U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission file number 1-12635
PARADISE MUSIC & ENTERTAINMENT, INC.
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(Name of small business issuer in its charter)
Delaware 13-3906452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 West 23rd Street, New York, New York 10010
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (212) 590-2100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.01 per share Boston Stock Exchange
NASDAQ
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
NASDAQ
Securities registered under Section 12(g) of the Act:
None
Check whether the issuer (1) filed all reports required to be filed by Sections
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The Issuer's revenues for the year ended June 30, 1998 were $13,593,426.
As of September 10, 1998, the aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was sold or the average bid and ask price of
such common equity on such date was $1,794,884. Solely for the purposes of this
calculation, shares held by directors, executive officers and stockholders of
the issuer that beneficially own more than 10% of the issuer's voting stock have
been excluded, except such shares, if any, with respect to which such persons
disclaim beneficial ownership. Such exclusion should not be deemed a
determination or admission by the issuer that such persons are, in fact,
affiliates of the registrant.
As of September 10, 1998, there were 2,255,431 shares of the registrant's common
stock outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one)
Yes |_| No |X|
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company is engaged in various aspects of the music and entertainment
business. The Company's current businesses include: production of original
scores and advertising themes for television, radio and film; production of
music videos and specials for television; music artist management; and a record
label. Operations are conducted through four wholly-owned subsidiaries: John
Leffler Music Inc. d/b/a Rave Music and Entertainment ("Rave"), Picture Vision,
Inc. ("Picture Vision"), All Access Entertainment Management Group, Inc. ("All
Access") and Push Records, Inc. ("Push"). Through its subsidiaries, the Company
provides a range of services which management believes, are not provided by
other independent music companies. This combination of services is believed to
provide certain competitive advantages including the ability to offer lower
costs and greater convenience to customers.
On October 6, 1998, the Company entered into an investment agreement (the "Pines
Investment Agreement") with Pines International Resorts, Inc. ("Pines") pursuant
to which, among other things, Pines agreed to purchase 500,000 shares of the
Company's Common Stock in consideration for payment to the Company of $775,000
in tranches of $345,000 and $430,000, respectively. Under the terms of this
agreement, the Company will receive the first payment of $345,000 no later than
October 14, 1998. In addition, the Company has agreed to grant warrants to Pines
for the purchase of 350,000 shares of the Company's Common Stock at prices
ranging from $1.55 to $2.50 per share. The warrants became exercisable on
October 6, 1998 and expire at various dates through December 31, 1999. The
Company intends to file a Registration Statement on Form S-3 with the Securities
and Exchange Commission (the "Commission") with respect to the 500,000 shares
sold to Pines, the 350,000 warrants granted and 100,000 additional shares issued
to CCF Capital Group, Inc. ("CCF Capital"), the Company's financial advisor. In
accordance with the Pines Investment Agreement, Pines is required to pay to the
Company $430,000 within one week of the filing of such S-3 Registration
Statement. If Pines defaults on such obligation, the Company will experience
immediate and serious liquidity problems. If the Company fails to have an
effective Registration Statement covering the shares issued to Pines within 90
days following the payment by Pines of $345,000, a monthly penalty, at the
option of Pines, of $50,000 or the issuance of 100,000 shares of the Company's
Common Stock shall be imposed until the Registration Statement becomes
effective.
The Company is seeking additional equity and/or debt financing beyond the Pines
investment. There can be no assurance that such financing can be obtained on a
timely basis or even if obtained, that such financing would not substantially
dilute existing stockholders. If such financing cannot be obtained this will
have an immediate adverse impact on the ability of the Company to continue its
present operations. In addition, based on the losses and continued cash
requirements of the Company's record label and the amount of financing
available, substantial revisions and curtailments of this business may be
required. For additional information, see "Liquidity and Capital Resources" and
the Independent Auditors Report and Notes 3 and 13 to the consolidated financial
statements. It should be noted that all descriptions of the current business of
the Company should be considered in light of the current and continuing adverse
impact resulting from the existing liquidity problems.
The Music Industry
The production of original scores and advertising themes for television, radio
and film; the production of music videos and specials for television and music
artist management are generally carried out by individuals or small privately
held companies. Usually, individuals or small companies engage in only one of
the foregoing businesses.
The record business, however, is dominated by divisions of six multi-billion
dollar international companies; Warner Bros., PolyGram, Sony, BMG, MCA/Universal
and Thorn EMI. These companies also have their own publishing divisions and
distribution systems. The remainder of the record business is comprised of
numerous small record companies, smaller distribution companies and smaller
publishing companies. The companies are called independents simply to
differentiate them from the six major companies. The Company believes that its
lower overhead structure provides the record label and its artists an
opportunity to share greater economic benefits than its competitors.
Most independent music companies specialize in only one aspect of the music
industry (such as niche-oriented record labels, jingles, video production,
artist management, concert promotion and genre-oriented publishing or
distribution). The Company believes that there is a significant opportunity for
consolidation among the smaller music companies which are increasingly
recognizing the need to adopt new strategies and form strategic alliances in
order to stay competitive.
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Current Business
Commercial Music
The Company's commercial music production business is conducted through
Rave, a company founded in 1986 by John Loeffler, the Chairman of the
Company. Rave creates original scores and advertising themes for
television, radio, and film. This business involves creating original
music, hiring musicians, recording music in its in-house studios and
submitting final, ready to use, compositions.
The Company typically works with advertising agencies to help create the
soundtracks for commercials. Once the Company has been solicited for its
services it reviews the information provided by its client and produces a
rough version of the proposed production ("demo"). The fees for producing
a "demo" range from $750 to $2,000. The experience of the Company is that
it is hired to produce finished soundtracks based on the demo less than
15% of the time.
