of California Labor Code Sections 2870, 2871 and
2872 is attached to this Agreement as Exhibit 4.
(e) Employee shall disclose all inventions and innovations to Company
that reasonably could be anticipated to be owned by or required to be assigned
to Company hereunder.
(f) Notwithstanding the foregoing provisions of this Section 9, this
Section 9 shall not apply to Works relating to the Label's business and affairs,
as such Works are addressed in the Label Employment Agreement.
10. Restrictions. In recognition of the consideration described herein,
Employee agrees that:
(a) Without limiting the generality of Section 2(a) above, and except as
set forth in Section 2(b) above, Employee shall not engage or be financially
interested, directly or indirectly, at any time prior to the "Noncompetition
Expiration Date," in any activity directly competitive with any business then
carried on by, or anticipated to be carried on by, Company or any of its
Subsidiaries (excluding the Label, as a corresponding commitment appears in the
Label Employment Agreement). Notwithstanding the foregoing, Employee may acquire
or hold, solely for investment, publicly traded securities of any corporation,
so long as such securities, in the aggregate, constitute less than five percent
(5%) of any class or series of outstanding securities of such corporation. As
used in this Section 10, "Noncompetition Expiration Date" shall mean:
(i) If Employee's employment is terminated by Company pursuant to
Section 8(a) or 8(c) above (or deemed so terminated in accordance with Section
8(f) above), then the actual date of termination of Employee's employment with
Company;
(ii) If Employee's employment is terminated (A) by Company pursuant
to Section 8(b) above (B) by Employee other than pursuant to Sections 8(d) or
8(e) above, or (C) deemed terminated as set forth in clauses (A) or (B) above in
accordance with Section 8(f)
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above, then the later of the actual date of such termination or the date upon
which the Term is scheduled to expire; or
(iii) If Employee's employment is terminated (A) by Company other
than pursuant to Sections 8(a), 8(b) or 8(c) above, (B) by Employee pursuant to
Sections 8(d) or 8(e) above, or (C) deemed terminated as set forth in clauses
(A) or (B) above in accordance with Section 8(f) above, then the actual date of
such termination.
(b) During the term of Employee's employment and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to Company's (and its Subsidiaries') business and affairs
that come to his knowledge while employed by Company (excluding information that
is or becomes publicly known or available for use through no fault of Employee),
including but not limited to: (i) matters of a business nature related to
Company or any Subsidiary, such as information about costs, profits, markets,
sales, lists of customers, lists of clients and other information of a similar
nature, (ii) plans or strategies for development of the business of Company or
any Subsidiary and (iii) matters of a technical nature related to Company or any
Subsidiary. Except as required in the performance of Employee's duties to
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person (except to his attorneys and financial advisors and as
required by law or legal process, provided Employee shall undertake to give
Company notice prior to such disclosure and shall comply with any applicable
protective order or equivalent), directly or indirectly, such matters unless
such use or disclosure has been specifically authorized in writing by Company in
advance. Employee shall advise his attorneys and financial advisors that such
trade secrets and confidential information are confidential and that by
receiving such trade secrets and confidential information such attorneys and
financial advisors are agreeing to be bound by this Section 10(b). Employee
agrees to be responsible for any breach of this Section 10(b) by his attorneys
or financial advisors. Notwithstanding the foregoing provisions of this Section
10(b), this Section 10(b) shall not apply to trade secrets and confidential
information relating to the Label's business and affairs, as such matters are
addressed in the Label Employment Agreement.
(c) Employee shall not, directly or indirectly, hire, offer to hire,
entice away, or in any other manner persuade or attempt to persuade any officer,
employee (other than Employee's personal assistant(s)), agent, representative,
customer, client, performer or songwriter of Company or any Subsidiary, to
discontinue his or her relationship with Company or any Subsidiary, until the
"Nonsolicitation Expiration Date," which shall mean the date one (1) year
following the date upon which the Term is scheduled to expire, unless Employee's
employment is terminated (i) by Company other than pursuant to Sections 8(a),
8(b) or 8(c) above, (ii) by Employee pursuant to Sections 8(d) or 8(e) above, or
(iii) deemed terminated as set forth in clauses (i) or (ii) above in accordance
with Section 8(f) above, in each of which cases it shall mean the date one (1)
year following the actual date of such termination. Notwithstanding the
foregoing provisions of this Section 10(c), this Section 10(c) shall not apply
to hiring, offering to hire, enticing away, or in any other manner persuading or
attempting to persuade any officer, employee (other than Employee's personal
assistant(s)), agent, representative, customer, client, performer or songwriter
of the Label, to discontinue his or her relationship with the Label, as such
matters are addressed in the Label Employment Agreement.
11. Employee's Representations. Employee hereby represents and warrants
that: (a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, (c) he will
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comply in all material respects with all policies of Company of which he has
written notice, provided they are consistent with applicable laws and (d) this
Agreement is enforceable against Employee in accordance with its terms, except
(i) as such enforceability may be limited by or subject to any bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally, (ii) as such obligations are subject to general
principles of equity and (iii) as rights to indemnity may be limited by federal,
state or local securities laws or by public policy. Without limiting the
generality of the foregoing, Employee specifically represents and warrants that
no term or condition under any contract or agreement related to Employee's past
employment with Universal Music Group or the termination thereof shall in any
way reduce or restrict Employee's ability to execute and perform this Agreement.
12. Assistance with Litigation. Employee agrees that for five years
following termination of his employment with Company, Employee shall make
himself reasonably available to Company to assist Company with litigation based
on fact or circumstance that arose during his employment. Employee further
agrees to cooperate reasonably with Company in any such litigation. Company
agrees to compensate Employee at a reasonable rate for his time, except time
spent in depositions or trial. Company further agrees to reimburse Employee such
reasonable and necessary out-of-pocket expenses incurred by Employee in
providing such assistance, in accordance with the principles set forth in
Section 7(c) above.
13. Company's Representations. Company hereby represents and warrants that,
subject to the satisfaction of the conditions set forth in the Side Letter: (a)
it has the right, power and authority to enter into this Agreement and to incur
the obligations incurred by it herein, (b) this Agreement has been duly and
validly authorized by Company and is enforceable against Company in accordance
with its terms, except (i) as such enforceability may be limited by or subject
to any bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, (ii) as such obligations are subject to
general principles of equity and (iii) as rights to indemnity may be limited by
federal, state or local securities laws or by public policy, and (c) the
provisions of this Agreement do not violate any other contracts or agreements to
which it is a party that would adversely affect its ability to perform its
obligations hereunder.
14. Governing Law.
(a) This Agreement shall be governed by and construed and enforced in
accordance with the internal substantive laws (and not the laws of choice of
laws) of the State of California.
(b) Subject to Section 8(j) above, each of the parties hereto hereby
irrevocably and unconditionally submits, for itself and its property, to the
exclusive jurisdiction of any California state court or federal court of the
United States of America sitting in the Central District of the State of
California, situated in Los Angeles County, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
California state court or, to the extent permitted by law, in such federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(c) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in
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any California state court or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
15. Exhibits. All exhibits to this Agreement are incorporated herein in
their entirety.
16. Entire Agreement. This Agreement and the Side Letter constitute the
whole agreement of the parties hereto in reference to any employment of Employee
by Company and in reference to the subject matter hereof, and all prior
agreements, promises, representations and understandings relative thereto are
merged herein.
17. Assignability. The services to be performed by Employee hereunder are
personal in nature and, accordingly, Employee may not, without the prior express
written consent of Company in each instance, assign or transfer this Agreement
or any rights or obligations hereunder. Company may not assign or transfer this
Agreement or any rights or obligations hereunder. For purposes of this
Agreement, a "Change in Control," meaning a sale of all or substantially all of
the assets of Company, or any transaction or series of related transactions
(including without limitation, any merger, reorganization, consolidation or
purchase of outstanding equity interests) resulting in the transfer of 50% or
more of the outstanding voting securities of Company, shall not be considered an
assignment. For the avoidance of doubt, however, the provisions of Section 8(d)
above shall continue to apply following a Change in Control. Nothing expressed
or implied herein is intended or shall be construed to confer upon or give to
any person, other than the parties hereto, any right, remedy or claim under or
by reason of this Agreement or of any term, covenant or condition hereof.
18. Remedies. Any material breach or violation by Employee of the terms of
Sections 3, 9, or 10 above, would result in immediate and irreparable injury and
harm to Company, and would cause damage to Company in amounts difficult to
ascertain and for which Company's remedies and defenses at law would be
inadequate. Accordingly, (a) in the event of any breach or threatened breach of
Section 10(a) above, Company shall be entitled to seek the remedy of injunction,
as well as all other remedies to which Company may be entitled, at law, in
equity or otherwise and (b) in the event of any such breach or threatened breach
of the aforementioned Sections other than Section 10(a) above, Company shall be
entitled to, and Employee hereby consents to, the remedy of injunction, as well
as all other remedies to which Company may be entitled, at law, in equity or
otherwise. The preceding sentence shall not be construed to prevent Employee
from disputing the factual basis of any remedies or defenses asserted by
Company.
19. Covenants Reasonable as to Time and Territory. Employee and Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon Company under this
Agreement, and hereby acknowledge and agree that: (i) such restrictions are
reasonable in time and territory; and (ii) the consideration provided and to be
provided to Employee is sufficient to compensate Employee for such restrictions.
20. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived only by a written instrument executed by the parties hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by any
party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as,
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a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
21. Notices. All notices, consents, requests and other communications hereunder
shall be in writing and, if given by personal delivery, shall be deemed to have
been validly served, given or delivered upon actual delivery and, if mailed or
delivered by overnight courier, shall be deemed to have been validly served,
given or delivered when deposited in the United States mail, as registered or
certified mail, with proper postage prepaid, or when deposited with the courier
service (provided the courier service obtains a signature acknowledging
receipt), and addressed to the party or parties to be notified, at the following
addresses (or such other addresses) as a party may designate for itself by like
notice:
If to Employee: Frederick W. Field
c/o Radar Pictures
10900 Wilshire Boulevard, Suite 1400
Los Angeles, CA 90024
With a copy to: Ziffren, Brittenham, Branca & Fischer
1801 Century Park West
Los Angeles, CA 90067-6406
Attention: Skip M. Brittenham, Esq. or
Gary Stiffelman, Esq.
If to Company: ARTISTdirect, Inc.
5670 Wilshire Blvd, Suite 200
Los Angeles, CA 90036
Attention: Marc P. Geiger
With copies to: VP of Business and Legal Affairs
and
Lenard & Gonzalez LLP
1801 Century Park West
Sixth Floor
Los Angeles, CA 90067
Attention: Allen D. Lenard, Esq.
22. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
23. Section Headings. The Section headings herein are used solely for
convenience and shall not be used in the interpretation or construction of this
Agreement.
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24. No Drafting Presumption. In interpreting the provisions of this
Agreement, no presumption shall apply against any party that otherwise would
operate against such party by reason of such document having been drafted by
such party or at the direction of such party.
25. Counterparts: Facsimile. This Agreement may be executed in two
counterparts and by facsimile, each of which shall be deemed an original and
both of which together shall be deemed one Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
/s/ FREDERICK W. FIELD ARTISTdirect, Inc.
----------------------------------
Frederick W. Field By: /s/ MARC GEIGER
------------------------------
Marc Geiger
Its: Chief Executive Officer
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EXHIBIT 1
Option to Acquire 3,023,700 Shares of Common Stock
147
ARTISTDIRECT, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of ARTISTdirect, Inc. (the
"Corporation"):
Optionee: Frederick W. Field
Grant Date: May 31, 2001
Vesting Commencement Date: The date Optionee commences Service as
CEO of the Corporation.
Exercise Price: $0.75 per share
Number of Option Shares: 3,023,700 shares
Expiration Date: May 30, 2008
Type of Option: Incentive Stock Option
-----
X Non-Statutory Stock Option
-----
Date Exercisable: Immediately Exercisable
Vesting Schedule: Although the Option is immediately exercisable,
the Option Shares shall initially be unvested and subject to repurchase by the
Corporation at the Exercise Price paid per share. Optionee shall acquire a
vested interest in, and the Corporation's repurchase right shall accordingly
lapse with respect to, the Option Shares in a series of sixty (60) successive
equal monthly installments upon Optionee's completion of each month of Service
over the sixty (60)-month period measured from the Vesting Commencement Date.
Notwithstanding the foregoing, the Option Shares are also subject to accelerated
vesting as specifically provided for in the attached Stock Option Agreement and
Stock Purchase Agreement. Except as set forth in Section 6(e) of the Stock
Option Agreement attached hereto as Exhibit A or in Section D.6(ii) of the Stock
Purchase Agreement attached hereto as Exhibit B, in no other event shall any
additional Option Shares vest after Optionee's cessation of Service.
REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES
ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE
RIGHTS EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHTS
ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT.
Optionee hereby agrees to be bound by all the terms and
conditions of the Option as set forth in the Stock Option Agreement and Stock
Purchase Agreement attached hereto as Exhibits A and B respectively.
148
All capitalized terms in this Notice shall have the meaning
assigned to them in this Notice or in the attached Stock Option Agreement or
Stock Purchase Agreement.
DATED: MAY 31, 2001
ARTISTDIRECT, INC.
By: /s/ MARC GEIGER
-------------------------------------
Title: Chief Executive Officer
----------------------------------
By: /s/ FREDERICK W. FIELD
-------------------------------------
OPTIONEE: FREDERICK W. FIELD
Address: c/o Radar Pictures, Inc.
10900 Wilshire Blvd.,
Suite 1400
Los Angeles, CA 90024
ATTACHMENTS:
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - STOCK PURCHASE AGREEMENT
EXHIBIT C - PROSPECTUS FOR STOCK OPTION GRANT
149
EXHIBIT A
STOCK OPTION AGREEMENT
150
ARTISTDIRECT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
RECITALS
A. The Board and the shareholders have approved a stock
option grant to Optionee in order to attract and retain Optionee to serve the
Corporation in the capacity of Chairman and Chief Executive Officer.
B. The option evidenced by this Agreement is granted to
Optionee in consideration of the services Optionee is to render the Corporation
and not for any capital-raising purposes or in connection with any
capital-raising activities.
C. The granted option is intended to be a Non-Qualified
Option which does NOT satisfy the requirements of Section 422 of the Code.
D. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, an Option to purchase up to the number of Option
Shares specified in the Grant Notice attached hereto. The Option Shares shall be
purchasable from time to time during the Option term specified in Paragraph 2 at
the Exercise Price.
