Employment Agreement - ARTISTdirect Inc. and Keith Yokomoto
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of July 1,
2001, and is entered into between ARTISTdirect, Inc., a Delaware corporation
(the "Company"), and Keith Yokomoto ("Employee").
RECITALS
WHEREAS, the Company desires to employ Employee to serve the Company and
its subsidiaries and Employee desires to be so employed by the 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, the Company hereby employs Employee, and Employee agrees to be employed
by the Company, as President and Chief Operating Officer. Employee shall report
to the Company's Chief Executive Officer and/or such other executives of the
Company and/or its subsidiaries as the Company may designate from time to time.
2. Devotion. During the Term, Employee shall faithfully perform to the best of
his ability all services and acts necessary or advisable as both (a) are
consistent with his title and position and (b) may reasonably be assigned to him
by any of the persons described in Section 1 above. In addition, during the
Term, Employee shall devote his business time, skill and energies exclusively to
the business of the Company and its subsidiaries and affiliates from time to
time (the "Affiliates").
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of the Company in the Los Angeles
area; provided, however, it is agreed that Employee will be expected to travel
from time to time at the Company's expense in accordance with the provisions of
Section 6(c) below.
4. Term. The term of Employee's employment hereunder shall commence on July 1,
2001, and continue through June 30, 2006 (the "Term"), unless terminated sooner
as provided in Section 7 below. Each twelve (12)-month period of the period
commencing July 1, 2001, and ending June 30, 2006, is referred to below as a
"Contract Year." Beginning July 1, 2006, and upon each successive one (1) year
anniversary thereof, the Term shall extend automatically for an additional one
(1) year period unless either the Company gives Employee or Employee gives the
Company written notice not less than ninety (90) and not more than one hundred
twenty (120) days prior to the end of the then-current period of its or his
intention not to extend the Term; provided, however, that the Term may terminate
earlier as provided in Section 7 below.
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5. Compensation. For all services to be rendered by Employee hereunder, Employee
shall be paid by the Company the amounts set forth in this Section 5. Employee
shall not be entitled to additional compensation for performing any services
consistent with his duties hereunder for any Affiliate.
(a) Base Salary. During the Term, the Company shall pay Employee a base
salary at the annual rate of Five Hundred Thousand Dollars ($500,000) (the "Base
Salary"), payable in accordance with the Company's standard payment schedule for
employees. The Base Salary shall be reviewed annually for any increases by the
Compensation Committee of the Company's Board of Directors (the "Board") or, if
none, the Board (the "Committee") in consultation with the Company's Chief
Executive Officer.
(b) Commencement Advance. (i) Within five (5) business days following
the later of the complete execution hereof or the approval hereof by the Board,
the Company shall pay Employee a one-time advance in the amount of Three Hundred
Thousand Dollars ($300,000) (the "Commencement Advance"). The first Sixty
Thousand Dollar ($60,000) portion of such advance shall be deemed a pre-payment
of any monies otherwise becoming payable to Employee pursuant to Section 5(c)
below during the first Contract Year; the second Sixty Thousand Dollar ($60,000)
portion of such advance shall be deemed a pre-payment of any monies otherwise
becoming payable to Employee pursuant to Section 5(c) below during the second
Contract Year; the third Sixty Thousand Dollar ($60,000) portion of such advance
shall be deemed a pre-payment of any monies otherwise becoming payable to
Employee pursuant to Section 5(c) below during the third Contract Year; the
fourth Sixty Thousand Dollar ($60,000) portion of such advance shall be deemed a
pre-payment of any monies otherwise becoming payable to Employee pursuant to
Section 5(c) below during the fourth Contract Year; and the fifth Sixty Thousand
Dollar ($60,000) portion of such advance shall be deemed a pre-payment of any
monies otherwise becoming payable to Employee pursuant to Section 5(c) below
during the fifth Contract Year. (ii) Notwithstanding anything to the contrary
contained herein, Employee acknowledges and agrees that in the event Employee's
employment shall terminate at any time either by the Company for Cause as
hereinafter defined or by Employee other than for Good Reason as hereinafter
defined, then Employee shall within thirty (30) days following such termination
repay to the Company the "Unearned Portion of the Commencement Advance," which
shall mean the positive difference, if any, between Three Hundred Thousand
Dollars ($300,000) and the lesser of (i) the amount earned by Employee pursuant
to Section 5(c) below or (ii) the product of (A) Five Thousand Dollars ($5,000)
and (B) the number of full months that shall have elapsed since July 1, 2001 as
of the date of termination. To the extent that Employee does not repay the
Unearned Portion of the Commencement Advance, the Company shall be entitled, in
addition to all other remedies available under applicable law, to offset any
obligation of any nature of the Company to Employee against such unpaid amount.
(iii) For the avoidance of doubt, notwithstanding anything to the contrary
contained herein, the Company acknowledges and agrees that in the event that
Employee's employment is terminated by the Company for reasons other than Cause
as hereinafter defined or by the Employee for Good Reason as hereinafter
defined, then Employee shall have no obligation to the Company to repay the
Unearned Portion of the Commencement Advance.
(c) Participation in Executive Bonus Pool. Employee shall be eligible to
participate in the Company's executive performance bonus pool. The bonus amount
will be based on the following factors: (1) the financial performance of the
Company as determined and measured by the Board and the Company's Chief
Executive Officer; and (2) Employee's achievement of management targets and
goals as set by the Company. The bonus amount is intended to reward contribution
to the Company's performance over an entire fiscal year, and consequently
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will be paid only if Employee is employed and in good standing at the time of
bonus payments, which generally is within 45 days after the close of the
Company's fiscal year.
(d) Participation in A&R Bonus Plan. ARTISTdirect Records, L.L.C. (the
"Record Label Affiliate") hereby agrees that, during the Term, so long as the
Record Label Affiliate remains an Affiliate of the Company, Employee shall be
entitled to participate in the A&R Bonus Plan of the Record Label Affiliate as
if Employee were an employee of the Record Label Affiliate, in accordance with
the A&R Exhibit attached hereto.