The Company utilizes the services of musicians, singers and engineers who
are independent contractors to work with the composer to produce the final
soundtrack in the Company's recording studios. The fee for a final
soundtrack typically ranges from $5,000 to $15,000. Creative/arranging
fees and the fees of the musicians, singers, engineers and studio expenses
are paid by the client. The Company retains its intellectual property
rights in its musical compositions. Royalty and residual distributions are
paid by Broadcast Music, Inc. ("BMI") or ASCAP to the Company, the
composer and the performers for the various uses of the actual
compositions. These residual fees can exceed the creative fees.
The Company has six midi recording studios at its New York headquarters.
The Company currently owns the equipment which includes a fully equipped
midi room and mixing room and is used in the recording of sound tracks for
television shows and commercials. The Company's four other recording
studios contain digital mini recording equipment owned by independent
contractors who work for the Company. The Company has an oral
understanding with such independent contractors for the free use of this
equipment when it is not in use.
The Company believes that its commercial music business has begun to
derive some creative benefits from the availability of resources of the
Company's other businesses, but has not to date realized any economic
benefit from such relationships. There can be no assurance when if at all,
that such commercial opportunities will be realized. Through its
relationships with various music artists, the music artist management
business has provided the commercial music business with access to both
well-known artists and artists whose style or sound might help the
commercial music company generate new business.
Video Production
The Company's music video and television special production business is
conducted through Picture Vision, a company founded in 1984 by Jon Small,
an Executive Vice President of the Company. The Company produces music
videos, used to promote music artists, as well as music specials and
programs for television and cable networks. In connection with this
business, the Company, utilizing both in-house capabilities and
independent contractors, directs, produces, story-writes, art directs,
scouts locations, produces special effects, edits, contracts, and manages
the production.
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The Company produces music videos for record labels (revenues of
$1,734,000), television specials, which became a more significant revenue
generator in fiscal 1998 (revenues of $6,920,000) and has also produced a
limited number of television commercials (revenues of $343,000), the
production of which is similar in many ways to music video production.
Music Artist Management
The Company's music artist management services are provided by All Access,
a company founded in 1994 by Brian Doyle and Richard Flynn, each an
Executive Vice President of the Company. In the music industry, artist
management means working with an artist in every facet of his or her
career. For developing artists, the Company provides assistance in the
following ways: building a support team for the artists (including an
attorney, an accountant/business manager and booking agent); securing
appropriate recording and publishing contracts; promoting sales of
records; and developing touring opportunities. For established artists,
the Company provides strategic planning to help maintain and advance the
artists' careers in areas including touring, recording and record sales;
publishing and ancillary uses of the artists music (such as motion picture
sound tracks). The Company specializes in developing and implementing
strategic plans for its artists that include personalized marketing and
promotion strategies with continuous monitoring and follow through for
each phase of the plan. Additionally, the Company acts as a liaison
between its artists and their advisors and offers a full range of
administrative support to its artists' careers.
The Company has a variety of sources for new artists. The Company receives
numerous referrals from within the industry due to its reputation in the
music artist management business. Recorded music companies prefer to work
with "known entities" and will recommend management companies to newly
acquired artists who are unrepresented. Music industry attorneys, who
often work with unsigned artists, are also a source of referrals. Likewise
business managers, accountants, producers and occasionally publishing
companies serve as sources of referrals. In addition, the Company's
representatives spend a good deal of time in small clubs and local music
venues listening to new music and following up industry leads. The Company
receives approximately five to ten "demo" tapes a month through referrals
and directly from artists in search of management. Various members of the
staff will listen to these tapes searching for the "better" talent. Only
when the Company identifies what it believes to be an exciting prospect
will the Company consider pursuing that artist. The Company generally will
hear an artist four or five times in live performances before deciding to
sign such artist. The Company's philosophy is to develop a relationship
with artists before actually signing them. This relationship building
process can take up to six months before it is mutually agreed that the
artist is ready for management. The artist must demonstrate a willingness
to listen to management, to take advice and direction, and to pursue his
or her career diligently.
The leading commercially successful artists typically have an exclusive
arrangement with a management company. A few management companies have
under contract a large number of artists (more than 10). The majority of
management companies have a relatively small number of artists under
contract (less than 10). The balance of the industry consists of a number
of very small companies that principally represent a number of unsigned
artists. To maximize client service and minimize overhead, it is the
intention of the Company to maintain a roster of eight to ten artists
(with three or four established artists and four or five developing
artists). In addition, as the Company builds relationships with new
artists, the Company may be working with up to six additional unsigned
artists who are not generating income.
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The Company currently manages the careers of six music artists and/or
music groups including Fat, Coward, Kim Sozzi, Hall & Oates, Daryl Hall
and Mosh Productions. For providing its services, the Company is paid
commissions typically ranging from 15% to 20% of the entertainment related
gross earnings (less certain minimal standard industry costs) of its
clients. The Company's policy, in accordance with industry practice, is to
pay up to 5% of commissions received to certain non-executive employees
who either identify, develop and/or manage such artists. With respect to
music artist management, the Company's most well known artists are Hall
and Oates and Daryl Hall. In accordance with industry practice, the
Company typically does not enter into written management contracts with
the artists it represents. However, the Company does adhere to agreed upon
fee structures with its artists and in the future will try to enter into
written agreements with certain of its artists to the extent practicable.
The Company believes that its music artist management business has begun
to derive some marketing benefits from its affiliation with the Company's
other business. Existing and potential clients of the Company's music
artist management business may find the television commercial
opportunities provided by the Company's commercial music division to be
attractive. Additionally, with music videos becoming such an important
promotional tool for artists, being able to provide music video production
services gives the music artist management business an advantage in
soliciting potential clients. There can be no assurance that such
commercial opportunities will be realized.
Independent Record Label
General
In February 1997, the Company incorporated its record label Push to
operate in the recorded music industry as a contemporary label featuring
alternative and adult contemporary artists. Push is under the direction of
Brian Doyle and Richard Flynn and will, to the extent practicable, utilize
the in-house recording studios and video production services of the
Company. Until it can support a higher level of overhead, Push will, to
the extent practicable, use the existing resources of the Company,
particularly those employed in its artist management services business.