2. OPTION TERM. This Option shall have a term of seven (7)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This Option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee or as otherwise provided herein. However,
this Option may, in connection with the Optionee's estate plan, be assigned in
whole or in part during Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established for the exclusive benefit
of one or more such family members. The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the Option
pursuant to such assignment or as set forth herein. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Board may deem appropriate.
4. DATES OF EXERCISE. The Option shall become exercisable for
the Option Shares as specified in the Grant Notice.
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5. CESSATION OF SERVICE. The Option term specified in
Paragraph 2 shall terminate (and this Option shall cease to be outstanding)
prior to the Expiration Date in accordance with the following provisions:
(i) Should Optionee cease Service by reason of an
Involuntary Termination, then Optionee's right to
exercise this Option shall lapse, and this Option
shall cease to be outstanding, upon the later of
(a) the expiration of the twelve (12) month period
measured from the date of Optionee's cessation of
Service or (b) the expiration of Optionee's initial
five-year employment term as set forth in the
Employment Agreement. In no event shall this Option
be exercisable at any time after the Expiration
Date.
(ii) Should Optionee cease Service by reason of
Justification, then Optionee's right to exercise
this Option shall lapse, and this Option shall
cease to be outstanding, upon the earlier of (a)
the expiration of the twelve (12) month period
measured from the date of Optionee's cessation of
Service or (b) the expiration of Optionee's initial
five-year employment term as set forth in the
Employment Agreement. In no event shall this Option
be exercisable at any time after the Expiration
Date.
(iii) Should Optionee cease Service for any reason other
than (a) an Involuntary Termination, (b) a
termination for Cause, (c) Optionee's death or
Permanent Disability or (d) Justification, then
Optionee's right to exercise this Option shall
lapse and this Option cease to be outstanding, upon
the earlier of (x) the expiration of the ninety
(90) day period measured from the date of
Optionee's cessation of Service or (y) the
Expiration Date.
(iv) Should Optionee's Service be terminated for Cause,
then this Option shall immediately terminate and
cease to be outstanding.
(v) Should Optionee cease Service by reason of his
death, then the personal representative of
Optionee's estate or the person or persons to whom
the Option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and
distribution or, if the Option has been transferred
to
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152
a trust in accordance with the terms herein, the
trustee of such trust, shall have the right to
exercise this Option. Such right shall lapse, and
this Option shall cease to be outstanding, upon the
earlier of (a) the expiration of the twelve (12)
month period measured from the date of Optionee's
death or (b) the Expiration Date.
(vi) Should Optionee cease Service by reason of
Permanent Disability while this Option is
outstanding, then Optionee's right to exercise this
Option shall lapse, and this Option shall cease to
be outstanding, upon the later of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's cessation of Service or
(b) the expiration of Optionee's initial five-year
employment term as set forth in the Employment
Agreement. In no event shall this Option be
exercisable at any time after the Expiration Date.
In the event that such Permanent Disability
prevents Optionee from personally exercising this
Option, this Option may be exercised by Optionee's
personal authorized representative to the same
extent that Optionee could otherwise exercise this
Option.
(vii) During the applicable post-Service exercise period,
this Option may not be exercised in the aggregate
for more than the number of Option Shares in which
the Optionee has acquired a vested interest in at
the time of Optionee's cessation of Service. Upon
the expiration of such exercise period or (if
earlier) upon the Expiration Date, this Option
shall terminate and cease to be outstanding for any
exercisable Option Shares for which the Option has
not otherwise been exercised.
6. CORPORATE TRANSACTION AND ACCELERATED VESTING OF OPTION
SHARES.
(a) In the event of any Corporate Transaction, the
Option Shares at the time subject to this Option but not otherwise vested shall
automatically vest in full so that this Option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all of
those Option Shares as vested shares. The Corporation shall provide Optionee
with a minimum of ten days prior written notice of any Corporate Transaction.
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153
(b) Immediately following the Corporate Transaction,
this Option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or Parent thereof) in connection with the
Corporate Transaction.
(c) If this Option is assumed in connection with a
Corporate Transaction, then this Option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the Option been exercised immediately prior to such
Corporate Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the same.
(d) This Agreement shall not in any way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
(e) In the event Optionee ceases Service by reason of
an Involuntary Termination, the Option Shares at the time subject to this Option
but not otherwise vested shall automatically vest in full so that this Option
shall immediately upon Optionee's cessation of Service become exercisable for
all of the Option Shares as fully-vested shares and may be exercised for any or
all of those Option Shares as vested shares.
(f) In the event Optionee ceases Service by reason of a
termination for deemed Justification pursuant to Section 8(f)(ii) of the
Employment Agreement, then the Option Shares at the time subject to this Option
but not otherwise vested shall automatically vest as to one-half of such
unvested Option Shares, so that this Option shall, immediately upon Optionee's
cessation of Service, become vested for one-half of such otherwise unvested
Option Shares.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the number and/or
class of securities subject to this Option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this Option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the Option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this Option with respect to
all or any part of the Option Shares for which this Option is at the time
exercisable, Optionee (or any other person or persons exercising the Option)
must take the following actions:
(i) Execute and deliver to the Corporation a
Stock Purchase Agreement for the number of Option Shares for which the
Option is exercised.
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(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation;
(B) shares of Common Stock held by
Optionee (or any other person or persons exercising the Option)
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date; or
(C) to the extent the Option is exercised
for vested Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the Option) shall concurrently provide
irrevocable instructions (a) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus
all applicable federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the Option exercise, payment of the
Exercise Price must accompany the Stock Purchase Agreement
delivered to the Corporation in connection with the Option
exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the Option (if other
than Optionee) have the right to exercise this Option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of federal and state
securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all federal, state and local income and
employment tax withholding requirements applicable to the Option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this Option) a certificate for the purchased Option Shares.
(c) In no event may this Option be exercised for any
fractional shares.
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10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE
EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION
AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS
SPECIFIED IN THE STOCK PURCHASE AGREEMENT.
11. LOCK-UP. Optionee agrees that prior to the one-year
anniversary of the commencement of his employment with the Corporation, he will
not sell, make any short sale of, hedge, 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
the Option Shares without the written consent of the Corporation's Board of
Directors.
12. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this
Option and the issuance of the Option Shares upon such exercise shall be subject
to compliance by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of any stock
exchange (or the Nasdaq National Market or other national market, if applicable)
on which the Common Stock may be listed for trading at the time of such exercise
and issuance.
13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
14. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
15. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate office. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
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APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CAUSE shall have the meaning given such term in the Employment
Agreement.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean any of the following
transactions effecting a change in control or ownership of the Corporation:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
G. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation.
H. EMPLOYEE shall mean the Optionee in his capacity as an
employee of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed
and the manner and method of performance.
I. EMPLOYMENT AGREEMENT shall mean that certain Employment
Agreement dated as of May 31, 2001, between Optionee and the Corporation.
J. EXERCISE DATE shall mean the date on which the Option shall
have been exercised in accordance with Paragraph 9 of the Agreement.
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K. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
L. EXPIRATION DATE shall mean the date on which the Option
expires as specified in the Grant Notice.
M. FAIR MARKET VALUE per share of Common Stock on any relevant
date, for purposes of Section 9 only, shall be determined in accordance with the
following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the average
of the high and low selling prices per share of Common Stock on the date
in question, as such prices are reported by the National Association of
Securities Dealers on the Nasdaq National Market (or, if not listed on
such market, any other national market) and published in The Wall Street
Journal. If there are no selling prices quoted for the Common Stock on
the date in question, then the Fair Market Value shall be the average of
the high and low selling prices on the last preceding date for which
such quotations exist.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the average high and
low selling prices per share of Common Stock on the date in question on
the Stock Exchange determined by the Compensation Committee to be the
primary market for the Common Stock, as such prices are officially
quoted in the composite tape of transactions on such exchange and
published in The Wall Street Journal. If there are no selling prices
quoted for the Common Stock on the date in question, then the Fair
Market Value shall be the average of the high and low selling prices on
the last preceding date for which such quotations exist.
N. GRANT DATE shall mean the date of grant of the Option as
specified in the Grant Notice.
O. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the Option evidenced hereby.
P. INVOLUNTARY TERMINATION shall mean the termination of
Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by
the Corporation for reasons other than (X) for Cause or (Y) by reason of
death or Permanent Disability, or
(ii) Optionee's resignation for Good Reason, as defined
in the Employment Agreement.
Q. JUSTIFICATION shall have the meaning given such term in the
Employment Agreement.
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R. NON-QUALIFIED OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. OPTION SHARES shall mean the number of shares of Common Stock
subject to the Option as specified in the Grant Notice.
T. OPTION TERM shall mean the actual period of time that this
Option remains outstanding pursuant to Paragraph 2 of this Agreement.
U. OPTIONEE shall mean the person to whom the Option is granted
as specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
X. SERVICE shall mean the Optionee's performance of services for
the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or an independent consultant.
Y. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.
Z. STOCK PURCHASE AGREEMENT shall mean the written notice of the
Option exercise on the form provided by the Corporation for such purpose.
AA. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
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EXHIBIT B
STOCK PURCHASE AGREEMENT
160
ARTISTDIRECT, INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made this _____ day of ___________________, _____ by
and between ARTISTdirect, Inc., a Delaware corporation, and Frederick W. Field,
Optionee.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
1. EXERCISE. Optionee hereby purchases _______ shares of
Common Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on May __, 2001 (the "Grant Date") to purchase up to
_______________ shares of Common Stock (the "Option Shares") at the exercise
price of $0.75 per share (the "Exercise Price").
2. PAYMENT. Concurrently with the delivery of this Agreement
to the Corporation, Optionee shall pay the Exercise Price for the Purchased
Shares in accordance with the provisions of the Option Agreement and shall
deliver whatever additional documents may be required by the Option Agreement as
a condition for exercise.
3. STOCKHOLDER RIGHTS. Until such time as the Corporation
exercises the Repurchase Right, Optionee (or any successor in interest) shall
have all the rights of a stockholder (including voting, dividend and liquidation
rights) with respect to the Purchased Shares, subject, however, to the transfer
restrictions of Articles B and C.
B. SECURITIES LAW COMPLIANCE
1. RESTRICTED SECURITIES. While the Purchased Shares have
been registered under the 1933 Act, Optionee hereby confirms that Optionee has
been informed that the Purchased Shares are control securities under the 1933
Act because Optionee is an affiliate of the Corporation and accordingly, the
Purchased Shares may not be resold or transferred except in compliance with the
federal securities laws.
2. RESTRICTIONS ON DISPOSITION OF PURCHASED SHARES. Optionee
shall make no disposition of the Purchased Shares (other than a Permitted
Transfer) unless and until Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
The Corporation shall not be required (i) to transfer on its
books any Purchased Shares which have been sold or transferred in violation of
the provisions of this Agreement or (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
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3. RESTRICTIVE LEGENDS. The stock certificates for the
Purchased Shares shall be endorsed with one or more of the following restrictive
legends:
(a) "The shares represented by this certificate are
"control" securities under the Securities Act of
1933 because the holder is an affiliate of the
Corporation. The shares may not be sold or offered
for sale in the absence of satisfactory assurances
to the Corporation that such sale or offer complies
with all applicable federal and state securities
laws."
(b) "The shares represented by this certificate are
subject to certain repurchase rights and other
restrictions on transfer granted to the Corporation
and accordingly may not be sold, assigned,
transferred, encumbered, or in any manner disposed
of except in conformity with the terms of a written
agreement dated ____________, ______ between the
Corporation and the registered holder of the shares
(or the predecessor in interest to the shares). A
copy of such agreement is maintained at the
Corporation's principal corporate offices."
Upon request by Optionee, the Corporation agrees to remove the legends above, in
each case, when the applicable restrictions or repurchase rights have lapsed and
are no longer, and will not in the future become, applicable.
C. TRANSFER RESTRICTIONS
1. RESTRICTION ON TRANSFER. Except for any Permitted
Transfer, Optionee shall not transfer, assign, encumber or otherwise dispose of
any of the Purchased Shares which are subject to the Repurchase Right.
2. TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of a
Permitted Transfer must, as a condition precedent to the validity of such
transfer, acknowledge in writing to the Corporation that such person is bound by
the provisions of this Agreement and that the transferred shares are subject to
the Repurchase Right to the same extent such shares would be so subject if
retained by Optionee.
3. LOCK-UP. Optionee agrees that prior to the one-year
anniversary of the commencement of his employment with the Corporation, he will
not sell, make any short sale of, hedge, 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
the Purchased Shares without the written consent of the Corporation's Board of
Directors.
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D. REPURCHASE RIGHT
1. GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Optionee ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Exercise Price any or all of the Purchased
Shares in which Optionee is not, at the time of his cessation of Service, vested
in accordance with the Vesting Schedule applicable to those shares or the
special vesting acceleration provisions of Paragraph D.6 of this Agreement (such
shares to be hereinafter referred to as the "Unvested Shares").
2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right
shall be exercisable by written notice delivered to each Owner of the Unvested
Shares prior to the expiration of the sixty (60)-day exercise period. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of such notice. The certificates representing the
Unvested Shares to be repurchased shall be delivered to the Corporation on the
closing date specified for the repurchase. Concurrently with the receipt of such
stock certificates, the Corporation shall pay to Owner, in cash, an amount equal
to the Exercise Price previously paid for the Unvested Shares which are to be
repurchased from Owner. Notwithstanding the foregoing, in the event such stock
certificates are not delivered to the Corporation at the time the Exercise Price
is so paid, such Unvested Shares shall nonetheless be deemed cancelled as of the
time of such payment and the Corporation may take such action is as necessary,
including the imposition of stop transfer orders, with respect to such shares.
The Corporation's right to exercise the Repurchase Right shall be conditioned on
the Corporation having taken all corporate action required to be taken to exempt
such repurchase from the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, pursuant to Rule 16b-3(e), or successor rule,
thereunder, and providing the Owner with satisfactory written evidence thereof
with its notice of exercise.
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate
and cease to be exercisable with respect to any and all Purchased Shares in
which Optionee vests in accordance with the Vesting Schedule. All Purchased
Shares as to which the Repurchase Right lapses shall, however, remain subject to
any Lock-up restrictions set forth in section C.3 hereof.
4. AGGREGATE VESTING LIMITATION. If the Option is exercised
in more than one increment so that Optionee is a party to one or more other
Stock Purchase Agreements (the "Prior Purchase Agreements") which are executed
prior to the date of this Agreement, then the total number of Purchased Shares
as to which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which Optionee would otherwise at the time be
vested, in accordance with the Vesting Schedule, had all the Purchased Shares
(including those acquired under the Prior Purchase Agreements) been acquired
exclusively under this Agreement.