(e) Following the execution hereof, the Company shall grant Employee an
option to acquire shares of the Company's Common Stock at a per share exercise
price equal to the per share fair market value as of the date of grant. Such
option shall become exercisable upon the satisfaction of one or more performance
criteria (i.e., the Company's and/or Employee's achieving specific milestones)
designated by the Committee in consultation with the Company's Chief Executive
Officer. The Committee also shall determine, in consultation with the Company's
Chief Executive Officer, the number of shares subject to, and the other terms
of, such option.
Amounts payable to Employee pursuant to this Section 5 shall be subject to
required withholdings. Employee hereby acknowledges and agrees that he shall not
be eligible to participate in any employee bonus plans of the Company other than
as may be expressly set forth in this Agreement.
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 benefits programs, which are available to other
similarly situated employees of the Company, subject to the Company's policies
with respect to all of such benefits or insurance programs or plans; provided,
however, that notwithstanding anything herein to the contrary, the 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. Employee may not accrue
more than a maximum of forty (40) days of unused vacation time and, accordingly,
vacation time will cease to accrue during any period in which Employee has forty
(40) days of accrued vacation time.
(c) The 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 the Company, including but not limited to for
business-related travel, hotel, meals, telephone calls and entertainment. As a
condition to the reimbursement of such expenses by the Company to Employee,
Employee shall provide the Company with copies of invoices, receipts or other
satisfactory documentation in sufficient detail to allow the 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 the Company to make
the reimbursements specified hereunder for expenses accrued prior to the
effective date of termination of this Agreement shall survive any termination of
the Term.
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(d) Employee shall be entitled to fringe benefits commensurate with
those available to comparable level executives. The Company shall pay for
Employee's reasonable attorneys' fees and costs related to the negotiation,
preparation and delivery of this Agreement in an amount not to exceed Three
Thousand Dollars ($3,000.00).
7. Termination. Employee and the Company hereby agree and acknowledge that the
Company shall have the right to terminate Employee's employment for any reason
whatsoever; provided, however, that if the Company terminates Employee's
employment other than pursuant to Sections 7(a), 7(b) or 7(c) below, it shall be
obligated to make the payment described in Section 7(f)(ii) below. For the
avoidance of doubt, for purposes of this Agreement, the Company's election not
to extend the Term pursuant to Section 4 above shall not constitute a
termination of Employee's employment by Company other than pursuant to Sections
7(a), 7(b) or 7(c) below.
(a) Disability. The 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 the Company and reasonably approved by
Employee. For this purpose, Employee will submit to appropriate medical
examinations.
(b) Cause. The 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 lesser
crime involving fraud, embezzlement or misappropriation of the property of the
Company or any of its Affiliates; (ii) engaged in gross negligence or willful
misconduct in the performance of Employee's duties hereunder; (iii) materially
breached any material provision hereof; or (iv) misappropriated for his own
purpose and benefit any (A) material property of Company or any Affiliate or (B)
any material opportunity of Company or any Affiliate. Notwithstanding anything
to the contrary contained herein, none of the events or circumstances described
in clauses (ii), (iii) or (iv)B above shall constitute "Cause" for purposes of
this Agreement unless the Company gives Employee written notice delineating the
claimed event or circumstance and setting forth the Company's intention to
terminate Employee's employment if such claimed event or circumstance is not
capable of remedy or is not duly remedied within thirty (30) days following such
notice, if capable of remedy, and Employee fails to remedy such event or
circumstance within such thirty (30)-day period. For the avoidance of doubt,
Employee's resignation from the Board during any time which he is a member of
the Board shall not in and of itself constitute a breach of this Agreement.
(c) Death. The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
(d) Good Reason. Employee may terminate his employment hereunder
forthwith at any time for Good Reason upon written notice to the 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 or duties; (ii) a reassignment of Employee to a geographic
location in excess of thirty-five (35) miles from the Company's current
principal offices; or (iii) a material breach by the Company of any of its
obligations to Employee
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hereunder. Notwithstanding anything to the contrary contained herein, none of
the foregoing events or circumstances shall constitute "Good Reason" for
purposes of this Agreement unless Employee gives the Company written notice
delineating the claimed event or circumstance and setting forth Employee's
intention to terminate his employment if such claimed event or circumstance is
not capable of remedy or is not duly remedied within a reasonable period
following such notice (not to exceed sixty (60) days), if capable of remedy, and
the Company fails to remedy such event or circumstance within such reasonable
period.
(e) Company's Obligations upon Termination. If Employee's employment is
terminated pursuant to this Section 7, Employee shall be entitled to, and the
Company's obligation hereunder shall be limited to: (i) the payment of any
unpaid compensation accrued under Section 5(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 7(f) below, if any.
(f) If Employee's employment is terminated:
(i) by the Company pursuant to Section 7(a) above, Employee will
receive the benefit of any Company disability plans; or
(ii) (A) by the Company other than pursuant to Sections 7(a), 7(b)
or 7(c) above, or (B) by Employee pursuant to Section 7(d) above, the Company
shall pay Employee the Severance Amount as hereinafter defined, less required
withholdings, in twelve (12) equal semi-monthly installments over the six (6)
month period immediately following such termination. The "Severance Amount"
shall mean the sum of (A) Three Hundred Fifty Thousand Dollars ($350,000) and
(B) the amount of Base Salary that would be payable to Employee pursuant to
Section 5(a) above during the shorter of (1) the twelve (12) month period
following the effective date of such termination or (2) the remainder of the
then-current period of the Term. Notwithstanding the foregoing, in the event
that Employee would receive one or more payments that would constitute
"parachute payments" within the meaning of Section 280G(b)(1) of the Internal
Revenue Code, the payments shall be reduced so that they are one dollar ($1)
less than the threshold to be treated as parachute payments. In the event that
the Employee is entitled to receive more than one such payment, the Employee
shall have the choice as to which payment or payments shall be reduced. The
parties hereto agree that the payments set forth in this Section 7(f)(ii)
constitute fair compensation and the sole remedy for damages for any termination
by the Company other than pursuant to Sections 7(a), 7(b) or 7(c) above, or by
Employee pursuant to Section 7(d) above.