Currently Push has entered into agreements with (i) Daryl Hall and John
Oates, who have recorded "Marigold Sky", which was released in late
September 1997, (ii) Luxx, who have recorded their first album titled
"Luxx" which was released in the third quarter of fiscal 1998, (iii)
Kidney Thieves, who have recorded their first album entitled "Trickster",
which was released in July 1998 and (iv) Blessid Union of Souls who are
scheduled to release an album in fiscal 1999. Push has entered into a
North American manufacturing and distribution agreement with BMG Music
d/b/a BMG Entertainment ("BMG"). The agreement with Daryl Hall and John
Oates grants Push the exclusive right to distribute the "Marigold Sky"
album (worldwide) and grants the Company two consecutive options for two
additional albums in the event certain sales criteria are met with respect
to the previous album. Sales criteria for "Marigold Sky" has been met.
To date, Push has required substantial cash resources in the development
of its business and has experienced substantial operating losses. It is
anticipated that additional cash investments and continued losses will be
required before the longer term viability of Push can be determined. Based
on the current liquidity problems being experienced by the Company, severe
revisions and curtailments in the operations of Push could be implemented
in the near future. Unless independent joint venture or other funding
sources can be obtained for Push, there can be no assurance as to the
continuing operations of Push. The description which follows as to the
current operations of Push is subject in its entirety to such liquidity
concerns.
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Production
Average music production costs for the Company's releases have been and
are expected to continue to be below what the Company believes to be the
industry average. The Company believes that the savings result from the
willingness of its artists to forego the substantial advances and other
benefits paid to the top recording artists by the major music companies in
consideration for such artists' receiving greater royalty participations
then are typically offered by competing labels. In addition, savings may
result from utilizing its integrated video and commercial production
facilities. It is also important to note that most independent music
companies do not have the facilities and services which the Company
currently owns and can provide. Consequently, the Company believes that it
can achieve a cost advantage over other small independent music companies.
The Company also tries to keep production costs low by utilizing producers
and musicians with whom the Company has relationships.
As an artist gains recognition, it is common practice to allocate larger
production budgets to their subsequent releases. The Company will follow
this strategy on a selective basis.
Manufacturing and Distribution
Typical distribution for an independent recorded music company is through
independent distributors. The major recorded music company-owned companies
offer national distribution, consistent market visibility, accounts
receivable and collection administration. Independent distributors offer
similar services, but normally on a much smaller scale.
In August 1997, Push entered into a three year agreement with BMG (a major
recorded music company-owned branch system) to provide distribution and
manufacturing services within the United States, its territories and
possessions and Puerto Rico for all sound recordings derived from masters
owned or controlled by Push. BMG is under no obligation to provide
promotional support under this agreement.
Push successfully negotiated worldwide distribution agreements in
connection with Daryl Hall & John Oates album "Marigold Sky". Management
will seek to negotiate foreign distribution and/or licensing agreements in
other territories not covered by the BMG agreement for future record
releases if management believes that one or more of its albums can be sold
profitably in foreign markets or that such distribution strategically
positions the Company for future sales.
Promotion
The Company has, and will continue to, market its releases by funding the
touring activities of its recording artists, particularly with respect to
newer artists. For all of the Company's recording artists, but especially
in the case of acts such as Luxx and Kidney Thieves that have little or no
preexisting fan base, touring activity may increase demand for the
artists' records in areas in which the artists perform. Such increased
demand, if realized, helps the Company's radio promotion staff and
consultants to convince local radio stations that there is an audience for
the record in areas where the acts are performing. Increased radio play,
if developed can increase attendance at the artists' live performances or
generate even more local retail demand for the records. There can be no
assurance that such marketing activities will result in any additional
sales.
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The traditional and most effective means of promoting recorded music is by
radio air play. Obtaining radio air play for a new release is an extremely
competitive process. The trend by radio stations to focus more on
particular music formats has made it easier for independent producers to
target those stations most likely to air a specific recording. Independent
radio promoters are often hired to gain air play and, in certain markets,
they are quite effective in gaining air play for a release. Public and
college radio stations are useful venues for lesser known artists. Music
videos are also a vital means of promoting artists and records.
Songs that are aired on a major radio station are chosen by the program
director, often in conjunction with a format consultant. Once a recording
is aired, the amount of repeat play it receives depends upon listener
requests and feedback, as well as actual sales data. Since listener
response and sales depend in large measure on how often a release is
aired, building a commercial hit depends on an ongoing cycle of air play
and sales. Nurturing this cycle requires constant marketing attention and
careful coordination with advertising, concert schedules and other
promotional activities. Other promotional tools include print advertising,
retail promotions, concert tours and appearances on television talk shows.
Additionally, getting music video airplay on MTV or VH-1 or other video
stations or programs, or on their niche oriented programs, is also
essential to the success of a recording music artist and their records.
The key to finding an audience for new artists is to properly coordinate
all these promotional activities to maximize awareness and exposure. The
Company has and will continue to, where possible, use its in-house
expertise to direct or assist with the promotional activities with respect
to its artists. By coordinating or providing assistance with these
activities, to the extent practicable, in-house costs will be further kept
under control.
Relationship with Artists
The Company's plan is to sign and develop new or emerging music artists
and, to the extent practicable, sign established artists. The Company will
continue to recruit new and emerging artists and to enter into exclusive,
long-term recording contracts (expected to cover an initial album, with
options to record three to five additional albums, at the Company's
discretion). The Company will concentrate its resources on a small number
of artists, developing a tailored marketing and promotion plan for each.
There can be no assurance that the Company will be able to attract new and
emerging music talent or established artists, or, if the Company is able
to attract such talent, that the Company will be able to develop that
talent successfully or in such manner so as to produce significant sales.