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5. RECAPITALIZATION. Any new, substituted or additional
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the Repurchase Right and
any escrow requirements hereunder, but only to the extent the Purchased Shares
are at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per share
to be paid upon the exercise of the Repurchase Right in order to reflect the
effect of any such Recapitalization upon the Corporation's capital structure;
provided, however, that the aggregate purchase price shall remain the same.
6. SPECIAL VESTING ACCELERATION.
(a) The Repurchase Right shall automatically terminate
in its entirety, and all the Purchased Shares shall
vest in full, (i) immediately prior to the
consummation of any Corporate Transaction that
occurs prior to Optionee's cessation of Service or
(ii) upon the cessation of Optionee's Service as a
result of an Involuntary Termination.
(b) The Repurchase Right shall automatically terminate
as to one-half of the then Unvested Shares
(calculated as of the time immediately prior to
application of this Section D.6(b)) upon any
termination of Optionee's employment with the
Corporation for deemed Justification (as defined in
the Employment Agreement) pursuant to Section
8(f)(ii) of the Employment Agreement.
E. SPECIAL TAX ELECTION
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit I. OPTIONEE SHOULD CONSULT WITH HIS TAX
ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND
THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
HIS BEHALF.
F. GENERAL PROVISIONS
1. ASSIGNMENT. The Corporation may assign the Repurchase
Right to any person or entity selected by the Board, including (without
limitation) one or more stockholders of the Corporation.
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2. NOTICES. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, one business day after being delivered to a reputable overnight
courier service, or upon deposit in the U.S. mail, registered or certified,
postage prepaid and properly addressed to the party entitled to such notice at
the address indicated below such party's signature line on this Agreement or at
such other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.
3. NO WAIVER. The failure of the Corporation in any instance
to exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Optionee. 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.
4. CANCELLATION OF SHARES. If the Corporation shall make
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such time,
the person from whom such shares are to be repurchased shall no longer have any
rights as a holder of such shares (other than the right to receive payment of
such consideration in accordance with this Agreement). Such shares shall be
deemed purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
G. MISCELLANEOUS PROVISIONS
1. OPTIONEE UNDERTAKING. Optionee hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Optionee or the
Purchased Shares pursuant to the provisions of this Agreement.
2. AGREEMENT IS ENTIRE CONTRACT. This Agreement and the
Registration Side Letter constitute the entire contract between the parties
hereto with regard to the subject matter hereof.
3. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without resort
to that State's conflict-of-laws rules.
4. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
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5. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Optionee, Optionee's permitted assigns and the
legal representatives, heirs and legatees of Optionee's estate, whether or not
any such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first indicated above.
ARTISTDIRECT, INC.
By:
--------------------------------
Title:
--------------------------------
Address:
--------------------------------
--------------------------------
By:
--------------------------------
OPTIONEE: FREDERICK W. FIELD
Address:
--------------------------------
--------------------------------
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SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Optionee has read and hereby approves
the foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms of such Agreement, including (without limitation) the
right of the Corporation (or its assigns) to purchase any Purchased Shares in
which Optionee is not vested at time of his cessation of Service.
By:
----------------------------------
OPTIONEE'S SPOUSE
Address:
----------------------------------
----------------------------------
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EXHIBIT I
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
I. FEDERAL INCOME TAX CONSEQUENCES AND SECTION 83(B) ELECTION FOR
EXERCISE OF NON-STATUTORY OPTION. If the Purchased Shares are acquired pursuant
to the exercise of a Non-Statutory Option, as specified in the Grant Notice,
then under Code Section 83, the excess of the fair market value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Exercise Price paid for those shares will be reportable as ordinary
income on the lapse date. For this purpose, the term "forfeiture restrictions"
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code Section
83(b) to be taxed at the time the Purchased Shares are acquired, rather than
when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of the Agreement. Even if the fair market
value of the Purchased Shares on the date of the Agreement equals the Exercise
Price paid (and thus no tax is payable), the election must be made to avoid
adverse tax consequences in the future. The form for making this election is
attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE
APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
II. FEDERAL INCOME TAX CONSEQUENCES AND CONDITIONAL SECTION 83(B)
ELECTION FOR EXERCISE OF INCENTIVE OPTION. If the Purchased Shares are acquired
pursuant to the exercise of an Incentive Option, as specified in the Grant
Notice, then the following tax principles shall be applicable to the Purchased
Shares:
(i) For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
The excess of (a) the fair market value of
the Purchased Shares on the date the Option is exercised or (if later)
on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (b) the Exercise Price paid for the Purchased Shares
will be includible in Optionee's taxable income for alternative minimum
tax purposes.
If Optionee makes a disqualifying
disposition of the Purchased Shares, then Optionee will recognize
ordinary income in the year of such disposition equal in amount to the
excess of (a) the fair market value of the Purchased Shares on the date
the Option is exercised or (if later) on the date any forfeiture
restrictions applicable to the Purchased Shares lapse over (b) the
Exercise Price paid for the Purchased Shares. Any additional gain
recognized upon the disqualifying disposition will be either short-term
or long-term capital gain depending upon the period for which the
Purchased Shares are held prior to the disposition.
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For purposes of the foregoing, the term
"forfeiture restrictions" will include the right of the
Corporation to repurchase the Purchased Shares pursuant to
the Repurchase Right. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased
Shares within two (2) years after the Grant Date or within
one (1) year after the exercise date of the Option.
In the absence of final Treasury Regulations
relating to Incentive Options, it is not certain whether
Optionee may, in connection with the exercise of the
Option for any Purchased Shares at the time subject to
forfeiture restrictions, file a protective election under
Code Section 83(b) which would limit Optionee's ordinary
income upon a disqualifying disposition to the excess of
the fair market value of the Purchased Shares on the date
the Option is exercised over the Exercise Price paid for
the Purchased Shares. Accordingly, such election if
properly filed will only be allowed to the extent the
final Treasury Regulations permit such a protective
election.
The Code Section 83(b) election will be
effective in limiting the Optionee's alternative minimum
taxable income to the excess of the fair market value of
the Purchased Shares at the time the Option is exercised
over the Exercise Price paid for those shares.
Page 2 of the attached form for making the election should be
filed with any election made in connection with the exercise of an Incentive
Option.
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(1) Generally, a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale, exchange or
gift, but does not include a transfer to the Optionee's spouse, a transfer into
joint ownership with right of survivorship if Optionee remains one of the joint
owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.
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SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal
Revenue Code, pursuant to Treas. Reg. Section 1.83-2.
The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
The property with respect to which the election is being made is
_____________ shares of the common stock of ARTISTdirect, Inc.
The property was issued on ______________, _____.
The taxable year in which the election is being made is the calendar year
_____.
The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if
for any reason taxpayer's service with the issuer terminates. The
issuer's repurchase right will lapse in a series of annual and monthly
installments over a four (4)-year period ending on ___________, 200__.
The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $__________per share.
The amount paid for such property is $___________ per share.
A copy of this statement was furnished to ARTISTdirect, Inc. for whom
taxpayer rendered the services underlying the transfer of property.
This statement is executed on _________________, ______.
______________________________ ______________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her federal and state tax returns for the current tax year and an additional
copy for his or her records.
170
The property described in the above Section 83(b) election is
comprised of shares of common stock acquired pursuant to the exercise of an
incentive stock option under Section 422 of the Internal Revenue Code (the
"Code"). Accordingly, it is the intent of the Taxpayer to utilize this election
to achieve the following tax results:
One purpose of this election is to have the alternative
minimum taxable income attributable to the purchased shares measured by the
amount by which the fair market value of such shares at the time of their
transfer to the Taxpayer exceeds the purchase price paid for the shares. In the
absence of this election, such alternative minimum taxable income would be
measured by the spread between the fair market value of the purchased shares and
the purchase price which exists on the various lapse dates in effect for the
forfeiture restrictions applicable to such shares.
Section 421(a)(1) of the Code expressly excludes from
income any excess of the fair market value of the purchased shares over the
amount paid for such shares. Accordingly, this election is also intended to be
effective in the event there is a "disqualifying disposition" of the shares,
within the meaning of Section 421(b) of the Code, which would otherwise render
the provisions of Section 83(a) of the Code applicable at that time.
Consequently, the Taxpayer hereby elects to have the amount of disqualifying
disposition income measured by the excess of the fair market value of the
purchased shares on the date of transfer to the Taxpayer over the amount paid
for such shares. Since Section 421(a) presently applies to the shares which are
the subject of this Section 83(b) election, no taxable income is actually
recognized for regular tax purposes at this time, and no income taxes are
payable, by the Taxpayer as a result of this election. The foregoing election is
to be effective to the full extent permitted under the Code.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
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APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Purchase Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean any of the following transactions
effecting a change in control or ownership of the Corporation:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
F. CORPORATION shall mean ARTISTdirect, Inc., a Delaware corporation,
and any successor corporation to all or substantially all of the assets or
voting stock of ARTISTdirect, Inc.
G. EMPLOYMENT AGREEMENT shall mean that certain Employment Agreement
dated as of May 31, 2001, by and between Optionee and the Corporation.
H. EXERCISE PRICE shall have the meaning assigned to such term in
Paragraph A.1.
I. GRANT DATE shall have the meaning assigned to such term in Paragraph
A.1.
J. GRANT NOTICE shall mean the Notice of Grant of Stock Option pursuant
to which Optionee has been informed of the basic terms of the Option.
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172
K. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of Optionee's
Service by reason of:
(i) Optionee's involuntary dismissal or discharge by
the Corporation for reasons other than (X) for Cause, as defined in the
Employment Agreement, or (Y) by reason of death or Permanent Disability,
or
(ii) Optionee's voluntary resignation for Good Reason,
as defined in the Employment Agreement.
M. 1933 ACT shall mean the Securities Act of 1933, as amended.
N. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
O. OPTION shall have the meaning assigned to such term in Paragraph A.1.
P. OPTION AGREEMENT shall mean all agreements and other documents
evidencing the Option.
Q. OPTIONEE shall mean the person to whom the Option is granted.
R. OWNER shall mean Optionee and all subsequent holders of the Purchased
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.
S. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
T. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of inheritance following
Optionee's death, (iii) a transfer to the Corporation in pledge as security for
any purchase-money indebtedness incurred by Optionee in connection with the
acquisition of the Purchased Shares, or (iv) a transfer of the Purchased Shares
to a trust for the sole benefit of Optionee or his immediately family.
U. PRIOR PURCHASE AGREEMENT shall have the meaning assigned to such term
in Paragraph D.4.
V. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.
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173
W. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
X. REPURCHASE RIGHT shall mean the right granted to the Corporation in
accordance with Article D.
Y. REGISTRATION SIDE LETTER shall mean that certain side letter dated as
of May __, 2001, by and between the Corporation and Optionee with respect to the
registration on Form S-8 of the Purchased Shares
Z. SEC shall mean the Securities and Exchange Commission.
AA. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or an independent consultant.
BB. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
CC. VESTING SCHEDULE shall mean the vesting schedule specified in the
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service; provided, the Option
Shares are subject to accelerated vesting pursuant to Section D.6 of the
Agreement.
DD. UNVESTED SHARES shall have the meaning assigned to such term in
Paragraph D.1.
A-3
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EXHIBIT C
PROSPECTUS FOR STOCK OPTION GRANT
175
EXHIBIT 2
Option to Acquire 755,880 Shares of Common Stock
176
ARTISTDIRECT, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of ARTISTdirect, Inc. (the
"Corporation"):
Optionee: Frederick W. Field
Grant Date: May 31, 2001
Vesting Commencement Date: The date Optionee commences Service
as CEO of the Corporation.
Exercise Price: $0.75 per share
Number of Option Shares: 755,880 shares
Expiration Date: May 30, 2008
Type of Option: Non-Statutory Stock Option
Exercise Schedule: The Option shall not be exercisable and the
Option Shares shall not be vested until a Triggering Event (as defined below)
has occurred. If no Triggering Event has occurred by the third anniversary of
the Vesting Commencement Date, then the Option Shares shall remain unvested and
unexercisable and the Option shall terminate. If a Triggering Event occurs by
the third anniversary of the Vesting Commencement Date, however, Optionee shall
acquire a vested interest in, and the Option shall become exercisable with
respect to, all of the Option Shares.
For purposes of this Option, "Triggering Event" shall be deemed
to occur upon the first to occur of (w) the "Average Closing Price" (as defined
below) equals or exceeds $3.50 (subject to adjustment for stock splits and the
like), (x) the shares of the Corporation's Common Stock are re-listed on the
Nasdaq National Market following a de-listing, (y) a Corporate Transaction
occurs or (z) upon an Involuntary Termination (as defined in the Option
Agreement) of Optionee's Service. "Average Closing Price," for purposes of this
Option, shall mean (i) the average closing price reported by the National
Association of Securities Dealers on the Nasdaq National Market (or, if not
listed on such market, any other national market) for shares of the
Corporation's Common Stock for any thirty (30) consecutive trading days during
the first three years measured from the Vesting Commencement Date or (ii), if
the Corporation is acquired by another entity, the consideration per share of
Common Stock received by the Corporation's stockholders in such acquisition.
Optionee hereby agrees to be bound by all the terms and
conditions of the Option as set forth in the Stock Option Agreement attached
hereto as Exhibit A.
All capitalized terms in this Notice shall have the meaning
assigned to them in this Notice or in the attached Stock Option Agreement.
177
DATED: MAY 31, 2001
ARTISTDIRECT, INC.
By: /s/ MARC GEIGER
-------------------------------------
Title: Chief Executive Officer
----------------------------------
By: /s/ FREDERICK W. FIELD
-------------------------------------
OPTIONEE: FREDERICK W. FIELD
Address: c/o Radar Pictures, Inc.
10900 Wilshire Blvd.,
Suite 1400
Los Angeles, CA 90024
ATTACHMENTS:
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - PROSPECTUS FOR STOCK OPTION GRANT
178
EXHIBIT A
STOCK OPTION AGREEMENT
179
ARTISTDIRECT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
RECITALS
A. The Board and the shareholders have approved a stock
option grant to Optionee in order to attract and retain Optionee to
serve the Corporation in the capacity of Chairman and Chief Executive
Officer.
B. The option evidenced by this Agreement is granted to
Optionee in consideration of the services Optionee is to render the
Corporation and not for any capital-raising purposes or in connection
with any capital-raising activities.