(g) Employee shall have no duty of mitigation and shall not be subject
to any right of offset with respect to any compensation received by Employee on
or after the termination of his employment.
(h) 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 the
Company under any federal, state or local law that provides for the continuation
of any medical or other employee benefits after employment.
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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 and Employee's contributions thereto (hereinafter
referred to as "Works") shall belong solely and exclusively to the Company. The
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 the 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 or quote of Employee shall be used after the Term
without Employee's written consent. All revenues derived by the Company from the
use, exhibition, distribution, licensing, or other exploitation of such Works
shall be the sole and exclusive property of the 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 the 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 the 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 the 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 the
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 the Company, with full power of
substitution, to be Employee's true and lawful attorney, in Employee's name,
place, and stead, 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.
(c) It is understood that the rights granted to the Company in this
Section 8 shall continue in effect after the termination or expiration of this
Agreement to the extent necessary for the 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 the Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to either (A) the business of the Company or any of its Affiliates at
the time of conception or reduction to practice of the invention, or (B) actual
or demonstrably anticipated research or development of the Company or any of its
Affiliates; or (ii) result from any work performed by
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Employee for the Company or any of its Affiliates. A copy of California Labor
Code Sections 2870, 2871 and 2872 is attached to this Agreement as Exhibit 1.
(e) Employee shall disclose all inventions and innovations to the
Company, even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
9. Restrictions. In recognition of the considerations described herein, Employee
agrees that:
(a) Without limiting the generality of Section 2 above, Employee
acknowledges and agrees that given the extent and nature of the confidential and
proprietary information he will obtain during the course of his employment with
the Company, it would be inevitable that such confidential information would be
disclosed or utilized by Employee should he obtain employment from or otherwise
become associated with any person or entity engaged in any activity directly
competitive with any business then carried on by, or anticipated to be carried
on by, the Company or any of its Affiliates (a "Competitor"). Consequently,
prior to the termination of Employee's employment, Employee shall not, without
the prior written consent of the Board, directly or indirectly, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, or be employed by or connected in any manner with, any Competitor.
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.
(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 Company's (and its Affiliates') business and affairs
that come to his knowledge while employed by the 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, 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 the Company and (iii) matters of a technical
nature. Except as required in the performance of Employee's duties to the
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person (except as required by law or legal process, provided
Employee shall undertake to give the 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 the Company in advance.
(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, agent, representative, customer, client, performer or songwriter of
the Company or any Affiliate, to discontinue his or her relationship with the
Company or any Affiliate at any time during the Term and for a one (1) year
period immediately following the expiration of the Term.
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
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party and that would adversely affect his ability to perform his obligations
hereunder, and (c) he will comply with all policies of the Company of which he
has notice, provided they are consistent with applicable laws.
11. The Company's Representations. The Company hereby represents and warrants
that: (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 the Company, 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.
12. Governing Law. 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.
13. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of Employee by the Company and in
reference to the subject matter hereof, and all prior agreements, promises,
representations and understandings relative thereto are merged herein.
14. Assignability.
(a) In the event that the Company shall merge or consolidate with any
other corporation, partnership or business entity or all or substantially all
the Company's business or assets shall be transferred in any manner to any other
corporation, partnership or business entity, such successor shall thereupon
succeed to, and be subject to, all rights, interests, duties and obligations of,
and shall thereafter be deemed for all purposes hereof to be, the Company
hereunder and the Company shall obtain a written assumption agreement from such
successor prior to completion of any such merger, consolidation or sale of
assets.
(b) This Agreement is personal in nature and neither of the parties
hereto shall, without the written consent of the other party hereto, assign or
transfer this Agreement or any rights or obligations hereunder, except by
operation of law or pursuant to the terms of Section 14(a) above.
(c) 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.
15. Remedies. Any material breach or violation by Employee of the terms of this
Agreement, including specifically, but not limited to, Sections 8 or 9 above,
would result in immediate and irreparable injury and harm to the Company, and
would cause damage to the Company in amounts difficult to ascertain and for
which the Company's remedies and defenses at law would be inadequate.
Accordingly, in the event of any such breach or threatened breach, the Company
shall be entitled to, and Employee hereby consents to the entry of, the remedy
of injunction, without any requirement that the Company post a bond, as well as
all other remedies to which the Company may be entitled, at law, in equity or
otherwise. Notwithstanding the foregoing, Employee shall be entitled to dispute
the factual basis of any breach asserted by the Company.
16. Covenants Reasonable as to Time and Territory. Employee and the Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the
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rights and remedies conferred upon the 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.
17. 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.
18. 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, 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: Keith Yokomoto
1746 Havemeyer Lane
Redondo Beach, CA 90278
With a copy to: Buchalter, Nemer, Fields & Younger, P.C.
333 Market St., 29th Floor
San Francisco, CA 94105
Attention: Gary Nemer, Esq.
If to the Company: ARTISTdirect, Inc.
5670 Wilshire Blvd, Suite 200
Los Angeles, CA 90036
Attention: Chief Executive Officer
With copies to: VP of Business and Legal Affairs
and
Allen D. Lenard, Esq.
1801 Century Park West
Sixth Floor
Los Angeles, CA 90067
19. 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
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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.
20. Section Headings. The Section headings herein are used solely for
convenience and shall not be used in the interpretation or construction of this
Agreement.
21. 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/ KEITH YOKOMOTO ARTISTdirect, Inc.
-------------------------
Keith Yokomoto
By: /s/ FREDERICK W. FIELD
------------------------
Frederick W. Field
Its: Chief Executive Officer
AGREED SOLELY AS TO THE PROVISIONS OF SECTION 5(d) ABOVE:
ARTISTdirect Records, L.L.C.
By: /s/ FREDERICK W. FIELD
-------------------------------
Frederick W. Field
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.