If the Company develops commercially successful music artists, there can
be no assurance that the Company will be able to maintain its
relationships with such artists even if it has entered into exclusive
recording contracts with them. Furthermore, performing artists
occasionally request releases from their exclusive recording agreements.
Among the reasons that may cause an artist to engage in so-called "label
jumping" are expectations of greater income and advances or promotional
support by a competing label. There can be no assurance that any given
artist developed by the Company will not determine to request a release
from his or her agreement with the Company. Because of the highly personal
and creative nature of the artist's contractual obligations to the
Company, it is not feasible to force an unwilling artist to perform the
terms of his or her contract with the Company. If the Company does release
a "label jumping" artist from his or her contract, it may be able to
obtain an "override royalty" as consideration for the release. Override
royalties are customarily paid by the released artist's new recording
company and are based on a percentage of the suggested retail selling
price or wholesale price (depending on the particular label in question),
subject to certain deductions. Such royalties are payable with respect to
a negotiated number of the artist's albums after release from his or her
existing contract.
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The Company will seek to contract with its artists on an exclusive basis
for the marketing of their recordings in return for a percentage royalty
on the retail selling price of the recording. The Company will generally
seek to obtain rights on a worldwide basis. A typical contract for an
artist may provide for a number of albums to be delivered, with advances
against royalties being paid upon delivery of each album, although
advances are often made prior to recording. The Company will generally
have an option to take each album that the artist is contracted to
deliver, exercisable within an agreed period of time, usually a few months
following delivery of the previous album. Normally, if an option is not
exercised, the artist has no obligation to deliver additional albums.
Provisions in contracts with established artists vary considerably and
may, for example, require the Company to release a fixed number of albums
and/or contain an option exercisable by the Company covering more than one
album. The Company will seek to obtain rights to commercially exploit
product delivered by the artists for the life of the product's copyright.
Under the contracts, advances are normally recoupable against royalties
payable to the artist. The Company will seek to recoup a portion of
certain marketing and tour support costs, if any, against artist
royalties.
Contracts either provide for the artists to deliver completed recordings
or for the Company to undertake the recording with the artist. If the
recording costs are advanced by the Company, they are added to the
advances paid to the artist and recouped against royalties payable to the
artist. The Company's staff is involved in selecting producers, recording
studios, any additional musicians needed and songs to be recorded, as well
as supervising the output of recording sessions, although for experienced
artists, such involvement may be less. The Company will produce music
videos of single songs for promotional purposes (clips) and longer music
programs (for example, concert programs). Income from music videos is
derived from the sale of video cassettes and from the publishing of music
included in such videos.
Acquisition Program
The music and entertainment industry includes six major companies in the
area of recorded music and thousands of smaller independent music entities
in the area of recorded music and the broader music business. The Company
believes that many owners of independent music entities do not enjoy
certain benefits which the Company intends to offer. These benefits
include the ability to provide a broader range of services to their
clients and greater liquidity and potential for capital enhancement
through ownership of a publicly traded entity. Other benefits that the
Company believes it can provide acquired entities are management expertise
and a broad range of industry contacts.
The Company's acquisition program will concentrate on small complementary
music driven businesses in the music and entertainment industry. The
Company has, to date, consummated only one transaction which could be
deemed an acquisition. In October, 1997, the Company hired the sole
proprietor of Paul Hoffman music to open a Los Angeles, California office
and studio facility for RAVE, the Company's commercial music subsidiary.
Known as "RAVE West," the Company spent approximately $60,000 and Mr.
Hoffman personally invested approximately $50,000 in the build out and
equipping of a state-of-the-art digital recording and editing facility. No
cash or securities were paid to Mr. Hoffman in exchange for the
"acquisition" of the going concern value of Paul Hoffman music, but Mr.
Hoffman's employment agreement called for him to earn options to purchase
shares of the Company's common stock based upon the earnings of RAVE West
in accordance with a formula established under the agreement. No options
have been earned by Mr. Hoffman as RAVE West has been operational for less
than four full quarters and has not yet achieved the earnings thresholds
established under the agreement for the vesting of any options.
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In June of 1998, Mr. Hoffman developed a business plan for commercializing
this new business as a stand-alone division of the Company (as opposed to
an operating division of RAVE). The business plan called for Mr. Hoffman
to invest his own funds to: (1) support the new division's infrastructure
and operations, (ii) hire and train a sales and marketing staff to grow
the revenues of the division, and (iii) "brand" the division by changing
its name from "RAVE West" to "Blue Music and Sound Design".
Unless and until the Company's financial condition is improved through the
infusion of capital from the sale of equity securities, debt financing or
a combination of the two, it is unlikely that the Company will be able to
consummate any new acquisitions for the foreseeable future. There can be
no assurance that any such financing can be obtained. There can be no
assurance that even if such financing is obtained, that any acquisitions
can be successfully consummated or, if consummated, that such acquisitions
will positively contribute to the cash flow and/or profits of the Company.
Copyrights
The Company's record business, like that of other companies involved in
recorded music, will primarily rest on ownership or control and
exploitation of musical works and sound recordings. The Company's music
products, including its commercial music, are and will be protected under
applicable domestic and international copyright laws.
Although circumstances vary from case to case, rights and royalties
relating to a particular recording typically operate as follows: When a
recording is made, copyright in that recording vests either in the
recording artist (and is licensed to the recording company) or in the
record company itself, depending on the terms of the agreement between
them. Similarly, when a musical composition is written, copyright in the
composition vests either in the writer (and is licensed to a music
publishing company) or in a publishing company. A public performance of a
musical composition will result in money being paid to the writer and
publisher. The rights to reproduce songs on soundcarriers are obtained by
record companies or publishers from the writer. The manufacture and sale
of a soundcarrier results in mechanical royalties being payable by the
record company to the performer at industry agreed or statutory rates for
the use of the composition and by the record company to the recording
artists for the use of the recording. The Company operates in an industry
in which revenues are adversely affected by the unauthorized reproduction
of recordings for commercial sale, commonly referred to as "piracy", and
by home taping for personal use.