C. The granted option is intended to be a Non-Qualified
Option which does NOT satisfy the requirements of Section 422 of the
Code.
D. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, an option to purchase up to the number of Option
Shares specified in the Grant Notice attached hereto. The Option Shares shall be
purchasable from time to time during the option term specified in Paragraph 2 at
the Exercise Price.
2. OPTION TERM. This Option shall have a term of seven (7)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This Option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee or as otherwise set forth herein. However,
this Option may, in connection with the Optionee's estate plan, be assigned in
whole or in part during Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established for the exclusive benefit
of one or more such family members. The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the Option
pursuant to such assignment or as set forth herein. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Board may deem appropriate.
4. DATES OF EXERCISE. The Option shall not be exercisable for
any Option Shares unless a Triggering Event has occurred by the third
anniversary of the Vesting
180
Commencement Date. If a Triggering Event has occurred by the third anniversary
of the Vesting Commencement Date, the Option shall become exercisable for all of
the Option Shares.
5. CESSATION OF SERVICE. The Option term specified in
Paragraph 2 shall terminate (and this Option shall cease to be outstanding)
prior to the Expiration Date in accordance with the following provisions:
(i) Notwithstanding anything herein to the contrary, if
a Triggering Event has not occurred by the third
anniversary of the Vesting Commencement Date, the
option shall immediately terminate and cease to be
outstanding.
(ii) Should Optionee cease Service by reason of an
Involuntary Termination, then Optionee's right to
exercise this Option shall lapse, and this Option
shall cease to be outstanding, upon the later of
(a) the expiration of the twelve (12) month period
measured from the date of Optionee's cessation of
Service or (b) the expiration of Optionee's initial
five-year employment term as set forth in the
Employment Agreement. In no event shall this Option
be exercisable at any time after the Expiration
Date.
(iii) Should Optionee cease Service by reason of
Justification, then to the extent this Option is
otherwise exercisable at the time of such cessation
of Service, Optionee's right to exercise this
Option shall lapse, and this Option shall cease to
be outstanding, upon the earlier of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's cessation of Service or
(b) the expiration of Optionee's initial five-year
employment term as set forth in the Employment
Agreement. In no event shall this Option be
exercisable at any time after the Expiration Date.
(iv) Should Optionee cease Service for any reason other
than (a) an Involuntary Termination, (b) a
termination for Cause, (c) Optionee's death or
Permanent Disability, or (d) Justification, then to
the extent this Option is otherwise exercisable at
the time of such cessation of Service, Optionee's
right
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181
to exercise this Option shall lapse and this Option
cease to be outstanding, upon the earlier of (x)
the expiration of the ninety (90) day period
measured from the date of Optionee's cessation of
Service or (y) the Expiration Date.
(v) Should Optionee's Service be terminated for Cause,
then this Option shall immediately terminate and
cease to be outstanding.
(vi) Should Optionee cease Service by reason of his
death, then the personal representative of
Optionee's estate or the person or persons to whom
the Option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and
distribution or, if the Option has been transferred
to a trust in accordance with the terms herein, the
trustee of such trust, shall have the right to
exercise this Option to the extent this Option is
otherwise exercisable at the time of such death.
Such right shall lapse, and this Option shall cease
to be outstanding, upon the earlier of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's death or (b) the
Expiration Date.
(vii) Should Optionee cease Service by reason of
Permanent Disability while this Option is
outstanding, then to the extent this Option is
otherwise exercisable at the time of such cessation
of Service, Optionee's right to exercise this
Option shall lapse, and this Option shall cease to
be outstanding, upon the later of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's cessation of Service or
(b) the expiration of Optionee's initial five-year
employment term as set forth in the Employment
Agreement. In no event shall this Option be
exercisable at any time after the Expiration Date.
In the event that such Permanent Disability
prevents Optionee from personally exercising this
Option, this Option may be exercised by Optionee's
personal authorized representative to the same
extent that Optionee could otherwise exercise this
Option.
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182
(viii) Upon the expiration of the applicable exercise
period or (if earlier) upon the Expiration Date,
this Option shall terminate and cease to be
outstanding for any exercisable Option Shares for
which the Option has not otherwise been exercised.
6. CORPORATE TRANSACTION
(a) Immediately following a Corporate Transaction, this
Option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or Parent thereof) in connection with the
Corporate Transaction. The Corporation shall provide Optionee with a minimum of
ten days prior written notice of any Corporate Transaction.
(b) If this Option is assumed in connection with a
Corporate Transaction, then this Option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the Option been exercised immediately prior to such
Corporate Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the same.
(c) This Agreement shall not in any way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the number and/or
class of securities subject to this Option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this Option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the Option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this Option with respect to
all or any part of the Option Shares for which this Option is at the time
exercisable, Optionee (or any other person or persons exercising the Option)
must take the following actions:
(i) Execute and deliver to the Corporation a
Notice of Exercise for the number of Option Shares for which the Option
is exercised.
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183
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation;
(B) shares of Common Stock held by
Optionee (or any other person or persons exercising the Option)
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date; or
(C) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the Option) shall concurrently provide
irrevocable instructions (a) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus
all applicable federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the Option exercise, payment of the
Exercise Price must accompany the Notice of Exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the Option (if other
than Optionee) have the right to exercise this Option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of federal and state
securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all federal, state and local income and
employment tax withholding requirements applicable to the Option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares.
(c) In no event may this option be exercised for any
fractional shares.
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184
10. LOCK-UP. Optionee agrees that prior to the one-year
anniversary of the commencement of his employment with the Corporation, he will
not sell, make any short sale of, hedge, 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
the Option Shares without the written consent of the Corporation's Board of
Directors.
11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this
Option and the issuance of the Option Shares upon such exercise shall be subject
to compliance by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of any stock
exchange (or the Nasdaq National Market or other national market, if applicable)
on which the Common Stock may be listed for trading at the time of such exercise
and issuance.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
13. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
14. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
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185
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify ARTISTdirect, Inc. (the "Corporation") that I
elect to purchase ______________ shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $ per share (the "Exercise
Price") pursuant to that certain option (the "Option") granted to me on _______,
_______.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
____________________, _______
Date
___________________________________
Optionee
Address: __________________________
___________________________________
Print name in exact manner it is to
appear on the stock certificate: ___________________________________
Address to which certificate is to
be sent, if different from address
above: ___________________________________
___________________________________
Social Security Number: ___________________________________
186
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as
amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean any of the following
transactions effecting a change in control or ownership of the Corporation:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
F. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation.
G. EMPLOYEE shall mean the Optionee in his capacity as an
employee of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed
and the manner and method of performance.
H. EMPLOYMENT AGREEMENT shall mean that certain Employment
Agreement dated as of May 31, 2001, between Optionee and the Corporation.
I. EXERCISE DATE shall mean the date on which the Option
shall have been exercised in accordance with Paragraph 9 of the Agreement.
J. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
K. EXPIRATION DATE shall mean the date on which the Option
expires as specified in the Grant Notice.
187
L. FAIR MARKET VALUE per share of Common Stock on any
relevant date, for purposes of Section 9 only, shall be determined in accordance
with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the average
of the high and low selling prices per share of Common Stock on the date
in question, as such prices are reported by the National Association of
Securities Dealers on the Nasdaq National Market (or, if not listed on
such market, any other national market) and published in The Wall Street
Journal. If there are no selling prices quoted for the Common Stock on
the date in question, then the Fair Market Value shall be the average of
the high and low selling prices on the last preceding date for which
such quotations exist.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the average high and
low selling prices per share of Common Stock on the date in question on
the Stock Exchange determined by the Compensation Committee to be the
primary market for the Common Stock, as such prices are officially
quoted in the composite tape of transactions on such exchange and
published in The Wall Street Journal. If there are no selling prices
quoted for the Common Stock on the date in question, then the Fair
Market Value shall be the average of the high and low selling prices on
the last preceding date for which such quotations exist.
N. GRANT DATE shall mean the date of grant of the Option as
specified in the Grant Notice.
O. GRANT NOTICE shall mean the Notice of Grant of Stock
Option accompanying the Agreement, pursuant to which Optionee has been informed
of the basic terms of the Option evidenced hereby.
P. INVOLUNTARY TERMINATION shall mean the termination of
Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by
the Corporation for reasons other than (X) for Cause, as defined in the
Employment Agreement, or (Y) by reason of death or Permanent Disability,
or
(ii) Optionee's resignation for Good Reason, as defined
in the Employment Agreement.
Q. JUSTIFICATION shall have the meaning given such term in
the Employment Agreement.
R. NON-QUALIFIED OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. NOTICE OF EXERCISE shall mean the written notice of
exercise in the form attached hereto as Exhibit I.
188
T. OPTION SHARES shall mean the number of shares of Common
Stock subject to the option as specified in the Grant Notice.
U. OPTIONEE shall mean the person to whom the Option is
granted as specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
W. PERMANENT DISABILITY shall mean the inability of Optionee
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
X. SERVICE shall mean the Optionee's performance of services
for the Corporation (or any Parent or Subsidiary) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant.
Y. STOCK EXCHANGE shall mean the American Stock Exchange or
the New York Stock Exchange.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AA. TRIGGERING EVENT shall have the meaning given such term in
the Grant Notice.
189
EXHIBIT B
PROSPECTUS FOR STOCK OPTION GRANT
190
EXHIBIT 3
Option to Acquire 665,220 Shares of Common Stock
191
ARTISTDIRECT, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of ARTISTdirect, Inc. (the
"Corporation"):
Optionee: Frederick W. Field
Grant Date: May 31, 2001
Vesting Commencement Date: The date Optionee commence Service as
CEO of the Corporation
Exercise Price: $0.75 per share
Number of Option Shares: 665,220 shares
Expiration Date: May 30, 2008
Type of Option: Non-Statutory Stock Option
Exercise Schedule: The Option shall not be exercisable and the
Option Shares shall not be vested until a Triggering Event (as defined below)
has occurred. If no Triggering Event has occurred by the third anniversary of
the Vesting Commencement Date, then the Option Shares shall remain unvested and
unexercisable and the Option shall terminate. If a Triggering Event occurs by
the third anniversary of the Vesting Commencement Date, however, Optionee shall
acquire a vested interest in, and the Option shall become exercisable with
respect to, all of the Option Shares.
For purposes of this Option, "Triggering Event" shall be deemed
to occur upon the first to occur of (w) the "Average Closing Price" (as defined
below) equals or exceeds $7.00 (subject to adjustment for stock splits and the
like), (x) the shares of the Corporation's Common Stock are re-listed on the
Nasdaq National Market following a de-listing, (y) a Corporate Transaction
occurs, or (z) upon an Involuntary Termination (as defined in the Option
Agreement) of Optionee's Service. "Average Closing Price," for purposes of this
Option, shall mean (i) the average closing price reported by the National
Association of Securities Dealers on the Nasdaq National Market (or, if not
listed on such market, any other national market) for shares of the
Corporation's Common Stock for any thirty (30) consecutive trading days during
the first three years measured from the Vesting Commencement Date or (ii), if
the Corporation is acquired by another entity, the consideration per share of
Common Stock received by the Corporation's stockholders in such acquisition.
Optionee hereby agrees to be bound by all the terms and
conditions of the Option as set forth in the Stock Option Agreement attached
hereto as Exhibit A.
All capitalized terms in this Notice shall have the meaning
assigned to them in this Notice or in the attached Stock Option Agreement.
192
DATED: MAY 31, 2001
ARTISTDIRECT, INC.
By: /s/ MARC GEIGER
-------------------------------------
Title: Chief Executive Officer
----------------------------------
By: /s/ FREDERICK W. FIELD
-------------------------------------
OPTIONEE: FREDERICK W. FIELD
Address: c/o Radar Pictures, Inc.
10900 Wilshire Blvd.,
Suite 1400
Los Angeles, CA 90024
ATTACHMENTS:
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - PROSPECTUS FOR STOCK OPTION GRANT
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EXHIBIT A
STOCK OPTION AGREEMENT
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ARTISTDIRECT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
RECITALS
A. The Board and the shareholders have approved a stock
option grant to Optionee in order to attract and retain Optionee to
serve the Corporation in the capacity of Chairman and Chief Executive
Officer.
B. The option evidenced by this Agreement is granted to
Optionee in consideration of the services Optionee is to render the
Corporation and not for any capital-raising purposes or in connection
with any capital-raising activities.
C. The granted option is intended to be a Non-Qualified
Option which does NOT satisfy the requirements of Section 422 of the
Code.
D. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, an option to purchase up to the number of Option
Shares specified in the Grant Notice attached hereto. The Option Shares shall be
purchasable from time to time during the option term specified in Paragraph 2 at
the Exercise Price.
2. OPTION TERM. This Option shall have a term of seven (7)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This Option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee or as otherwise set forth herein. However,
this Option may, in connection with the Optionee's estate plan, be assigned in
whole or in part during Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established for the exclusive benefit
of one or more such family members. The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the Option
pursuant to such assignment or as set forth herein. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Board may deem appropriate.
4. DATES OF EXERCISE. The Option shall not be exercisable for
any Option Shares unless a Triggering Event has occurred by the third
anniversary of the Vesting
195
Commencement Date. If a Triggering Event has occurred by the third anniversary
of the Vesting Commencement Date, the Option shall become exercisable for all of
the Option Shares.
5. CESSATION OF SERVICE. The Option term specified in
Paragraph 2 shall terminate (and this Option shall cease to be outstanding)
prior to the Expiration Date in accordance with the following provisions:
(i) Notwithstanding anything herein to the contrary, if
a Triggering Event has not occurred by the third
anniversary of the Vesting Commencement Date, the
option shall immediately terminate and cease to be
outstanding.
(ii) Should Optionee cease Service by reason of an
Involuntary Termination, then Optionee's right to
exercise this Option shall lapse, and this Option
shall cease to be outstanding, upon the later of
(a) the expiration of the twelve (12) month period
measured from the date of Optionee's cessation of
Service or (b) the expiration of Optionee's initial
five-year employment term as set forth in the
Employment Agreement. In no event shall this Option
be exercisable at any time after the Expiration
Date.
(iii) Should Optionee cease Service by reason of
Justification, then to the extent this Option is
otherwise exercisable at the time of such cessation
of Service, Optionee's right to exercise this
Option shall lapse, and this Option shall cease to
be outstanding, upon the earlier of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's cessation of Service or
(b) the expiration of Optionee's initial five-year
employment term as set forth in the Employment
Agreement. In no event shall this Option be
exercisable at any time after the Expiration Date.