11
<PAGE> 12
A&R Exhibit
A&R BONUS PLAN
FOR
ARTISTdirect RECORDS, L.L.C.
ARTISTdirect Records L.L.C. (the "Company") has established this A&R Bonus Plan
(the "Plan") in order to motivate and reward participants in connection with the
performance of their artist & repertoire duties and responsibilities based on
the success of the Company's recorded music.
1. PARTICIPANTS: The Company's Chief Executive Officer (the "CEO") shall have
the sole and absolute discretion to make determinations under the Plan,
including, without limitation, the determination as to which employees of the
Company shall be participants in the Plan (each, a "Participant"). Participant
acknowledges that the Plan may have provisions that vary with respect to the
applicable Participant.
2. ENTITLEMENT TO A&R BONUS:
(a) Subject to the terms and conditions hereof, a Participant will be
entitled to receive a bonus (an "A&R Bonus") based on net sales of "Qualifying
Albums" delivered by a "Qualifying Artist" (as such terms are defined below).
(b) As used herein:
(i) "Qualifying Artist" means an artist (A) that enters into, during
the Employment Term, a Recording Agreement primarily because of the
Participant's efforts, as determined by the CEO in his sole good faith
discretion, and/or (B) for which the Participant is substantially responsible
for the performance of day-to-day artist & repertoire duties for the Company, as
determined by the CEO in his sole good faith discretion.
(ii) "Qualifying Album" means an Album delivered during the
Employment Term by a Qualifying Artist in satisfaction of the minimum delivery
commitment provided in such artist's Recording Agreement and commercially
released in the United States during the Employment Term.
(iii) "Recording Agreement" means an exclusive recording agreement
between the Company and a Qualifying Artist (or an entity furnishing the
services of a Qualifying Artist).
(iv) "Employment Term" shall mean the term of Participant's
employment by the Company.
(c) In respect of each Qualifying Album, the CEO may determine in his
sole good faith discretion that, although such album shall be deemed a
Qualifying Album, a Participant's A&R Bonus with respect to such Qualifying
Album shall be at a reduced rate, for example, when an artist is a Qualifying
Artist with respect to more than one Participant. In such cases, the total A&R
Bonus payable to all of the Participants shall not exceed the applicable royalty
rates set forth in Exhibit A attached hereto (which is hereby incorporated into
the Plan by reference), with such total A&R Bonus being split in equal portions
between the Participant(s) subject to clause
<PAGE> 13
(A) of paragraph 2(b)(i) above and the Participant(s) then subject to clause (B)
of paragraph 2(b)(i) above, or as the CEO may otherwise determine. The final
determination of whether a Participant shall receive an A&R Bonus as to any
artist, and whether the rates shall be subject to any reductions, shall be made
by the CEO, in his sole good faith discretion, and no such determination shall
be subject to challenge by a Participant. The Company and/or the CEO shall
undertake to advise Participant of any reductions of Participant's A&R Bonus
under this paragraph 2(c) prior to the implementation thereof, provided that the
Company's or the CEO's failure to do so will not constitute a breach hereof or
impede the Company's right to rely on the CEO's determination under this
paragraph 2(c).
3. CALCULATION OF A&R BONUS:
(a) A&R Bonuses paid under the Plan shall be payable in respect of
Qualifying Albums only and shall be based upon a royalty computed, reduced,
adjusted, determined and paid in the manner set forth in said Exhibit A. Any
term defined in said Exhibit A and used herein shall have the same meaning as
ascribed to it in Exhibit A, unless otherwise defined herein.
(b) Notwithstanding anything contained herein or in Exhibit A to the
contrary:
(i) An A&R Bonus with respect to each Qualifying Artist shall only
be payable to a Participant if and when the applicable Qualifying Artist is in a
recouped position as of the end of an accounting period under the applicable
Recording Agreement, as calculated in accordance with the next sentence. A
Qualifying Artist shall only be deemed to be in a recouped position hereunder if
the cumulative royalties credited to the account of a Qualifying Artist under
the applicable Recording Agreement with respect to the Qualifying Albums by such
Qualifying Artist exceed all cumulative Recoupable Costs (as defined below) with
respect to the applicable Qualifying Artist. For the avoidance of doubt, the A&R
Bonus shall not be paid on any Net Sales of the Qualifying Albums that are
applied towards such recoupment. As used herein, "Recoupable Costs" shall mean
the aggregate of (A) all monies paid to a Qualifying Artist as required under
the applicable Recording Agreement (for example, a signing advance), but
excluding royalties, video costs, tour support, extra-contractual advances and
marketing and promotion costs, (B) all recording funds paid under a Recording
Agreement for Qualifying Albums by the applicable Qualifying Artist, and (C) to
the extent not included in a recording fund under clause (B) of this paragraph
3(b)(i), all recording costs (as defined in the applicable Recording Agreement)
for Qualifying Albums by the applicable Qualifying Artist and any master
recording recorded in connection therewith or a single derived therefrom.
(ii) Notwithstanding paragraph 3(b)(i) above, after the first time
the A&R Bonus shall have become payable to a Participant in respect of a
particular Qualifying Album, the A&R Bonus shall continue to be payable in
respect of all subsequent Net Sales of such Qualifying Album (subject to
paragraph 4 below) regardless of whether Company's subsequent payment of
additional Recoupable Costs causes the applicable Qualifying Artist's royalty
account to be in an unrecouped position under paragraph 3(b)(i) above.
(iii) No Participant shall be paid aggregate A&R Bonuses during any
fiscal year in excess of $500,000 (pre tax). Subject to the provisions of the
Plan, excess amounts will be carried forward for future payment.
(iv) If a Participant is entitled to receive a royalty with respect
to a Qualifying Album pursuant to a separate agreement (for example, a producer
agreement), he or she shall not be entitled to receive an A&R Bonus under the
Plan.