Potential publishing revenues may be derived from the Company's ownership
interest in musical compositions, written in whole or in part by artists.
Management anticipates securing a partial ownership position in the
copyright to any compositions written by its recording artists, where such
rights are available and have not been previously sold or assigned.
Generally, revenues from publishing are generated in the form of: (1)
mechanical royalties, paid by the record company to the publisher for the
mechanical duplication of the copyright to a particular composition (as
distinct from the copying of the artist's performance of that
composition); (2) performance royalties collected and paid by performing
rights entities such as ASCAP and BMI for the actual public performance of
the composition as represented by radio airplay, Musak, or as a theme or
single broadcast in synchronization with a visual image via television;
(3) sub-publishing revenues derived from copyright earnings in foreign
territories, and publishers in those territories acting as designated
collection agents for the Company; and (4) licensing fees derived from
printed sheet music, uses in synchronization with images as a video or
film scores, computer games and other software applications, and any other
use involving the composition.
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The Company may be engaged, with respect to its recorded music business,
in licensing activities involving both the acquisition of rights to
certain master recordings and compositions for its own projects and the
granting of rights to third parties in the master recordings and
compositions it owns. There can be no assurance that the Company will be
able to obtain licenses from third parties on terms satisfactory to the
Company or at all.
Competition
The Company currently competes with numerous other businesses and
individuals who produce original music scores and advertising themes for
television, radio and film, produce music videos and specials for
television and provide music artist management. Currently, the production
of original scores and advertising themes for television, radio and film,
the production of music videos and video specials for television, and
music artist management are carried out by individuals or small privately
held niche companies. Generally, each such individual or small company
engages in only one of these businesses. Many of these businesses and
individuals including Crushing Enterprises, Elias Associates, JSM Music,
Inc. and Tomandandy, with respect to commercial music, The End,
Propaganda, DNA, Automatic Films and High Five with respect to video
production and Gold Mountain Entertainment, Left Bank Management and H.K.
Management, with respect to artist management, have greater financial
resources, and in many instances longer operating histories, than the
Company.
Push, the Company's record label, faces intense competition for
discretionary consumer spending from numerous other record companies and
other forms of entertainment offered by film companies, video companies
and others. Push competes directly with other recorded music companies,
including the six major recorded music companies, which distribute
contemporary music, as well as with other record companies for signing
artists and acquiring music catalogs. Many of these competitors have
significantly longer operating histories, greater financial resources and
larger music catalogs than the Company. The Company's ability to compete
successfully in the recorded music business will be largely dependent upon
obtaining additional capital, signing and retaining successful artists and
introducing music products which are accepted by consumers.
The Company does not believe that there are currently any independent
music companies, that are comparable in size to the Company, which offer
the range of services which are provided by the Company.
Organization
The Company was incorporated in the State of Delaware on July 18, 1996 and
is located at 53 West 23rd Street, New York, New York, 10010 and its
telephone number is 212-590-2100.
Employees/Independent Contractors
As of September 10, 1998, the Company had 35 employees, 26 of whom were
located at the Company's New York office, 6 of whom were located in
Nashville, Tennessee, and 3 of whom were located in Los Angeles. None of
the Company's employees is represented by a labor union. The Company has
not experienced any work stoppage and considers relations with its
employees to be good.
As is customary in the music business, the Company also utilizes the
services of artists, performers, composers, producers, engineers, roadies,
booking agents and others who are independent contractors. These
independent contractors hire out their services on an as needed basis and
receive a set fee for the services. The services performed by these
independent contractors are not needed on a full time basis. As a result,
services of independent contractors are less expensive than having full
time employees perform these services.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space at three locations. Its headquarters and
commercial music recording studios are located at 53 West 23rd Street in New
York City where it leases approximately 20,000 square feet, pursuant to a lease
that expires in July 2007. The Company's music video production business leases
2,050 square feet of office space at 209 10th Avenue South in Nashville,
Tennessee which lease expires in August 2000. The Company's commercial music
business also leases 3,400 square feet of office space at 7237 Santa Monica
Boulevard in Los Angeles, which lease expires in September 2002. Rent expense
for leased facilities amounted to approximately $322,000 for the year end June
30, 1998.
ITEM 3. LEGAL PROCEEDINGS
Except for proceedings in the normal course of business, neither the Company nor
any of its subsidiaries is a party to or involved in any material pending legal
proceedings.
ITEM 4. MATTERS SUBMITTED TO SHAREHOLDER VOTE
The Company did not submit any matters to the vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock commenced trading on the Nasdaq SmallCap Market and
the Boston Stock Exchange on January 22, 1997. The high and low bid prices of
the Company's Common Stock (as reported by Nasdaq and the Boston Stock Exchange)
for each quarter since its initial public offering were as follows:
Nasdaq SmallCap Market
Start End
Date Date High Low
---- ---- ---- ---
01/22/97 03/31/97 $7 $5-3/8
04/01/97 06/30/97 $5-7/8 $3-1/2
07/01/97 09/30/97 $5-1/32 $3-5/8
10/01/97 12/31/97 $6-3/8 $3
01/01/98 03/31/98 $4 $2-13/16
04/01/98 06/30/98 $3-3/4 $2
Boston Stock Exchange
Start End
Date Date High Low
---- ---- ---- ---
01/22/97 03/31/97 $7 $5
04/01/97 06/30/97 $6 $3
07/01/97 09/30/97 $5-3/64 $3-5/8
10/01/97 12/31/97 $6-3/8 $3
01/01/98 03/31/98 $4 $2-13/16
04/01/98 06/30/98 $3-5/8 $2
The prices set forth above reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The public market for the Common Stock is limited and the foregoing quotations
should not be taken as necessarily reflective of prices which might be obtained
in actual market transactions or in transactions involving substantial numbers
of shares.