(iv) Should Optionee cease Service for any reason other
than (a) an Involuntary Termination, (b) a
termination for Cause, (c) Optionee's death or
Permanent Disability, or (d) Justification, then to
the extent this Option is otherwise exercisable at
the time of such cessation of Service, Optionee's
right
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196
to exercise this Option shall lapse and this Option
cease to be outstanding, upon the earlier of (x)
the expiration of the ninety (90) day period
measured from the date of Optionee's cessation of
Service or (y) the Expiration Date.
(v) Should Optionee's Service be terminated for Cause,
then this Option shall immediately terminate and
cease to be outstanding.
(vi) Should Optionee cease Service by reason of his
death, then the personal representative of
Optionee's estate or the person or persons to whom
the Option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and
distribution or, if the Option has been transferred
to a trust in accordance with the terms herein, the
trustee of such trust, shall have the right to
exercise this Option to the extent this Option is
otherwise exercisable at the time of such death.
Such right shall lapse, and this Option shall cease
to be outstanding, upon the earlier of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's death or (b) the
Expiration Date.
(vii) Should Optionee cease Service by reason of
Permanent Disability while this Option is
outstanding, then to the extent this Option is
otherwise exercisable at the time of such cessation
of Service, Optionee's right to exercise this
Option shall lapse, and this Option shall cease to
be outstanding, upon the later of (a) the
expiration of the twelve (12) month period measured
from the date of Optionee's cessation of Service or
(b) the expiration of Optionee's initial five-year
employment term as set forth in the Employment
Agreement. In no event shall this Option be
exercisable at any time after the Expiration Date.
In the event that such Permanent Disability
prevents Optionee from personally exercising this
Option, this Option may be exercised by Optionee's
personal authorized representative to the same
extent that Optionee could otherwise exercise this
Option.
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197
(viii) Upon the expiration of the applicable exercise
period or (if earlier) upon the Expiration Date,
this Option shall terminate and cease to be
outstanding for any exercisable Option Shares for
which the Option has not otherwise been exercised.
6. CORPORATE TRANSACTION
(a) Immediately following a Corporate Transaction, this
Option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or Parent thereof) in connection with the
Corporate Transaction. The Corporation shall provide Optionee with a minimum of
ten days prior written notice of any Corporate Transaction.
(b) If this Option is assumed in connection with a
Corporate Transaction, then this Option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the Option been exercised immediately prior to such
Corporate Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the same.
(c) This Agreement shall not in any way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the number and/or
class of securities subject to this Option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this Option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the Option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this Option with respect to
all or any part of the Option Shares for which this Option is at the time
exercisable, Optionee (or any other person or persons exercising the Option)
must take the following actions:
(i) Execute and deliver to the Corporation a
Notice of Exercise for the number of Option Shares for which the Option
is exercised.
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198
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation;
(B) shares of Common Stock held by
Optionee (or any other person or persons exercising the Option)
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date; or
(C) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the Option) shall concurrently provide
irrevocable instructions (a) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus
all applicable federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the Option exercise, payment of the
Exercise Price must accompany the Notice of Exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the Option (if other
than Optionee) have the right to exercise this Option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of federal and state
securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all federal, state and local income and
employment tax withholding requirements applicable to the Option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares.
(c) In no event may this option be exercised for any
fractional shares.
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199
10. LOCK-UP. Optionee agrees that prior to the one-year
anniversary of the commencement of his employment with the Corporation, he will
not sell, make any short sale of, hedge, 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
the Option Shares without the written consent of the Corporation's Board of
Directors.
11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this
Option and the issuance of the Option Shares upon such exercise shall be subject
to compliance by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of any stock
exchange (or the Nasdaq National Market or other national market, if applicable)
on which the Common Stock may be listed for trading at the time of such exercise
and issuance.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
13. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
14. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
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200
EXHIBIT I
NOTICE OF EXERCISE
I hereby notify ARTISTdirect, Inc. (the "Corporation") that I
elect to purchase ______________ shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $ per share (the "Exercise
Price") pursuant to that certain option (the "Option") granted to me on _______,
_______.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the Exercise
Price.
____________________, _______
Date
___________________________________
Optionee
Address: __________________________
___________________________________
Print name in exact manner it is to
appear on the stock certificate: ___________________________________
Address to which certificate is to
be sent, if different from address
above: ___________________________________
___________________________________
Social Security Number: ___________________________________
201
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as
amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean any of the following
transactions effecting a change in control or ownership of the Corporation:
(i) a stockholder-approved merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
F. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation.
G. EMPLOYEE shall mean the Optionee in his capacity as an
employee of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed
and the manner and method of performance.
H. EMPLOYMENT AGREEMENT shall mean that certain Employment
Agreement dated as of May 31, 2001, between Optionee and the Corporation.
I. EXERCISE DATE shall mean the date on which the Option
shall have been exercised in accordance with Paragraph 9 of the Agreement.
J. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
K. EXPIRATION DATE shall mean the date on which the Option
expires as specified in the Grant Notice.
202
L. FAIR MARKET VALUE per share of Common Stock on any
relevant date, for purposes of Section 9 only, shall be determined in accordance
with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the average
of the high and low selling prices per share of Common Stock on the date
in question, as such prices are reported by the National Association of
Securities Dealers on the Nasdaq National Market (or, if not listed on
such market, any other national market) and published in The Wall Street
Journal. If there are no selling prices quoted for the Common Stock on
the date in question, then the Fair Market Value shall be the average of
the high and low selling prices on the last preceding date for which
such quotations exist.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the average high and
low selling prices per share of Common Stock on the date in question on
the Stock Exchange determined by the Compensation Committee to be the
primary market for the Common Stock, as such prices are officially
quoted in the composite tape of transactions on such exchange and
published in The Wall Street Journal. If there are no selling prices
quoted for the Common Stock on the date in question, then the Fair
Market Value shall be the average of the high and low selling prices on
the last preceding date for which such quotations exist.
N. GRANT DATE shall mean the date of grant of the Option as
specified in the Grant Notice.
O. GRANT NOTICE shall mean the Notice of Grant of Stock
Option accompanying the Agreement, pursuant to which Optionee has been informed
of the basic terms of the Option evidenced hereby.
P. INVOLUNTARY TERMINATION shall mean the termination of
Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by
the Corporation for reasons other than (X) for Cause, as defined in the
Employment Agreement, or (Y) by reason of death or Permanent Disability,
or
(ii) Optionee's resignation for Good Reason, as defined
in the Employment Agreement.
Q. JUSTIFICATION shall have the meaning given such term in
the Employment Agreement.
R. NON-QUALIFIED OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. NOTICE OF EXERCISE shall mean the written notice of
exercise in the form attached hereto as Exhibit I.
203
T. OPTION SHARES shall mean the number of shares of Common
Stock subject to the option as specified in the Grant Notice.
U. OPTIONEE shall mean the person to whom the Option is
granted as specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
W. PERMANENT DISABILITY shall mean the inability of Optionee
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
X. SERVICE shall mean the Optionee's performance of services
for the Corporation (or any Parent or Subsidiary) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant.
Y. STOCK EXCHANGE shall mean the American Stock Exchange or
the New York Stock Exchange.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AA. TRIGGERING EVENT shall have the meaning given such term in
the Grant Notice.
204
EXHIBIT B
PROSPECTUS FOR STOCK OPTION GRANT
205
EXHIBIT 4
California Labor Code Sections 2870, 2871 and 2872
SECTION 2870
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
SECTION 2871
No employer shall require a provision made void and unenforceable by Section
2870 as a condition of employment or continued employment. Nothing in this
article shall be construed to forbid or restrict the right of an employer to
provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
SECTION 2872
If an employment agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the burden
of proof shall be on the employee claiming the benefits of its provisions.
206
EXHIBIT 2
207
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 31, 2001,
is entered into between ARTISTdirect Records, L.L.C., a Delaware limited
liability company ("Company") and Frederick W. Field ("Employee"), and shall be
effective upon the date that all of the conditions set forth in that certain
side letter agreement of even date (the "Side Letter") among Company,
ARTISTdirect, Inc. ("AD"), ARTISTdirect Recordings, Inc. ("ADR"), Employee and
Radar Records Holdings, LLC, a Delaware limited liability company ("FieldCo"),
shall have been satisfied (the "Effective Date").
RECITALS
WHEREAS, Company desires to employ Employee to serve Company and its
subsidiaries, and Employee desires to be so employed by Company, on the terms
and subject to the conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set
forth herein, Company hereby employs Employee, and Employee agrees to be
employed by Company, as Chief Executive Officer. Employee shall be Company's
most senior executive. Employee shall report solely and directly to Company's
members. During the Term, and subject to the provisions of the Operating
Agreement of Company dated of even date herewith, as the same may be amended
from time to time (the "Operating Agreement"), Employee shall faithfully perform
to the best of his ability all services and acts as are (a) consistent with his
title and position and (b) reasonably assigned to him by a "Majority in
Interest" (as defined in the Operating Agreement).
2. Devotion.
(a) During the Term, Employee shall devote his business time, skill and
energies exclusively to the business of Company and the "Company Affiliates" (as
defined below), subject to Section 2(b) below. For purposes of this Agreement,
"Company Affiliate" shall mean any entity that directly or indirectly has
"Control" (as defined below) of Company, as well as any entity over which
Company has Control, where having "Control" means having the power to direct the
affairs of an entity by reason of ownership of securities, by contract, or
otherwise. Without limiting the preceding sentence, a person or entity owning
directly or indirectly 50% or more of the voting securities of an entity shall
be deemed to have Control over such entity.
(b) It is hereby acknowledged that, concurrently with the execution of
this Agreement, Employee and AD, which is a Company Affiliate, are entering into
an employment agreement whereby, subject to the satisfaction of the conditions
set forth in the Side Letter, Employee shall become the Chairman and Chief
Executive Officer of AD (the "AD Employment Agreement"). In light of the
foregoing, it is specifically acknowledged and agreed that the performance of
Employee's services to AD pursuant to the AD Employment Agreement shall not be
deemed to be a breach of this Agreement. In addition, provided such activities
do not unreasonably interfere with the performance by Employee of his duties
hereunder, Employee shall be entitled to devote not more than twenty percent
(20%) of his total business time, measured upon a yearly basis, to the
208
motion picture and television activities of Radar Pictures, LLC and service on
the board of directors of each of the following companies: Huge Click,
Interland, Load Media, Omnipod, Strategic Data Corporation and E-Vox (such
activities and service, collectively, the "Permitted Outside Activities").
Employee shall be entitled to retain for his own account the proceeds earned by
Employee from the Permitted Outside Activities.
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of Company in the Los Angeles area;
provided, however, it is agreed that Employee will be expected to travel from
time to time at Company's expense in accordance with the provisions of Section
6(c) below.
4. Term. The term of Employee's employment shall commence on the Effective
Date and continue for five years (the "Term"), unless terminated sooner as
provided in Section 7 below.
5. Compensation. For all services to be rendered by Employee hereunder
(other than to AD), Employee shall be paid by Company a base salary at the
annual rate of One Million Dollars ($1,000,000), less applicable withholdings,
payable in accordance with Company's standard payment schedule for employees.
Except as specifically provided in the AD Employment Agreement, Employee shall
not be entitled to additional compensation for performing any services
consistent with his duties hereunder for any Company Affiliate.
6. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company
retirement, profit sharing and pension plans and life and other insurance
programs, as well as other benefit programs (other than A&R incentive plans and
other employee bonus plans), which are available to the other most senior
executives of Company, subject to Company's policies with respect to all of such
benefits or insurance programs or plans, and the terms thereof, which policies
and terms may include limitations on the eligibility of a Company employee to
participate simultaneously in both Company benefit plans and Company Affiliate
benefit plans; provided, however, that notwithstanding anything herein to the
contrary, Company shall not be obligated to institute or maintain any particular
benefit or insurance program or plan or aspect thereof.
(b) Employee shall be entitled to not less than four (4) weeks' vacation
during each year of the Term hereof to be scheduled at mutually agreeable times
and accrued and taken in accordance with Company policy. For the avoidance of
doubt, any vacation to be taken by Employee pursuant to this Agreement shall be
taken simultaneously with any vacation to be taken by Employee pursuant to the
AD Employment Agreement.
(c) Company agrees to reimburse Employee for such reasonable and
necessary out-of-pocket expenses incurred by Employee during the Term in the
performing of services for Company, including but not limited to for
business-related travel (first class), hotel, meals, telephone calls and
entertainment. If Employee shall travel in respect of both any Permitted Outside
Activity and Company business, Employee shall only seek and be entitled to those
expenses reasonably allocable to his pursuit of Company business. As a condition
to the reimbursement of such expenses by Company to Employee, Employee shall
provide Company with copies of invoices, receipts or other satisfactory
documentation in sufficient detail to allow Company to confirm the business
nature of the expenses and claim an income tax deduction for such paid items, if
such items are deductible. The obligations of Company to make the
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209
reimbursements specified hereunder for approved expenses accrued prior to the
effective date of termination of this Agreement shall survive any termination of
the Term.
7. Termination.
(a) Company may terminate Employee's employment hereunder after the
occurrence and during the continuance of any Disability of Employee, upon thirty
(30) days' prior written notice to Employee. For purposes of this Agreement,
"Disability" means Employee's incapacity to perform substantially all of his
then current duties as required hereunder for one hundred eighty (180) days or
more within any period of three hundred sixty-five (365) consecutive days
because of mental or physical condition, illness or injury, consistent with
applicable state and federal law. In the event of any dispute regarding the
existence of Employee's Disability, the matter will be resolved by the
determination of a physician qualified to practice medicine in the State of
California, selected by Employee and reasonably approved by Company, or, failing
such approval, by a majority of three physicians qualified to practice medicine
in the State of California, one to be selected by Company, one to be selected by
Employee and the third to be selected by the two designated physicians. For this
purpose, Employee will submit to appropriate medical examinations.