<PAGE> 14
4. PERIOD OF PARTICIPATION IN THE PLAN: Notwithstanding anything in this Plan or
said Exhibit A to the contrary, no A&R Bonus (including any amounts carried
forward from preceding accounting period(s) pursuant to paragraph 3(b)(iii)
above) shall be payable to Participant with respect to the accounting periods
that commence after the Employment Term except as follows: Provided that a
Participant shall continue to "qualify" (as described below), a Participant
shall be entitled to receive A&R Bonus under this Plan with respect to
Qualifying Albums for a period of four (4) full accounting periods immediately
following the termination of such Participant's employment by Company, except
that the A&R Bonus shall be computed at 75% of the otherwise applicable royalty
rate with respect of Net Sales of Qualifying Albums occurring during the first
two (2) accounting periods following termination of employment and at 50% of the
otherwise applicable royalty rate with respect of Net Sales of Qualifying Albums
occurring during the third and fourth accounting periods following termination
of employment; including all amounts carried forward from preceding accounting
period(s) pursuant to paragraph 3(b)(iii) above (provided that no such
carried-forward amounts shall be reduced by applying either of said 75% or 50%
rates, it being understood that paragraph 3(b)(iii) shall continue to apply in
respect of any aggregate A&R Bonus amounts payable hereunder after the
termination of employment). A Participant shall be deemed to "qualify" for A&R
Bonus after the termination of employment pursuant to this paragraph 4 if the
Participant has fulfilled his or her obligations under his or her employment
agreement with Company for the full scheduled term of such agreement (as same
may have been extended) and has not resigned or had his or her employment
terminated by Company for "cause," as defined in such agreement.
5. MISCELLANEOUS:
(a) The Company expressly reserves the right to amend or modify the Plan
in any respect or to terminate the Plan in its entirety, as the Company's Board
of Directors may determine in its sole and absolute discretion; provided,
however, that all benefits that have accrued under the Plan up to the date of
termination or amendment shall be calculated and paid, if applicable, to the
Participant in accordance with the form and terms of the Plan in effect
immediately prior to such termination or amendment.
(b) Subject only to a Participant's examination rights as set forth in
Exhibit A, the Plan shall be interpreted, construed and administered by the CEO
and his interpretations and constructions and actions taken in good faith
hereunder shall be final, conclusive and binding on all Participants for all
purposes.
<PAGE> 15
Exhibit A
1 ROYALTIES: Company shall accrue and credit to the account of each Participant,
as applicable, in accordance with the provisions of paragraph 2.01 below, the
following royalties for the sale of Phonograph Records derived from Master
Recordings hereunder:
1.01 A royalty of two percent (2%) of the Royalty Base for Net Sales
through Normal Retail Channels in the United States of Qualifying Albums ("USNRC
Net Album Sales").
1.02 (a) The royalty rate with respect to Net Sales of Qualifying Albums
sold for distribution in Canada shall be eighty-five percent (85%) of the
otherwise applicable royalty rate set forth herein.
(b) The royalty rate with respect to Net Sales of Qualifying Albums
sold for distribution in the following countries to the extent such countries
are included in the "Territory" as defined in the applicable Recording
Agreement: Australia, Germany, Japan, New Zealand and the United Kingdom shall
be seventy-five percent (75%) of the otherwise applicable royalty rate set forth
herein.
(c) The royalty rate with respect to Net Sales of Records sold for
distribution in the rest of the "Territory" as defined in the applicable
Recording Agreement (i.e., all applicable countries other than those set forth
in paragraphs 1.02(a) and 1.02(b) above) shall be fifty percent (50%) of the
otherwise applicable royalty rate set forth herein.
1.03 (a) Notwithstanding anything to the contrary set forth herein, with
respect to Net Sales of Qualifying Albums sold in the form of compact discs, the
royalty rate shall be eighty-five percent (85%) of the otherwise applicable
royalty rate set forth herein.
(b) With respect to Net Sales of Qualifying Albums sold in the form
of Record configurations not specifically provided for herein, Company shall
have the option to accrue, at its sole discretion, with respect to each such
Record, either a royalty equal to the same dollars-and-cents (or other currency)
royalty amount as would otherwise be accrued hereunder with respect to an
equivalent Record in the form of an analog cassette, or a royalty computed at
the same percentage of the Royalty Base of such other Record configuration as
the percentage of the Royalty Base utilized to compute the royalty for an
equivalent Record in the form of an analog cassette. If the foregoing royalty
amount or Royalty Base with respect to an equivalent Record in the form of an
analog cassette does not exist, then, with respect to Net Sales of Records sold
in the form of Record configurations not specifically provided for herein, the
royalty rate for such Records shall be seventy-five percent (75%) of the
otherwise applicable royalty rate set forth in this agreement. For purposes of
this paragraph only, the term "configurations not specifically provided for
herein" means configurations other than vinyl disc, analog cassette, audio-only
compact disc, and Audio-Visual Devices. For the avoidance of doubt, no royalties
shall be payable to Participant with respect to Audio-Visual Recordings and
Audio-Visual Devices.
(c) (i) Notwithstanding paragraph 1.03(b) above, in the event that
Company shall, or shall license third parties to, transmit information embodying
the Master(s) hereunder for sale to the consumer via Electronic Distribution,
point-of-sale manufacturing or any other means of Electronic Distribution now
known or hereafter devised, the royalty to be accrued hereunder in respect of
such exploitation shall be seventy-five percent (75%) of the royalty rate
applicable to the equivalent Record in the form of compact disc and shall be
computed based on the applicable Royalty Base.
(ii) Participant shall not be entitled to a royalty with respect
to the public performance income received by Company in connection with the
digital broadcast of
<PAGE> 16
Qualifying Albums hereunder (or, for the avoidance of doubt, any master
recording contained thereon).
1.04 (a) The royalty for Net Sales of Qualifying Albums as premium
Records and Budget Records shall be accrued at one-half (1/2) of the otherwise
applicable royalty rate set forth herein and shall be computed based on the
particular Royalty Base of each such Record.