The approximate number of holders of record of the common stock was 32 as of
September 10, 1998. The Company believes that there are in excess of 300 round
lot beneficial owners of common stock whose shares are held in street name.
The Company has never paid a dividend on its common stock. The Company
anticipates that future earnings, if any, will be retained for use in its
business or for other corporate purposes, and it is not anticipated that cash
dividends in respect of the common stock will be paid.
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<PAGE>
Recent Sales of Unregistered Securities
On October 6, 1998, the Company entered into the Pines Investment Agreement with
Pines pursuant to which, among other things, Pines agreed to purchase 500,000
shares of the Company's Common Stock in consideration for payment to the Company
of $775,000 in tranches of $345,000 and $430,000, respectively. Under the terms
of this agreement the Company will receive the first payment of $345,000 no
later than October 14, 1998. In addition, the Company has agreed to grant
warrants to Pines for the purchase of 350,000 shares of the Company's Common
Stock at prices ranging from $1.55 to $2.50 per share. The warrants became
exercisable on October 6, 1998 and expire at various dates trough December 31,
1999. In accordance with the Pines Investment Agreement, Pines is required to
pay to the Company $430,000 within one week of filing a Registration Statement
on Form S-3. On or about September 24, 1998, the Company entered into a
non-exclusive financial advisory relationship with CCF Capital pursuant to
which, among other things, CCF Capital would receive, upon the closing of the
Pines Investment Agreement, 100,000 shares of the Company's Common Stock in
connection with the rendering of its financial advisory services and an
aggregate of $75,000. In addition, CCF Capital will receive a monthly fee of
$6,500 for a minimum of 8 months and a maximum of 35 months.
In late July of 1998, all six members of the Company's Board of Directors sold
in the aggregate approximately 105,000 shares of the Company's Common Stock in
one or more open market transactions at a price per share of $2.875. The
Company's two outside directors lent the proceeds of such open market sales (an
aggregate of approximately $48,000) to the Company pursuant to convertible
promissory notes that would allow the holders of such notes to convert the
outstanding principal and interest accrued thereunder into shares of the
Company's Common Stock at a price per share equal to $2.875. Three of the
Company's Board members took the proceeds of their open market sales
(approximately $190,000) and reinvested them into the Company in exchange for
restricted shares of Common Stock at a purchase price per share of $2.875. One
of the Company's Board members, Mr. Loeffler, used the proceeds of his open
market sales to repay approximately $58,000 of a loan that had been advanced to
him by the Company. In all, the Company received approximately $302,000 in gross
proceeds from such transactions. The securities were issued to the foregoing
persons in reliance on the exception from registration set forth in Section 4(2)
of the Securities Act of 1933, as amended.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
Except for the historical information contained herein, this Annual Report on
Form 10-KSB may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties, including,
without limitation, the ability of the Company to obtain adequate financing to
continue its current operations, risks associated with the ability to produce
additional albums which are commercially successful, the Company's history of
operating losses, dependence on senior management, risks inherent in the
recorded music industry, the Company's ability to contract with recording
artists, the Company's ability to manage growth and the success of the Company's
acquisition program. The forward-looking statements contained herein represent
the Company's judgment as of the date of filing this Annual Report hereof, and
the Company cautions readers not to place undue reliance on such statements.
General
The Company currently derives most of its revenues from: the production of
original music scores and advertising themes for television, radio, and film;
the production of music videos used to promote music artists and music specials
and programs for television networks and other video broadcasters; the
management of music artists and the recorded music business.
The Company believes the results of operations of its operating subsidiaries
will be subject to seasonal variations, which variations may initially offset
each other. As such, the Company's operating results could be materially
adversely affected. The timing of new record releases, for example, could
materially impact the Company's operating results. Additionally, due to the
success of particular artists, artists touring schedules and the timing of music
television specials, it is possible that the Company could also experience
material fluctuations in revenue from year to year.
As discussed in "Liquidity and Capital Resources", as well as in Item 1 of this
Annual Report and elsewhere, the Company is experiencing severe liquidity
problems which have had and will continue to have a material adverse effect on
operations of the Company.
Results of Operations
Commercial music production revenues increased to $1,497,173 for the fiscal year
ended June 30, 1998 from $894,362 for the fiscal year ended June 30, 1997, an
increase of $602,811 or 67.4% while commercial music production cost of sales
increased to $644,552 for the fiscal year ended June 30, 1998 from $365,434 for
the fiscal year ended June 30, 1997, an increase of $279,118 or 76.4%. The
increase in revenues was primarily due to an increase in advertising agency
billings and royalty income relating to musical compositions for three
television series.
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<PAGE>
Gross profit as a percentage of commercial music production revenues decreased
to 56.9% for the fiscal year ended June 30, 1998 from 59.1% for the fiscal year
ended June 30, 1997. The decrease was attributable to a decrease in residual
income which has no cost of sales associated with it, the utilizing of outside
studios as new studios were being built and higher than expected costs on a few
jobs. The level of residual and royalty income varies from year to year based
upon the number of compositions airing at any one time, the medium on which such
compositions are aired and the frequency of such airings.
Video production revenues increased to $8,997,169 for the fiscal year ended June
30, 1998 from $3,839,472 for the fiscal year ended June 30, 1997, an increase of
$5,157,697 or 134.3%. The increase in production revenues was due to the
completion of the production of three television music specials compared with
one special in 1997.
Cost of sales for video productions increased to $7,508,866 for the fiscal year
ended June 30, 1998 from $2,976,949 for the fiscal year ended June 30, 1997, an
increase of $4,531,917 or 152.2%. The increase was attributable to an increase
in the number of music special productions.
Gross profit as a percentage of video production revenues decreased to 16.5% for
the fiscal year ended June 30, 1998 from 22.5% for the fiscal year ended June
30, 1997. The decrease was primarily attributable to the Company earning a lower
gross profit on the music specials described above.