(b) Company may terminate Employee's employment hereunder for Cause. For
the purposes of this Agreement, "Cause" shall mean Employee shall have: (i) been
convicted of, or pleaded nolo contendere to any felony or to any lesser crime
involving fraud, embezzlement, or misappropriation of the property of Company or
any Company Affiliate; (ii) engaged in gross negligence or willful misconduct in
the performance of Employee's duties hereunder; (iii) materially breached any of
the provisions of Sections 1 or 2 above, or Sections 8, 9, 10 or 15 below; (iv)
misappropriated for his own purpose and benefit any (A) material property of
Company or any Company Affiliate or (B) any material opportunity of Company or
any Company Affiliate, (v) materially failed to abide by any of Sections 3.1(b)
or 3.2 of the Operating Agreement, or the second sentence of Section 13.1 of the
Operating Agreement; (vi) had his employment with AD terminated by AD pursuant
to (A) Section 8(b)(ii) of the AD Employment Agreement due to his willful
misconduct or (B) Section 8(b)(iii) of the AD Employment Agreement due to a
material breach by Employee of Sections 3 or 10 of the AD Employment Agreement;
or (vii) terminated his employment with AD without "Good Reason" or
"Justification" (as defined in the AD Employment Agreement). Notwithstanding
anything to the contrary contained herein, no event or circumstance described in
any of the preceding clauses (ii), (iii), (iv)(B) or (v) above shall constitute
"Cause" for purposes of this Agreement unless Company gives Employee (or
FieldCo, if applicable) written notice delineating the claimed event or
circumstance and setting forth Company's intention to terminate Employee's
employment if such claimed event or circumstance is not duly remedied within
thirty (30) days following such notice, if susceptible to remedy, and Employee
fails to remedy such event or circumstance within such thirty (30) day period;
provided, however, that if such failure susceptible to remedy cannot be remedied
within such thirty (30) day period, it shall not constitute Cause hereunder if
Employee shall commence such remedy within such thirty (30) day period and
thereafter diligently pursue such remedy and cause its completion within a
reasonable period thereafter. In addition, the first breach by Employee of
either the commitment contained in the second sentence of Section 2(b) above
(regarding Employee's performance of services to AD under the AD Employment
Agreement) or the commitment contained in the third sentence of Section 2(b)
above (regarding the Permitted Outside Activities) shall not be grounds for
termination for Cause.
(c) The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
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(d) Employee may terminate his employment hereunder forthwith at any
time for Good Reason upon written notice to Company. For purposes of this
Agreement, "Good Reason" shall mean the occurrence of any of the following (i)
Employee's termination of his employment with AD for "Good Reason" (as defined
in the AD Employment Agreement); (ii) a termination of Employee's employment
with AD that is neither (A) by AD pursuant to Sections 8(a), 8(b) or 8(c) of the
AD Employment Agreement nor (B) deemed, pursuant to Section 8(f) of the AD
Employment Agreement, to have been by AD pursuant to Section 8(b) of the AD
Employment Agreement; (iii) at any time following a "Funding Default" as defined
in the Operating Agreement; or (iv) a material breach by Company of any of its
material obligations to Employee hereunder. Notwithstanding anything to the
contrary contained herein, no event or circumstance in the preceding clause (iv)
shall constitute "Good Reason" for purposes of this Agreement unless Employee
gives Company written notice delineating the claimed event or circumstance and
setting forth Employee's intention to terminate Employee's employment if such
claimed event or circumstance is not duly remedied within thirty (30) days
following such notice, if susceptible to remedy, and Company fails to remedy
such event or circumstance (or cause such remedy) within such thirty (30) day
period; provided, however, that if such failure susceptible to remedy cannot be
remedied within such thirty (30) day period and does not involve a payment of
compensation or a reimbursement of expenses, it shall not constitute Good Reason
hereunder if Company shall commence such remedy within such thirty (30) day
period and thereafter diligently pursue such remedy and cause its completion
within a reasonable period thereafter.
(e) If Employee's employment is terminated pursuant to this Section 7,
Employee shall be entitled to, and Company's obligation hereunder shall be
limited to, (i) the payment of any unpaid compensation accrued under Section 5
above through the effective date of such termination; (ii) any unreimbursed
expenses incurred, and other accrued employee benefits (as described above)
accrued, through the date of termination; and (iii) the additional compensation
provided in Section 7(f) below, if any.
(f) If Employee's employment is terminated:
(i) by Company pursuant to Section 7(a) above, Employee will receive
the benefit of any Company disability plans; or
(ii) by Employee pursuant to Section 7(d) above, Company shall pay
Employee a lump sum in an amount equal to the aggregate amount of Employee's
base salary payable at the annualized level being paid to Employee pursuant to
Section 5 above at the time of such termination, less required withholdings,
during the Payment Period specified below. As used herein, the "Payment Period"
shall mean (I) fifty percent (50%) of the remainder of the scheduled Term if
such termination occurs during the first three (3) years of the Term, (II)
twelve (12) consecutive months after the effective date of such termination if
such termination occurs during the fourth (4th) year of the Term, or (III) the
full remainder of the scheduled Term if such termination occurs during the fifth
(5th) year of the Term. The parties hereto agree that the payment set forth in
this Section 7(f)(ii) constitutes fair compensation and the sole remedy for
damages for any termination by Employee pursuant to Section 7(d) above. Employee
shall have no duty of mitigation and shall not be subject to any right of offset
with respect to any other compensation received by Employee during the Payment
Period.
(g) Nothing in this Agreement shall be deemed a release or waiver of
right to any medical or other employee benefits available to Employee on or
after the effective date of
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termination of the executive's employment by Company under any federal, state or
local law that provides for the continuation of any medical or other employee
benefits after employment.
(h) (i) In the event of a dispute between Employee and Company as to
whether Employee's employment may be terminated by Company for Cause or whether
Employee terminated, or is entitled to terminate, Employee's employment for Good
Reason, then solely as to such dispute (and not as to any other disputes under
this Agreement, as such other disputes shall be settled in accordance with
Section 13 below), the dispute shall be settled exclusively by arbitration,
before a single arbitrator, in accordance with this Section 7(h) and the then
most applicable rules of the American Arbitration Association for employment
dispute resolution. The arbitrator shall have the authority to decide only the
issue of whether Cause for termination or a Good Reason for resignation exists.
Such arbitration shall be decided within ninety (90) days of the filing of a
petition to arbitration. Such arbitration shall be administered by the American
Arbitration Association and shall be the exclusive remedy for determining the
issue of Cause or Good Reason only (as opposed to any other disputes between the
parties hereto). If a party desires to submit an dispute to arbitration pursuant
to this Section 7(h) when the arbitration proceeding set forth in Section 8(j)
of the AD Employment Agreement already is in effect, such dispute shall be
determined in the same arbitration proceeding as that which is already so in
effect.
(ii) If the parties are unable to agree upon an arbitrator, the
parties shall select a single arbitrator from a list of fifteen arbitrators
drawn by the parties at random from the "Independent" (or "Gold Card") list of
retired judges or, at Employee's option, from a list of fifteen persons (which
shall be retired judges or litigation attorneys experienced in labor matters)
provided by the American Arbitration Association. If the parties are unable to
agree upon an arbitrator from the list so drawn, then the parties shall each
strike names alternately from the list, with the first to strike being
determined by lot. After each party has used seven strikes, the remaining name
on the list shall be the arbitrator. If such person is unable to serve for any
reason, the parties shall repeat this process until an arbitrator is selected.
(iii) In the event of a dispute subject to this Section 7(h), the
parties shall be entitled to reasonable discovery subject to the discretion of
the arbitrator. The remedial authority of the arbitrator shall be the same as,
but no greater than, would be the remedial power of a court having jurisdiction
over the parties in respect of the specific dispute, and shall be expressly
limited to such dispute (i.e., as to whether a termination constituted a valid
termination for Cause or Good Reason) and shall not extend to any other matters
or disputes. The arbitrator shall, upon an appropriate motion, dismiss any claim
without an evidentiary hearing if the party bringing the motion establishes that
he or it would be entitled to summary judgment if the matter had been pursued in
court litigation. In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.
(iv) Unless mutually agreed by the parties otherwise, any such
arbitration shall take place in the City of Los Angeles, California. Any filing
or administrative fees related to such arbitration initially shall be borne by
the party requesting arbitration, and the parties shall bear equally the cost of
the arbitrator's compensation; provided, however, that the arbitrator shall be
entitled to award the prevailing party in such arbitration all of such party's
filing or administrative fees related to such arbitration, as well as require
the nonprevailing party to bear the entire cost of the arbitrator's
compensation. Each party hereto shall be responsible all of its own attorneys'
fees and costs related to such dispute and arbitration proceedings.
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(v) During the continuance of any arbitration pursuant to this
Section 7(h), Employee shall not cause or permit Company to enter into or modify
the terms of any agreement, contract or arrangement without the prior written
approval of ADR, except an agreement, contract or arrangement:
(A) is required for Company to honor its then existing
contractual obligations; or
(B) previously was approved by ADR.
8. Rights to Works. In return for the consideration described herein,
Employee agrees as follows:
(a) All inventions, trade secrets, ideas, recordings, original works of
authorship or other work product of any kind that Employee conceives, develops,
discovers or makes in whole or in part pursuant to this Agreement or in the
scope of Employee's employment hereunder and Employee's contributions thereto
(hereinafter referred to as "Works") shall belong solely and exclusively to
Company. Company shall have the perpetual and exclusive right to use, exhibit,
distribute, or license throughout the universe, any Work or part thereof in
which Employee's services for Company are utilized by all forms of audio,
visual, textual, digital, electronic or other distribution that are now known or
may hereafter exist, and otherwise exploit such Works in such media, forums and
for such uses throughout the universe as it deems appropriate; provided,
however, that no likeness of Employee shall be used during or after the Term
without Employee's written consent and no quote of Employee shall be attributed
to Employee during or after the Term without Employee's written consent. All
revenues derived by Company from the use, exhibition, distribution, licensing,
or other exploitation of such Works shall be the sole and exclusive property of
Company.
(b) To the extent that the Works are considered: (i) contributions to
collective works and/or (ii) as parts or components of audiovisual works, the
parties hereby expressly agree that the Works shall be considered "works made
for hire" under the United States Copyright Act of 1976, as amended (17 U.S.C.
Section 101 et seq.). In accordance therewith, the sole right of copyright in
and to the Works shall belong exclusively to Company in perpetuity. To the
extent that the Works are deemed works other than contributions to collective
works and/or parts or components of audiovisual works, Employee hereby
irrevocably assigns and transfers to Company to the maximum extent permitted by
law all right, title and interest in the Works, including but not limited to all
copyrights, patents, trade secret rights, and other proprietary rights in or
relating to the Works. At Company's reasonable written request and sole expense,
Employee shall execute, verify, acknowledge, deliver and file any and all formal
assignments, recordations and any and all other documents that Company may
prepare and reasonably call for to give effect to the provisions of this
Agreement. If Employee fails to execute any such document or instrument, or
perform any such act, within ten (10) business days, Employee shall be deemed to
have irrevocably constituted and appointed Company, with full power of
substitution, to be Employee's true and lawful attorney, in Employee's name,
place, and stead, solely to execute, acknowledge, swear to, and file all
instruments, conveyances, certificates, agreements, and other documents, and to
take any action which may be necessary or appropriate to effect the provisions
of this Section 8. The powers of attorney granted herein shall be deemed to be
coupled with an interest and shall be irrevocable.
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(c) It is understood that the rights granted to Company in this Section
8 shall continue in effect after the termination or expiration of this Agreement
to the extent necessary for Company's full enjoyment of such rights.
(d) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to either (A) the business of Company or any Company Affiliate at the
time of conception or reduction to practice of the invention, or (B) actual or
demonstrably anticipated research or development of Company or any Company
Affiliate; or (ii) result from any work performed by Employee for Company or any
Company Affiliate. A copy of California Labor Code Sections 2870, 2871 and 2872
is attached to this Agreement as Exhibit 1, and incorporated herein by
reference.
(e) Employee shall disclose all inventions and innovations to Company
that reasonably could be anticipated to be owned by or required to be assigned
to Company hereunder.
(f) Notwithstanding the foregoing provisions of this Section 8, this
Section 8 shall not apply to Works relating to AD's or ADR's business and
affairs, as such Works are addressed in the AD Employment Agreement.
9. Restrictions. In recognition of the consideration described herein,
Employee agrees that:
(a) Without limiting the generality of Section 2(a) above, and except as
set forth in Section 2(b) above, Employee shall not engage or be financially
interested, directly or indirectly, at any time prior to the "Noncompetition
Expiration Date," in any activity directly competitive with any business then
carried on by, or anticipated to be carried on by, Company or any Company
Affiliate over which Company has Control. Notwithstanding the foregoing,
Employee may acquire or hold, solely for investment, publicly traded securities
of any corporation, so long as such securities, in the aggregate, constitute
less than five percent (5%) of any class or series of outstanding securities of
such corporation. As used in this Section 9, "Noncompetition Expiration Date"
shall mean:
(i) If Employee's employment is terminated (A) by Company pursuant
to Section 7(a) or 7(c) above, or (B) by Employee pursuant to Section 7(d)
above, then the actual date of termination of Employee's employment with
Company; or
(ii) If Employee's employment is terminated (A) by Company pursuant
to Section 7(b) above or (B) by Employee other than pursuant to Section 7(d)
above, then the later of the actual date of such termination or the date upon
which the Term is scheduled to expire.
(b) During the term of Employee's employment and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to the business and affairs of Company or any Company
Affiliate over which Company has Control that come to his knowledge while
employed by Company (excluding information that is or becomes publicly known or
available for use through no fault of Employee), including but not limited to:
(i) matters of a business nature related to Company or any Company Affiliate
over which Company has Control, such as information about costs, profits,
markets, sales, lists of customers, lists of
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clients and other information of a similar nature, (ii) plans or strategies for
development of the business of Company or any Company Affiliate over which
Company has Control and (iii) matters of a technical nature related to Company
or any Company Affiliate over which Company has Control. Except as required in
the performance of Employee's duties to Company under this Agreement, Employee
shall not use for his own benefit or disclose to any person (except to his
attorneys and financial advisors and as required by law or legal process,
provided Employee shall undertake to give Company notice prior to such
disclosure and shall comply with any applicable protective order or equivalent),
directly or indirectly, such matters unless such use or disclosure has been
specifically authorized in writing by Company in advance. Employee shall advise
his attorneys and financial advisors that such trade secrets and confidential
information are confidential and that by receiving such trade secrets and
confidential information such attorneys and financial advisors are agreeing to
be bound by this Section 9(b). Employee agrees to be responsible for any breach
of this Section 9(b) by his attorneys or financial advisors.