(b) The royalty for Net Sales of Qualifying Albums as Mid-Priced
Records and Net Sales of Qualifying Albums sold through Armed Forces Post
Exchanges shall be three-fourths (3/4) of the otherwise applicable royalty rate
set forth herein and shall be computed based on the particular Royalty Base of
each such Record.
(c) The royalty rate on a Qualifying Albums in the form of a
Multiple-Record Album shall be one-half (1/2) of the otherwise applicable
royalty rate set forth herein, if the Royalty Base in the applicable territory
of that Multiple-Record Album is the same as the Royalty Base applicable to a
top-line single unit Album in the same configuration marketed by Company or its
principal licensee in the territory concerned at the beginning of the royalty
accounting period concerned. If a different Royalty Base applies to a
Multiple-Record Album, the royalty rate prescribed in the preceding sentence
shall be adjusted in proportion to the variance in the Royalty Base, provided
that in no event shall it be more than the applicable basic Album royalty rate
set forth in paragraphs 1.01 and 1.02 above in the applicable territory.
1.05 (a) With respect to Qualifying Albums through record clubs or
similar sales plans whether operated by Non-Affiliated Third Parties or
otherwise, the royalty to be accrued hereunder shall be a sum equal to five
percent (5%) of fifty percent (50%) of Company's net receipts with respect to
such exploitation.
(b) The terms "net receipts" and "net amount received" and similar
terms in this paragraph 1.05 shall mean amounts received by Company in
connection with the subject matter thereof which are solely attributable to a
Qualifying Album (excluding catalog and/or administrative fees payable to
Company), after deduction of any costs or expenses or amounts which Company is
obligated to pay to third parties (such as, without limitation, production
costs, mechanical copyright payments, AF of M and other union or guild
payments).
1.06 (a) As to Net Sales by Company or its affiliated licensees of
Qualifying Albums through direct mail or mail order, whether or not in
conjunction with radio or TV advertising, including through methods of
distribution such as "key outlet marketing", or by any combination of such
methods, the royalty to be accrued hereunder shall be a fifty percent (50%) of
the otherwise applicable royalty rate.
(b) Notwithstanding the foregoing, in the event Company or any of
its affiliated licensees in a particular country utilize television, radio
and/or movie theater advertising in conjunction with a television campaign
and/or radio campaign and/or movie theater campaign to promote its sales of
Records derived from Master Recordings hereunder, then the royalty to be accrued
hereunder with respect to Net Sales of such Records sold by Company or the
particular affiliated licensee in such country during the semi-annual accounting
period in which the first such advertisement is broadcast through the end of the
semi-annual accounting period in which the last such advertisement is broadcast,
shall be fifty percent (50%) of the otherwise applicable royalty rate set forth
herein.
1.07 With respect to Joint Recordings, the royalty to be accrued
hereunder shall be the otherwise applicable royalty provided for herein divided
by the total number of artists
<PAGE> 17
(including the Qualifying Artist) whose performances are embodied on the Joint
Recording concerned.
2 ACCOUNTINGS
2.01 Accountings as to royalties accruing or which otherwise would have
accrued hereunder shall be made by Company to Participant on or before September
30th for the period ending the preceding June 30th, and on or before March 31st
for the period ending the preceding December 31st, or such other accounting
periods as Company may in general adopt, but in no case less frequently than
semi-annually, together with payment of accrued royalties, if any, earned by
Participant during such preceding half-year, less advances to Participant or
other recoupable and/or deductible amounts hereunder. Company shall have the
right to hold reasonable reserves in respect of sales hereunder.
2.02 Royalties in connection with the exploitation of Master Recordings
hereunder shall be computed in the same national currency as Company is
accounted to by its licensees and shall be paid at the same rate of exchange as
Company is paid, and shall be subject to any taxes applicable to royalties
remitted by or received from foreign sources, provided, however, that royalties
on Records sold outside the United States shall not be due and payable by
Company until payment therefor has been received by Company in the United States
in United States Dollars. If Company shall not receive payment in the United
States, or in United States Dollars, and shall be required to accept payment in
a foreign country or in foreign currency, Company shall deposit to the credit of
Participant (at Participant's request and expense), in such currency in a
depository in the country in which Company is required to accept payment,
Participant's share of royalties due and payable to Participant with respect to
such sales. Deposit as aforesaid shall fulfill the obligations of Company as to
Record sales to which such royalty payments are applicable. If any law,
government ruling or any other restriction affects the amount of the payments
which Company's licensee can remit to Company, Company may deduct from
Participant's royalties an amount proportionate to the reduction in such
licensee's remittances to Company.
2.03 All royalty statements rendered by Company to Participant shall be
binding upon Participant and not subject to any objection by Participant for any
reason unless a specific objection in writing, stating the basis thereof, is
given to Company within two and one-half (2 1/2) years from the date rendered
(provided a statement shall be deemed rendered when due for purposes of
computing time periods hereunder unless Participant notifies Company otherwise
in writing within 60 days from the date such statement was originally due).
Failure to make specific objection within said time period shall be deemed
approval of such statement.
2.04 (a) Participant shall have the right at Participant's own expense
to audit Company's books and records only as the same pertain to sales or other
distributions of Phonograph Records hereunder on which royalties are payable to
Participant or other exploitations of Master Recordings hereunder on which
royalties are payable to Participant, in each case for the five (5) accounting
periods prior to Company's receipt of written notice from Participant of
Participant's desire to audit such books and records. Participant may make such
an examination for a particular statement only once, and only within two and
one-half (2) years after the date when Company renders (or is deemed to have
rendered under paragraph 2.03) said statement as set forth in paragraph 2.01
above. Such audit shall be conducted during Company's usual business hours, and
at Company's regular place of business (in the United States or at Company's
foreign offices, if applicable) where Company keeps the books and records to be
examined. Such audit shall be conducted by an independent certified public
accountant of Participant's own choice. If such accountant, or his or her firm,
has begun an
<PAGE> 18
examination of Company's books and records for another party or pursuant to an
agreement other than this agreement, the examination on Participant's behalf
shall not be undertaken until such other examination is concluded and any
applicable audit issues relating to such other examination have been resolved.