The current year's gross profit includes three television special productions
which generated significant revenues and profits; however, the gross profit
percentage on these projects was lower than the Company's gross profit
percentage on its smaller projects.
Music artist management revenues increased to $891,401 for the fiscal year ended
June 30, 1998 from $834,452 for the fiscal year ended June 30, 1997, an increase
of $56,949 or 6.8%. The increase was primarily attributable to a higher level of
touring activity of one artist and signing of a significant production contract
offset in part by managing fewer artists than in 1997.
Record label revenues for the year ended June 30, 1998 were $2,207,683 and
resulted primarily from shipments of the Daryl Hall and John Oates album
"Marigold Sky". There were no record label sales for the year ended June 30,
1997. Gross profit amounted to $599,593 for the year ended June 30, 1998
compared with a loss of $104,622 for the year ended June 30, 1997. The gross
profit in 1998 relates to the "Marigold Sky" album. The loss in 1997 resulted
from the production of a Luxx album which was fully expensed in such year but
which had no related revenues in 1997.
The Company's marketing, selling, general and administrative expenses increased
to $6,828,087 for the fiscal year ended June 30, 1998 from $3,199,901 for the
fiscal year ended June 30, 1997, an increase of $3,628,186 or 113.4%. The
increase is primarily attributable to (i) the operations of Push, (ii) costs
associated with building an infrastructure to operate and manage a public
company, and (iii) executive compensation.
Interest income increased to $139,040 for the fiscal year ended June 30, 1998
from $94,100 for the fiscal year ended June 30, 1997, an increase of $44,940 or
47.8%. The increase resulted from the investment of proceeds from the Company's
initial public offering for a full year in fiscal 1998 compared with six months
in fiscal 1997 offset by lower cash amounts invested in the current fiscal year.
The cash was utilized to fund the Company's operations.
-14-
<PAGE>
The Company's loss before income taxes increased to $2,857,129 for the fiscal
year ended June 30, 1998 from $984,520 for the fiscal year ended June 30, 1997,
an increase of $1,872,609 or 190.2%. The increase was primarily due to the
increase in marketing, selling, general and administrative expenses described
above offset in part by the increase in profit at the Company's video production
subsidiary.
Liquidity and Capital Resources
The Company has a history of operating losses having incurred losses of
approximately $2.9 million and 1.0 million for the years ended June 30, 1998 and
1997, respectively. These losses have had a negative impact on the liquidity of
the Company. The Company currently requires additional working capital to
continue funding the operations of its businesses and is currently exploring
various alternatives to obtain such financing. There can be no assurance that
such financing will be available or, if available, on terms that are acceptable
or favorable to the Company. Failure to obtain such financing will have a
material adverse effect on the Company and its continuing operations.
Continuation of the Company as a going concern is dependent on its ability to
resolve its liquidity problem and attain future profitable operations.
On October 6, 1998, the Company entered into the Pines Investment Agreement with
Pines pursuant to which, among other things, Pines agreed to purchase 500,000
shares of the Company's Common Stock in consideration for payment to the Company
of $775,000 in tranches of $345,000 and $430.000, respectively. Under the terms
of this agreement the Company will receive the first payment of $345,000 no
later than October 14, 1998. In addition, the Company has agreed to grant
warrants to Pines for the purchase of 350,000 shares of the Company's Common
Stock at prices ranging from $1.55 to $2.50 per share. The warrants became
exercisable on October 6,1998 and expire at various dates through December 31,
1999. In accordance with the Pines Investment Agreement, Pines is required to
pay to the Company $430,000 within one week of filing a Registration Statement
on Form S-3. If Pines defaults on such obligation, the Company will experience
immediate and serious liquidity problems.
In addition to the Pines Investment Agreement, the Company is pursuing debt
and/or equity financing to provide for its immediate, short-term and long-term
cash requirements. In the event that the Company cannot procure adequate
financing, the Company may be required to, among other things, reduce its
operating costs, reduce its payroll, curtail its on-going investment activities,
especially in Push Records, and curtail, restrict or even eliminate certain of
the Company's businesses or operating subsidiaries. Even if the Company is
successful in obtaining financing for its immediate cash needs, there can be no
assurance that the actions outlined above will ensure the Company's survival as
a going concern and if the Company does continue, implementation of the cash
containment measures outlined above could materially adversely affect the
long-term profitability or potential future value of the Company's business and
operating subsidiaries.
The Company's tangible net asset value as of June 30, 1998 was below the
threshold required by NASDAQ for continued listing of the Company's securities.
The Company believes that the financing provided pursuant to the Pines
Investment Agreement will result in an increase of the Company's tangible net
asset value above the threshold established for continued NASDAQ listing.
However, there can be no assurance that failure to consummate the Pines
Investment Agreement or continuing losses will not result in a net tangible
asset value in the future which again falls below the requirement for continued
NASDAQ listing. If the Company's securities are delisted, the value of the
Company's securities would be materially adversely affected and the Company
would, in all likelihood, find it more difficult to consummate any financing
transactions.
During the year ended June 30, 1998, the Company had cash used by operating
activities in the amount of $2,497,659 as compared to $443,419 of cash used for
the year ended June 30, 1997. The operating cash usage was primarily
attributable to the net loss and an increase in accounts receivable offset by
depreciation, amortization and provision for returns and increases in accrued
expenses and other current liabilities.
During the year ended June 30, 1998, the Company used cash for investing
activities in the amount of $1,722,932 as compared to cash used for investing
activities of $112,144 for the year ended June 30, 1997. The cash was used for
the construction of the Company's newly leased facility, the purchase of
property and equipment and cash which collateralizes a letter of credit in
connection with a leased facility and an officer loan.