(c) Employee shall not, directly or indirectly, hire, offer to hire,
entice away, or in any other manner persuade or attempt to persuade any officer,
employee (other than Employee's personal assistant(s)), agent, representative,
customer, client, performer or songwriter of Company or any Company Affiliate,
to discontinue his or her relationship with Company or any Company Affiliate,
until the "Nonsolicitation Expiration Date," which shall mean the date one (1)
year following the date upon which the Term is scheduled to expire, unless
Employee's employment is terminated by Employee pursuant to Section 7(d) above,
in which case it shall mean the date one (1) year following the actual date of
such termination. Notwithstanding the foregoing provisions of this Section 9(c),
this Section 9(c) shall not apply to hiring, offering to hire, enticing away, or
in any other manner persuading or attempting to persuade any officer, employee
(other than Employee's personal assistant(s)), agent, representative, customer,
client, performer or songwriter of AD or ADR, to discontinue his or her
relationship with AD or ADR, as such matters are addressed in the AD Employment
Agreement.
10. Employee's Representations. Employee hereby represents and warrants
that: (a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, (c) he will comply in
all material respects with all policies of Company of which he has written
notice, provided they are consistent with applicable laws and (d) this Agreement
is enforceable against Employee in accordance with its terms, except (i) as such
enforceability may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, (ii) as such obligations are subject to general principles of equity
and (iii) as rights to indemnity may be limited by federal, state or local
securities laws or by public policy. Without limiting the generality of the
foregoing, Employee specifically represents and warrants that no term or
condition under any contract or agreement related to Employee's past employment
with Universal Music Group or the termination thereof shall in any way reduce or
restrict Employee's ability to execute and perform this Agreement.
11. Assistance with Litigation. Employee agrees that for five years
following termination of his employment with Company, Employee shall make
himself available to Company to assist Company with litigation based on fact or
circumstance that arose during his employment. Employee further agrees to
cooperate reasonably with Company in any such litigation. Company agrees to
compensate Employee at a reasonable rate for his time, except time spent in
depositions or trial. Company further agrees to reimburse Employee such
reasonable and
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necessary out-of-pocket expenses incurred by Employee in providing such
assistance, in accordance with the principles set forth in Section 6(c) above.
12. Company's Representations. Company hereby represents and warrants that,
subject to the satisfaction of the conditions set forth in the Side Letter: (a)
it has the right, power and authority to enter into this Agreement and to incur
the obligations incurred by it herein, (b) this Agreement has been duly and
validly authorized by Company and is enforceable against Company in accordance
with its terms, except (i) as such enforceability may be limited by or subject
to any bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, (ii) as such obligations are subject to
general principles of equity and (iii) as rights to indemnity may be limited by
federal, state or local securities laws or by public policy, and (c) the
provisions of this Agreement do not violate any other contracts or agreements to
which it is a party that would adversely affect its ability to perform its
obligations hereunder.
13. Governing Law.
(a) This Agreement shall be governed by and construed and enforced in
accordance with the internal substantive laws (and not the laws of choice of
laws) of the State of California.
(b) Subject to Section 7(h) above, each of the parties hereto hereby
irrevocably and unconditionally submits, for itself and its property, to the
exclusive jurisdiction of any California state court or federal court of the
United States of America sitting in the Central District of the State of
California, situated in Los Angeles County, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
California state court or, to the extent permitted by law, in such federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(c) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any California state
court or federal court. Each of the parties hereto hereby irrevocably waives, to
the fullest extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
14. Entire Agreement. This Agreement and the Side Letter constitute the
whole agreement of the parties hereto in reference to any employment of Employee
by Company and in reference to the subject matter hereof, and all prior
agreements, promises, representations and understandings relative thereto are
merged herein.
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15. Assignability. The services to be performed by Employee hereunder are
personal in nature and, accordingly, Employee may not, without the prior express
written consent of Company in each instance, assign or transfer this Agreement
or any rights or obligations hereunder. Company may not assign or transfer this
Agreement or any rights or obligations hereunder. For purposes of this
Agreement, a "Change in Control," meaning a sale of all or substantially all of
the assets of Company, or any transaction or series of related transactions
(including without limitation, any merger, reorganization, consolidation or
purchase of outstanding equity interests) resulting in the transfer of 50% or
more of the outstanding voting securities of Company, shall not be considered an
assignment. For the avoidance of doubt, however, the provisions of Section 7(d)
above shall continue to apply following a Change in Control. Nothing expressed
or implied herein is intended or shall be construed to confer upon or give to
any person, other than the parties hereto, any right, remedy or claim under or
by reason of this Agreement or of any term, covenant or condition hereof.
16. Remedies. Any material breach or violation by Employee of the terms of
Sections 2, 8, or 9 above would result in immediate and irreparable injury and
harm to Company, and would cause damage to Company in amounts difficult to
ascertain and for which Company's remedies and defenses at law would be
inadequate. Accordingly, (a) in the event of any breach or threatened breach of
Section 9(a) above, Company shall be entitled to seek the remedy of injunction,
as well as all other remedies to which Company may be entitled, at law, in
equity or otherwise and (b) in the event of any such breach or threatened breach
of the aforementioned Sections other than Section 9(a) above, Company shall be
entitled to, and Employee hereby consents to, the remedy of injunction, as well
as all other remedies to which Company may be entitled, at law, in equity or
otherwise. The preceding sentence shall not be construed to prevent Employee
from disputing the factual basis of any remedies or defenses asserted by
Company.
17. Covenants Reasonable as to Time and Territory. Employee and Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon Company under this
Agreement, and hereby acknowledge and agree that: (i) such restrictions are
reasonable in time and territory; and (ii) the consideration provided and to be
provided to Employee is sufficient to compensate Employee for such restrictions.
18. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived only by a written instrument executed by the parties hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by any
party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
19. Notices. All notices, consents, requests and other communications
hereunder shall be in writing and, if given by personal delivery, shall be
deemed to have been validly served, given or delivered upon actual delivery and,
if mailed or delivered by overnight courier, shall be deemed to have been
validly served, given or delivered when deposited in the United States mail, as
registered or certified mail, with proper postage prepaid, or when deposited
with the courier service (provided the courier service obtains a signature
acknowledging receipt), and addressed to the party or parties to be notified, at
the following addresses (or such other addresses) as a party may designate for
itself by like notice:
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If to Employee: Frederick W. Field
c/o Radar Pictures
10900 Wilshire Boulevard, Suite 1400
Los Angeles, CA 90024
With a copy to: Ziffren, Brittenham, Branca & Fischer
1801 Century Park West
Los Angeles, CA 90067-6406
Attention: Skip M. Brittenham, Esq. or
Gary Stiffelman, Esq.
If to Company: ARTISTdirect Records, L.L.C.
5670 Wilshire Blvd, Suite 200
Los Angeles, CA 90036
Attention: Marc P. Geiger
With copies to: ARTISTdirect, Inc.
5670 Wilshire Blvd, Suite 200
Los Angeles, CA 90036
Attention: VP of Business and Legal Affairs
and
Lenard & Gonzalez LLP
1801 Century Park West
Sixth Floor
Los Angeles, CA 90067
Attention: Allen D. Lenard, Esq.
20. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
21. Section Headings. The Section headings herein are used solely for
convenience and shall not be used in the interpretation or construction of this
Agreement.
22. No Drafting Presumption. In interpreting the provisions of this
Agreement, no presumption shall apply against any party that otherwise would
operate against such party by reason of such document having been drafted by
such party or at the direction of such party.
23. Counterparts: Facsimile. This Agreement may be executed in two
counterparts and by facsimile, each of which shall be deemed an original and
both of which together shall be deemed one Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
/s/ FREDERICK W. FIELD ARTISTdirect Records, L.L.C.
------------------------------
Frederick W. Field
By: ARTISTdirect Recordings, Inc.
Its: Member
By: ARTISTdirect, Inc.
Its: Sole Shareholder
By: /s/ MARC GEIGER
-----------------------
Marc Geiger
Its: Chief Executive
Officer
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EXHIBIT 1
California Labor Code Sections 2870, 2871 and 2872
SECTION 2870
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require
an employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
SECTION 2871
No employer shall require a provision made void and unenforceable by Section
2870 as a condition of employment or continued employment. Nothing in this
article shall be construed to forbid or restrict the right of an employer to
provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
SECTION 2872
If an employment agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the burden
of proof shall be on the employee claiming the benefits of its provisions.
220
EXHIBIT 3
221
ARTISTdirect, Inc.
5670 Wilshire Blvd., Suite 200
Los Angeles, CA 90036
May 31, 2001
Mr. Frederick W. Field
c/o Ziffren, Brittenham, Branca & Fischer
1801 Century Park West
Los Angeles, CA 90067-6406
Attention: Gary Stiffelman, Esq.
Gentlemen:
Reference is hereby made to that certain Employment Agreement of even
date (the "Employment Agreement") by and between ARTISTdirect, Inc., a Delaware
corporation ("AD"), and Frederick W. Field ("FIELD") pursuant to which Field is
to become the Chairman of the Board of Directors and Chief Executive Officer of
AD.
Pursuant to Section 6(c) of the Employment Agreement, AD will issue to
Field three separate option grants with respect to the common stock of AD
("Common Stock") (each, an "Option" and collectively, the "Options") in the
forms attached as Exhibits 1, 2 and 3 to the Employment Agreement.
AD hereby agrees that it shall, at its sole cost and expense, as
expeditiously as reasonably possible:
1. Prepare and file with the Securities and Exchange Commission ("SEC")
a registration statement on Form S-8 (or successor form) with respect to all of
the shares of Common Stock issuable upon exercise of the Options (collectively,
the "Option Shares") and use all reasonable efforts to cause such registration
statement to become effective, and keep such registration statement effective
until all of the Options have been exercised in full or expired in accordance
with their terms.
2. Prepare and file with the SEC such amendments and supplements to such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for the period set forth in paragraph 1 above.
3. Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by Field or any
permitted transferee of the Options in accordance with the terms therein
(collectively, the "Optionee"), provided that AD shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
In addition to the foregoing, with a view to making available to the
Optionee the benefits of certain rules and regulations of the SEC which may
permit the sale of the Option Shares to the public without registration, AD
agrees to use its best efforts to make and keep public information available, as
those terms are understood and defined in SEC Rule 144 or any similar or
analogous rule promulgated under the Securities Act, at all times that Optionee
is an affiliate of
222
AD and file with the SEC, in a timely manner, all reports and other documents
required of AD under the 1934 Securities Exchange Act, as amended.
If the foregoing accurately reflects our understanding, please so
indicate by signing below:
Sincerely,
ARTISTdirect, Inc.
By: /s/ MARC GEIGER
-----------------------------
Marc Geiger
Its: Chief Executive Officer
AGREED AND ACKNOWLEDGED:
/s/ FREDERICK W. FIELD
----------------------------
Frederick W. Field
2
223
EXHIBIT 4
224
ARTISTDIRECT, INC.
ARTISTDIRECT RECORDINGS, INC.
ARTISTDIRECT RECORDS, L.L.C.
5670 Wilshire Blvd, Suite 200
Los Angeles, CA 90036
May 31, 2001
Mr. Frederick W. Field
Radar Records Holdings, LLC
c/o Ziffren, Brittenham, Branca & Fischer
1801 Century Park West
Los Angeles, CA 90067-6406
Attention: Gary Stiffelman, Esq.
Gentlemen:
Reference is hereby made to the following facts:
A. ARTISTdirect, Inc. ("AD") and Frederick W. Field ("FIELD") are
parties to an Employment Agreement of even date pursuant to which Field is to
become the Chairman and Chief Executive Officer of AD (the "AD EMPLOYMENT
AGREEMENT"), and in connection with which AD is granting Field three (3) stock
options (the "OPTIONS") and entering into a letter agreement with Field
regarding registering the shares of AD Common Stock subject to the Options (the
"REGISTRATION RIGHTS LETTER").
B. ARTISTdirect Records, L.L.C. (the "LABEL"), ARTISTdirect
Recordings, Inc., which is a wholly-owned subsidiary of AD ("ADR"), and Radar
Records Holdings, LLC, which, directly or indirectly, is wholly owned by Field
("FIELDCO"), are parties to an Operating Agreement of even date pursuant to
which ADR and FieldCo are to be issued units of membership interest in, and
become the sole members of, the Label (the "OPERATING AGREEMENT").
C. The Label and Field are parties to an Employment Agreement of
even date pursuant to which Field is to become the Chief Executive Officer of
the Label (the "LABEL EMPLOYMENT AGREEMENT").
D. The Label and ADR are parties to a Loan and Security Agreement of
even date pursuant to which ADR is to lend funds to, and receive a security
interest in the assets of, the Label (the "LOAN AND SECURITY AGREEMENT").
In connection with the applicable parties entering into the AD
Employment Agreement, the Registration Rights Letter, the Operating Agreement,
the Label Employment Agreement, the documents related to the grant of the
Options and the Loan and Security Agreement (collectively, the "TRANSACTION
DOCUMENTS") and issuing the Options, you and we have agreed as follows:
1. Defined Terms. Capitalized terms used in this side letter agreement
(this "SIDE LETTER") without definition shall have the meaning ascribed
to them in the Operating Agreement.
2. AD Representations.
(a) AD represents and warrants, as of the execution hereof and
subject to the satisfaction of the conditions set forth in Section 4 below, each
of the following: (a) AD and ADR
225
Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 2 of 7
are duly organized, validly existing corporations, in good standing under the
laws of the State of Delaware, and AD and ADR have all necessary power and
authority to enter into, and to perform their obligations under the Transaction
Documents (including, without limitation, AD's obligation to issue the Options);
(b) each Transaction Agreement has been duly authorized by AD, ADR, or the
Label, as applicable, and upon execution, assuming valid execution and delivery
by FieldCo and Field, each Transaction Agreement will constitute a legal, valid
and binding obligation of AD, ADR or the Label, as applicable, enforceable
against AD, ADR or the Label, as applicable, in accordance with its terms,
except (i) as such enforceability may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, (ii) as such obligations are subject to
general principles of equity and (iii) as rights to indemnity may be limited by
federal, state or local securities laws or by public policy, and (c) the
execution, delivery and performance of the Transaction Documents by AD, ADR and
the Label do not and will not (i) violate, conflict with or result in the breach
of any provision of AD's or ADR's Certificate of Incorporation or Bylaws or any
law or order of any court or other governmental authority applicable to AD or
ADR or any of their assets, properties or business; or (ii) conflict with,
result in any breach of, constitute a default (or event which with the giving of
notice or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in the
creation of any encumbrance on any of the capital stock or on any of the assets
or properties of AD or ADR pursuant to any note, bond, mortgage or indenture,
contract, agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which AD or ADR is a party or by which any of such
interests or any of such assets or properties are bound or affected.