Notwithstanding the foregoing, if Company notifies Participant that the
accountant designated by Participant to conduct an examination of Company's
books and records is engaged in an examination on behalf of another party
("Other Examination") and Company does not elect to waive the foregoing
provisions requiring that Participant's representative not be engaged in any
Other Examination, then Participant may nevertheless have its examination
conducted by its designee, and the running of the time within which such
examination may be made shall be suspended until Participant's designee has
completed the Other Examination, subject to the following conditions:
(i) Participant shall notify Company of its election to that
effect within fifteen (15) days after the date of Company's said notice to
Participant;
(ii) Participant's designee shall proceed in a reasonably
continuous and expeditious manner to complete the Other Examination and render
the final report thereon to the client and Company; and
(iii) Participant's examination shall not be commenced by its
designee before the delivery to Company of the final report on the Other
Examination, shall be commenced within thirty (30) days thereafter, and shall be
conducted in a reasonably continuous and expeditious manner.
(b) Participant acknowledges that Company's books and records
contain confidential trade information. Neither a Participant nor his or her
representatives shall at any time communicate to others (except as required by
law or legal process, provided Participant shall undertake to give Company
notice prior to such disclosure and shall comply with any applicable protective
order or equivalent) or use on behalf of any other Person any facts or
information obtained as a result of such examination of Company's books and
records.
2.05 Participant will not have the right to bring an action against
Company in connection with any royalty accounting or payments hereunder unless a
Participant commences the suit within thirty-six (36) months from the date such
statement of accounting for royalties or such payment was rendered (or deemed
rendered). If Participant commences suit on any controversy or claim concerning
royalty accountings rendered by Company under this agreement, the scope of the
proceeding will be limited to determination of the amount of the royalties due
for the accounting periods concerned, and the court will have no authority to
consider any other issues or award any relief except recovery of any royalties
found owing. A Participant's recovery of any such royalties will be the sole
remedy available to Participant by reason of any claim related to Company's
royalty accountings.
2.06 Participant hereby authorizes and directs Company to withhold from
any monies due Participant from Company any part thereof required by the United
States Internal Revenue Service and/or any other governmental authority to be
withheld, and to pay such withheld amount on behalf of Participant to the United
States Internal Revenue Service and/or such other authority.
2.07 Notwithstanding anything to the contrary expressed or implied
elsewhere herein, if, at any time during or after the Term, the performances
embodied on any Master Recording become property of the public domain in any
territory of the applicable territory such that any Person may reproduce and/or
exploit Records embodying such performances in such territory without license
from and/or payment to Company, then no monies whatsoever shall thereafter
<PAGE> 19
be accrued to Participant's account hereunder in connection with the
exploitation by Company or its subsidiaries, affiliates or licensees of such
performances in such territory on and after the date on which such performances
become property of the public domain in such territory.
3 DEFINITIONS
3.01 As used herein, the following terms shall have the meaning ascribed
to them below:
(a) "Additional Deductions" shall mean twenty-five percent (25%) of
the Base Price for compact discs or for any other equivalent Record other than
as expressly provided for in this paragraph 3.01(a) (unless Company applies the
dollar-and-cents royalty provisions of paragraph 1.03(b) above). With respect to
the sale of Records by Electronic Transmission through a music distribution
source owned by a Non-Affiliated Party, there will be a further Additional
Deduction equal to the administration fee, if any, that is charged to Company by
such Non-Affiliated Party for the transaction concerned.
(b) "Album" shall mean one or more LPs, sold in a single package.
(c) "Armed Forces Post Exchanges" shall mean United States military
posts, ships' stores or other United States armed forces facilities, including,
without limitation, federal, state and/or local governments.
(d) "Artwork" shall mean all artwork created for use on or in
connection with Phonograph Records or other derivatives of such Master
Recordings.
(e) "Audio-Visual Devices" shall mean all forms of reproductions of
Audio-Visual Recordings now or hereafter known, manufactured or distributed
primarily for home and/or jukebox use and/or use on or in means of
transportation.
(f) "Audio-Visual Recordings" shall mean every form of recording
wherein a visual image is embodied, reproduced, transmitted or otherwise
communicated, whether of a Qualifying Artist or otherwise, together with sound,
whether or not the interaction of a consumer is possible, or necessary, for the
visual images to be utilized or viewed.
(g) "Base Price" shall mean:
(i) The "Retail List Price", defined as Company's suggested
retail list price (or the equivalent price category) in the United States for
records sold in the United States, and, with respect to Records sold outside the
United States, an equivalent of or substitute for an actual or hypothetical
retail price ("Retail-related Base") as may be established by Company or its
licensee(s) in conformity with the general practice of the Record industry in
such country, or otherwise, provided that Company may but shall not be obligated
to utilize the price adopted by the local mechanical copyright collection agency
as the basis for the collection of mechanical copyright royalties.
Notwithstanding anything to the contrary expressed or implied in the preceding
sentence, it is understood and agreed that if a Retail-related Base cannot be
established in a particular country, the Base Price shall be that amount equal
to the lowest wholesale price payable by the largest category of Company's
customers in the normal course of business with respect to such Records sold for
distribution during the applicable semi-annual accounting period, multiplied by
one hundred twenty-six percent (126%), provided however, that if a published
price to dealers ("ppd") exists in the applicable country of sale then Company
may apply the ppd in lieu of the lowest wholesale price.
<PAGE> 20
(ii) With respect to the sale of Master Recordings whereby a
consumer purchases the rights to use or otherwise exploit such Masters through
Electronic Transmission to any medium, now known or hereafter developed, that
has the capacity to store such Masters for use at a later time, the Base Price
shall be the actual price for such transaction paid by the largest category of
such consumers.