(b) AD further warrants and represents that
(i) AD and/or its Permitted Transferees own (directly or
beneficially) 100% of the outstanding shares of capital stock of ADR, which,
absent the prior consent of FieldCo for so long as FieldCo shall remain a
Member, which consent may be withheld for any reason whatsoever, the foregoing
shall remain true for so long as AD, ADR and/or their respective Permitted
Transferees have any direct or beneficial interest in the Company; provided,
however, that AD may transfer shares of capital stock of ADR, and ADR may issue
shares of capital stock of ADR or interests derivative thereof (e.g., options to
acquire shares of capital stock of ADR or "phantom" interests in the net profits
of ADR) to employees of AD, ADR or their respective Permitted Transferees, so
long as such shares or interests do not entitle the holders thereof to an
interest in more than 20% of the capital or profits of ADR;
(ii) As of the date hereof, AD's shares of capital stock in ADR
are validly issued, fully paid and non-assessable; and
(iii) As of the date hereof, AD and/or its Permitted Transferees
have the sole control over, and all voting rights with respect to the exercise
by ADR of, all voting rights, consent rights, rights of approval and like rights
and power under the Transaction Documents and all related agreements, and,
absent the prior consent of FieldCo for so long as FieldCo shall remain a
Member, which consent may be withheld for any reason whatsoever, neither AD nor
ADR shall voluntarily cause or allow the foregoing to cease to remain true for
so long as AD, ADR and/or its Permitted Transferees have any direct or indirect
interest in the Label.
226
Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 3 of 7
3. Field Representations, Warranties and Covenants.
(a) Field hereby represents and warrants that, as of the date hereof:
FieldCo is a duly organized, validly existing limited liability company, in good
standing, under the laws of the State of Delaware. Field is an individual with
his current principal place of residence in the State of California, and FieldCo
and Field have all necessary power and authority to enter into, and to perform
their obligations under the Transaction Documents. Each Transaction Agreement to
which FieldCo is a party has been duly authorized by FieldCo, upon execution,
assuming valid execution and delivery by AD, ADR and the Label, subject to
Section 4 below, each Transaction Agreement will constitute a legal, valid and
binding obligation of FieldCo and Field, as the case may be, enforceable against
each of them in accordance with their respective terms except (i) as such
enforceability may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, (ii) as such obligations are subject to general principles of equity
and (iii) as rights to indemnity may be limited by federal, state or local
securities laws or by public policy. The execution, delivery and performance of
the Transaction Documents and all related agreements by FieldCo and Field, as
the case may be, do not and will not: (i) violate, conflict with or result in
the breach of any provision of FieldCo's Certificate of Formation or limited
liability company agreement or any law or order of any court or other
governmental authority applicable to FieldCo or Field, or any of their
respective assets, properties or business; or (ii) conflict with, result in any
breach of, constitute a default (or event which with the giving of notice or
lapse of time, or both, would become a default) under, require any consent
under, or give to others any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, or result in the creation of any
encumbrance on any of the Membership Interests or other equity interests or on
any of the assets or properties of FieldCo or Field pursuant to any note, bond,
mortgage or indenture, contract, agreement, lease, sublease, license, permit,
franchise or other instrument or arrangement to which FieldCo or Field is a
party or by which any of such interests or any of such assets or properties are
bound or affected. FieldCo and Field have provided AD, ADR, and the Label with
copies of all written contracts and have disclosed to ADR the terms of all
material oral agreements to which any of them or any Affiliate is a party or has
any obligation (A) with composers, lyricists, singers, musicians, or any other
Person, in each case, directly relating to the production, manufacture or
distribution of musical Recordings, (B) related to any indebtedness for borrowed
money of FieldCo, or for which FieldCo is liable for repayment, (C) that limit
or purport to limit the ability of FieldCo, Field or any of their respective
Affiliates to compete in the Record Label Business, or (D) the performance of
which would, or could reasonably be expected to have a material adverse effect
on the business or financial condition of FieldCo, the Label, ADR or AD (all
such contracts and pre-existing obligations are listed on Schedule 14.3 to the
Operating Agreement).
(b) Field further warrants, represents and covenants that:
(i) As of the date hereof, FieldCo engages in no business or
activity (and has no assets), other than the investment in the Label and cash
investments (or cash equivalents, money market accounts or publicly traded
securities), and, absent the prior consent of ADR for so long as ADR shall
remain a Member, which may be withheld for any reason whatsoever, the foregoing
shall remain true for so long as Field, FieldCo and/or its Permitted Transferees
have any direct or beneficial interest in the Label;
(ii) As of the date hereof, Field and/or his Permitted
Transferees own (directly or beneficially) 100% of the membership interests in
FieldCo, which membership
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Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 4 of 7
interest provides Field and/or his Permitted Transferees with a 100% ownership
and economic interest in FieldCo and, absent the prior consent of ADR for so
long as ADR shall remain a Member, which consent may be withheld for any reason
whatsoever, the foregoing shall remain true for so long as Field, FieldCo and/or
its Permitted Transferees have any direct or beneficial interest in the Label;
provided, however, that FieldCo may issue membership interests in FieldCo or
other interests derivative thereof (e.g., "phantom" interests in the net profits
of FieldCo) to employees of the Label, so long as such interests do not entitle
the holders thereof to an interest in more than 20% of the capital or profits of
FieldCo; and provided, further, that FieldCo may convert into a corporation so
long as it notifies ADR promptly following the occurrence thereof. In the event
FieldCo is converted into a corporation, the covenants and restrictions set
forth in this Section 3(b) shall remain applicable, all references to FieldCo
shall be deemed to refer to said corporation, and all references to membership
interests of FieldCo shall be deemed to refer to stock of said corporation;
(iii) As of the date hereof, Field's membership interest in
FieldCo is validly issued, fully paid and non-assessable; and
(iv) As of the date hereof, Field and/or his Permitted
Transferees have the sole control over, and all voting rights with respect to
the exercise by FieldCo of, all voting rights, consent rights, rights of
approval and like rights and power under the Transaction Documents and all
related agreements, and, absent the prior consent of ADR for so long as ADR
shall remain a Member, which consent may be withheld for any reason whatsoever,
neither FieldCo nor Field shall voluntarily cause or allow the foregoing to
cease to remain true for so long as Field, FieldCo and/or its Permitted
Transferees have any direct or indirect interest in the Label.
4. Conditions Precedent to Effectiveness. None of the Transaction Documents
shall become effective until the date all of the following conditions shall have
been satisfied (or the satisfaction thereof is waived in writing by the
applicable Person(s)) (the "EFFECTIVE DATE"), if at all:
(a) The Transaction Documents and the issuance of the Options shall
have been approved by the stockholders of AD at a meeting thereof; provided,
however, that the satisfaction of this condition may be waived in writing by
FieldCo and Field;
(b) Immediately following the meeting of stockholders
described in paragraph (a) above, the Board of Directors of AD shall be
comprised of the following individuals: Field, Marc Geiger, Keith Yokomoto,
Steve Krupa, Allen Lenard, Cliff Friedman, Ben Moody, Dara Khosrowshahi and Don
Muller; provided, however, that the satisfaction of this condition may be waived
in writing by FieldCo and Field;
228
Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 5 of 7
(c) ADR shall have delivered to FieldCo and Field a certificate,
signed by a duly authorized officer of ADR, certifying that as of the date upon
which the stockholder approvals and actions required by the preceding paragraphs
(a) and (b) shall have been obtained (the "Approval Date"):
(i) all of ADR's representations under the applicable
Transaction Documents are true and correct in all material respects;
(ii) there has been no change, event, violation, circumstance
or effect that is materially adverse to the business, assets, liabilities,
financial condition or results of operations of ADR; and
(iii) with respect to ADR, there has been no action, suit, or
proceeding pending or, to the best of ADR's knowledge, threatened, before any
governmental authority or any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would prevent consummation of any of
the transactions contemplated by the Transaction Documents, or cause any of the
transactions contemplated by the Transaction Documents to be rescinded following
consummation thereof;
provided, however, that the satisfaction of this condition may be waived in
writing by FieldCo and Field;
(d) FieldCo shall have delivered to ADR and AD a certificate, signed
by Field, certifying that, as of the Approval Date:
(i) all of FieldCo's representations under the applicable
Transaction Documents are true and correct in all material respects;
(ii) there has been no change, event, violation, circumstance
or effect that is materially adverse to the business, assets, liabilities,
financial condition or results of operations of FieldCo or Field; and
(iii) with respect to FieldCo, there has been no action, suit,
or proceeding pending or, to the best of FieldCo's knowledge, threatened, before
any governmental authority or any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would prevent consummation of any of
the transactions contemplated by the Transaction Documents, or cause any of the
transactions contemplated by the Transaction Documents to be rescinded following
consummation thereof;
provided, however, that the satisfaction of any condition set forth in this
Section 4(d) may be waived in writing by ADR and AD.
(e) AD shall have delivered to Field and FieldCo a certificate,
signed by a duly authorized officer of AD, certifying that, as of the Approval
Date:
(i) all of AD's representations pursuant to Section 2 above
and the applicable Transaction Documents are true and correct in all material
respects;
(ii) there has been no change, event, violation, circumstance
or effect that is materially adverse to the business, assets, liabilities,
financial condition or results of operations of AD; and
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Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 6 of 7
(iii) with respect to AD, there has been no action, suit, or
proceeding pending or, to the best of AD's knowledge, threatened, before any
governmental authority or any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would prevent consummation of any of
the transactions contemplated by the Transaction Documents, or cause any of the
transactions contemplated by the Transaction Documents to be rescinded following
consummation thereof;
provided, however, that the satisfaction of any of the conditions set forth in
this Section 4(e) may be waived in writing by FieldCo and Field;
(f) Field shall have delivered to ADR and AD, a certificate, signed
by Field, certifying that, as of the Approval Date
(i) all of Field's representations pursuant to Section 3 above
and applicable Transaction Documents are true and correct in all material
respects; and
(ii) there has been no change, event, violation, circumstance
or effect that is materially adverse to the business, assets, liabilities or
financial condition of Field;
(iii) with respect to Field, there has been no action, suit, or
proceeding pending or, to the best of Field's knowledge, threatened, before any
governmental authority or any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would prevent consummation of any of
the transactions contemplated by the Transaction Documents, or cause any of the
transactions contemplated by the Transaction Documents to be rescinded following
consummation thereof;
provided, however, that the satisfaction of any of the conditions set forth in
this Section 4(f) may be waived in writing by ADR and AD;
You and we have further agreed that, if any of the conditions set forth
in this Section 4 are not satisfied (or the satisfaction thereof is waived in
writing by the applicable party) on or before July 31, 2001, each of the
Transaction Documents shall be deemed void ab initio, of no force or effect.
5. Condition Subsequent. If ADR shall fail to make the Advance required of
it pursuant to Section 5.1(d)(i) of the Operating Agreement on or before the
date five Business Days following the Effective Date, then FieldCo and Field
shall have the right, but not the obligation, at any time during the five
Business Days after the five Business Days following the Effective Date, to
terminate all of the Transaction Documents by written notice to AD and ADR. In
the event FieldCo and Field shall deliver such a notice, each of the Transaction
Documents shall be deemed void ab initio, of no force or effect.
230
Mr. Frederick W. Field
Radar Records Holdings, LLC
May 31, 2001
Page 7 of 7
If the foregoing accurately reflects our understanding, please so
indicate by signing below:
Sincerely,
ARTISTdirect, Inc.
By: /s/ MARC GEIGER
-----------------------------
Marc Geiger
Its: Chief Executive Officer
ARTISTdirect Recordings, Inc.
By: /s/ MARC GEIGER
-----------------------------
Marc Geiger
Its: Chief Executive Officer
ARTISTdirect Records, L.L.C.
By: ARTISTdirect Recordings, Inc.
Its: Member
By: ARTISTdirect, Inc.
Its: Sole Shareholder
By: /s/ MARC GEIGER
-------------------------
Marc Geiger
Its: Chief Executive
Officer
AGREED AND ACKNOWLEDGED:
Radar Records Holdings, LLC
/s/ FREDERICK W. FIELD By: /s/ FREDERICK W. FIELD
--------------------------------- --------------------------------
Frederick W. Field Frederick W. Field
Its: Member
231
ARTISTDIRECT, INC.
PROXY
Annual Meeting of Stockholders, June 29, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
OF DIRECTORS OF ARTISTDIRECT, INC.
The undersigned revokes all previous proxies, acknowledges receipt of
the Notice of the Annual Meeting of Stockholders to be held Friday, June 29,
2001 and the Proxy Statement and appoints Marc P. Geiger and James B. Carroll,
and each of them, the Proxy of the undersigned, with full power of substitution,
to vote all shares of common stock of ARTISTDIRECT, INC. (the "Company") which
the undersigned is entitled to vote, either on his or her own behalf or on
behalf of any entity or entities, at the 2001 Annual Meeting of Stockholders of
the Company to be held at __________________________________ on Friday, June 29,
2001 at 10:00 a.m. Pacific Daylight Savings Time (the "Annual Meeting"), and at
any adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat. The shares
represented by this Proxy shall be voted in the manner set forth on this proxy
card.
1. To elect three directors to serve for a three-year term ending
in the year 2004 or until their successors are duly elected and
qualified;
WITHHOLD
FOR AUTHORITY TO VOTE
Keith K. Yokomoto
-------------- ----------------------
Frederick W. Field
-------------- ----------------------
Benjamin Moody
-------------- ----------------------
2. To ratify the appointment of KPMG LLP as independent accountants
of the Company for the fiscal year ending December 31, 2001.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To approve the formation of a record label company as a
co-venture between the FOR AGAINST ABSTAIN Company and
Frederick W. Field, and related agreements with Mr. Field.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To approve an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse stock split.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. In accordance with the discretion of the proxy holders, to act
upon all matters FOR AGAINST ABSTAIN incident to the conduct of
the meeting and upon other matters as may properly come
before the meeting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
The Board of Directors recommends a vote IN FAVOR OF the directors
listed above and a vote IN FAVOR OF each of the listed proposals. This Proxy,
when properly executed, will be voted as specified above. IF NO SPECIFICATION IS
MADE, THIS PROXY WILL BE VOTED IN FAVOR OF THE ELECTION OF THE DIRECTORS LISTED
ABOVE AND IN FAVOR OF PROPOSAL TWO.
Please print the name(s)
appearing on each share
certificate(s) over which
you have voting authority:
-----------------------------------------------
(Print name(s) on certificate)
Please sign your
name: Date:
---------------------------------- -----------------
(Authorized Signature(s))