(h) "Budget Record" shall mean a Record, whether or not previously
released, bearing a Base Price more than thirty-two percent (32%) lower than the
Base Price applicable to top-line Records in the same configuration (e.g.,
whether it is a tape cassette, compact disc, or vinyl Record and whether it is
an Album or a Single) released by Company or Company's licensees in the country
concerned. Notwithstanding the foregoing, if a particular Record is marketed and
priced by any licensee outside of the United States as a "budget record," and if
the accounting statement rendered by the licensee concerned provides for payment
of royalties at the "budget rate," then Company will be entitled to treat such
Records as Budget Records hereunder.
(i) "Electronic Distribution" or "Electronic Transmission" shall
mean any transmission to the consumer, whether sound alone or sound coupled with
an image, in any form, analog or digital, now known or later developed
(including, but not limited to, direct broadcast satellite, point-to- point
satellite, cable system, broadcast station, point-of-sale manufacturing, etc.).
(j) "Joint Recording" shall mean any Master Recording embodying a
Qualifying Artist's performances together with the performances of any other
Person in respect of which Company is obligated to pay royalties to a third
party.
(k) "Master," "Recording" and "Master Recording" shall mean a sound
recording intended for reproduction in the form of Phonograph Records, or
otherwise.
(l) "Mid-Priced Record" shall mean a Record, whether or not
previously released, bearing a Base Price at least fifteen percent (15%), but
not more than thirty-two percent (32%), lower than the Base Price applicable to
top-line Records in the same configuration (e.g., whether it is a tape cassette,
compact disc, or vinyl Record and whether it is an Album or a Single) released
by Company or Company's licensees in the country concerned. Notwithstanding the
foregoing, if a particular Record is marketed and priced by any licensee outside
of the United States as a "mid-price Record," and if the accounting statement
rendered by the licensee concerned provides for payment of royalties at the
"mid-price rate," then Company will be entitled to treat such Records as
Mid-Price Records hereunder.
(m) "Multiple-Record Album" shall mean an Album of more than one LP.
(n) "Net Sales" shall mean sales of Records, paid for, less returns
and credits. Net Sales shall specifically exclude the following:
(i) (A) Records given away gratis or sold for fifty percent
(50%) or less of the Gross Price (as hereinafter defined); Records distributed
for publicity, advertising or promotional purposes to disc jockeys, radio or
television stations, publishers, distributors, dealers, consumers, or others and
Records sold as cutouts, surplus or for scrap.
(B) Free or bonus Records given away together with Records
sold for monetary consideration (sometimes referred to as "free goods"). The
number of Records automatically deemed not sold for royalty purposes under this
paragraph 3.01(n)(i)(B) shall not exceed Company's standard discount limitation,
which is for Singles and Long-Play
<PAGE> 21
Singles, 23.08% of the gross total distributed and, for Albums (including Albums
sold via Electronic Distribution), 15% of the gross total distributed. Albums
deemed not sold pursuant to the immediately preceding sentence are sometimes
referred to herein as "Standard Album Free Goods." (The calculations of Records
deemed not sold for royalty purposes pursuant to the terms of this paragraph
3.01(n)(i)(B) shall be applicable regardless of whether or not any such
discounts are, in fact, on the invoices or other type of billing document to
Company's customers.)
(C) Free or bonus Records given away pursuant to special
sales plans in addition to free goods.
(D) To the extent that Records hereunder are sold subject to
a sales plan, pursuant to paragraphs 3.01(n)(i)(B) or 3.01(n)(i)(C) above,
entailing a selling price for such Records reduced by a percentage discount from
Company's or its licensee's "Gross Price" (i.e., the selling price to
distributors before any discounts or free goods or bonus plans), the number of
such Records deemed to be Net Sales shall be determined by reducing the number
of Records actually sold by the percentage of discount granted applicable to
such sale.
(ii) Without limitation of the generality of paragraph
3.01(n)(i) above, Company shall have the right to deduct from the number of
Records sold returns and credits of any nature, including without limitation:
(i) those on account of any return or exchange privilege; (ii) defective
merchandise; and (iii) errors in billing or shipment, provided that returns
shall be pro-rated between royalty-bearing and non-royalty-bearing Records in
the same proportion as actually shipped.
(iii) Without limitation of the foregoing, royalties shall not
be payable with respect to distributions which are not Net Sales and the terms
"Net Sales" and/or "net royalty-bearing sales" shall not include the sales
described in paragraphs 3.01(n)(i) and 3.01(n)(ii) above and shall not include
any sales which are being held as royalty reserves.
(o) "Non-Affiliated Parties" and "Non-Affiliated Third Parties"
shall mean Persons other than Persons as to which ARTISTdirect, Inc., Company or
any principal of Company now or hereafter directly or indirectly holds more than
a fifty percent (50%) interest or control (including joint ventures).
(p) "Person" shall mean any individual, corporation, partnership,
association, or other entity, or the legal successors or representative of any
of the foregoing.
(q) "Records" and "Phonograph Records" shall mean any device now or
hereafter known, on or by which sound may be recorded and reproduced, which is
manufactured or distributed primarily for home and/or consumer and/or jukebox
use and/or use on or in means of transportation, including Electronic
Transmission, but excluding "sight and sound" devices.
(r) (i) "Royalty Base" shall mean the Base Price less all excise,
sales and similar taxes and less the applicable Additional Deductions, if any.
(ii) Company may at any time and from time to time change the
method by which it computes royalties in the United States from a retail basis
to some other basis (the "New Basis"), such as, without limitation, a wholesale
basis. The New Basis will replace the then-current Royalty Base and the royalty
rates shall be adjusted to the appropriate royalty which would be applied to the
New Basis so that the dollars-and-cents royalty amounts payable with respect to
the top-line product through Normal Retail Channels as of the date of
<PAGE> 22
such change would be the same as that which was payable immediately prior to
such New Basis; for sales other than top-line product, for which there is a New
Basis, the adjusted royalty rate shall be reduced in the ratio of the royalty
rate for such sales to the royalty rates for sales of top-line product. If there
are other adjustments made by Company that would otherwise make the New Basis
more favorable (a particular example of which might be the distribution of
smaller quantities of free goods than theretofore distributed) then the benefits
of such other adjustments will be taken into consideration in adjusting the
royalty rate.