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<PAGE>
During the year ended June 30, 1998, the Company had net cash used in financing
activities of $1,667 compared to net cash provided by financing activities of
$5,558,868 for the year ended June 30, 1997. In the 1997 period the Company
received net proceeds of approximately $5,588,000 from the issuance of 1,224,333
shares of common stock, 1,146,000 of which were included in the Company's
underwritten initial public offering and related over allotment option exercise,
78,333 of which were included in a private placement, and $100,000 from a bank
loan by Republic National Bank to one of the Company's subsidiaries.
The Company has completed construction of its newly leased facility at a net
cost of approximately $1.1 million.
In late July of 1998, all six members of the Company's Board of Directors sold
in the aggregate approximately 105,000 shares of the Company's Common Stock in
one or more open market transactions at a price per share of $2.875. The
Company's two outside directors lent the proceeds of such open market sales (an
aggregate of approximately $48,000) to the Company pursuant to convertible
promissory notes that would allow the holders of such notes to convert the
outstanding principal and interest accrued thereunder into shares of the
Company's Common Stock at a price per share equal to $2.875. Three of the
Company's Board members took the proceeds of their open market sales
(approximately $190,000) and reinvested them into the Company in exchange for an
aggregate of 66,249 restricted shares of Common Stock at a purchase price per
share of $2.875. One of the Company's Board members, Mr. Loeffler, used the
proceeds of his open market sales to repay approximately $58,000 of a loan that
had been advanced to him by the Company. In all, the Company received
approximately $302,000 in gross proceeds from such transactions.
Inflation
The impact of inflation on the Company's operating results has been
insignificant in recent years, reflecting generally lower rates of inflation in
the economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.
Year 2000
The Company has conducted a review of its computer systems to identify any
systems that could be affected by the "Year 2000" issue. The year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major systems failure or miscalculations. The
Company believes that its computer systems and software products are fully year
2000 compatible. However, it is possible that certain computer systems or
software products of the Company's suppliers or customers may not accept input
of, store, manipulate and output dates in the year 2000 or thereafter without
error or interruption. The Company has retained a consultant to evaluate the
implications of year 2000 issues on the Company and its suppliers and customers.
There can be no assurance that the Company will not be required to make
significant expenditures to identify, address or remedy any potential year 2000
problems, or to satisfy liabilities to which the Company may become subject as a
result of such problem.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See index to the Company's financial statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's directors and executive officers are as follows:
Name Age Position with the Company
---- --- -------------------------
John Loeffler 47 President, Chief Executive Officer and
Chairman of the Board
Jon Small 51 Executive Vice President and Director
Brian Doyle 42 Executive Vice President and Director
Richard Flynn 41 Executive Vice President, Treasurer,
Secretary and Director
Paul Thomas Cohen 46 Director
Thomas J. Edelman 47 Director
Philip G. Nappo, III 39 Chief Operating Officer
Joseph A. Gallo 46 Senior Vice President and Chief Financial
Officer
Mr. John Loeffler has been President, Chief Executive Officer and Chairman of
the Board of the Company since its inception in 1996. From 1986 to September
1996, Mr. Loeffler was the Chief Executive Officer and sole stockholder of Rave.
From 1986 to 1995, Mr. Loeffler was the President of Rave. Rave's roster of
staff composers and producers regularly produced four to five commercial
soundtracks per week. Rave's clients include: Downy Fabric Softner, Hertz and
Coca Cola. Mr. Loeffler was awarded by ASCAP as one of television's "Most
Performed" composers in 1988 and 1989 for his title themes of the television
shows "Kate & Allie", "Another World", and NBC's "Friday Nite Videos". He also
composed the theme for New York City's Channel 4 NBC Evening News, and recently
completed the themes for the new syndicated TV show, "WMAC Masters", ESPN's
"Survival of the Fittest", Robin Leach's "Home Videos of the Stars", the New
York Marathon and ESPN's "US Open", as well as two NBC Summer Olympic '96
Specials. Prior to 1986, Mr. Loeffler was a composer and producer at Sherman and
Cahan, a commercial music production company in New York City. Since 1979, he
has also been a consulting music director to Grey Advertising. Mr. Loeffler
graduated from Williams College, cum laude, in 1973.
Mr. Jon Small has been an Executive Vice President and a director of the Company
since its inception in 1996. Since September 1996, Mr. Small has been the Chief
Executive Officer of Picture Vision. From 1984 to September 1996, Mr. Small had
been President and the sole stockholder of Picture Vision. Picture Vision has
produced, executively-produced and or directed over 300 video musical
productions of such performers as Garth Brooks, Whitney Houston, Madonna, Anita
Baker, Ray Charles, Van Morrison, Rod Stewart, Reba McEntire, Billy Joel and
Sting. Previously, as a musician/performer, Mr. Small toured, or recorded with
The Kinks, The Doobie Brothers, and Billy Joel. While at Picture Vision, Mr.
Small produced and or directed specials for Disney and HBO and has received
several Grammy nominations. While at Picture Vision, Mr. Small also produced and
directed specials and long form programs including NBC's 1994 Thanksgiving
Special "Reba! Live in concert", the Disney special Billy Joel's "Live from Long
Island", Anita Baker's "One Night of Rapture", Hall & Oates' "Live from the
Apollo Theater", Donald Fagen's "New York Rock and Soul Revue", Garth Brooks'
"Live from Central Park", and several shows for the ABC Network's series "Live
in Concert". While at Picture Vision, Mr. Small has won ACE and Monitor awards
for Best Television Music Specials and has received two Grammy nominations for
his work with Billy Joel. He received Country Music awards for Best Video of the
Year, awards for Cable Excellence (ACE), and Monitor Awards. He has been awarded
gold Medals by the International Film & TV Festival. In addition, the Academy of
Country Music set a precedent by choosing two of Mr. Small's videos out of the
final five in the "Videos of the Year" category.
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<PAGE>
In July of 1998, programs produced and/or executive produced by Mr. Small were
nominated for seven (7) Emmy Awards and in August 1998, a music video produced
and directed by Mr. Small was nominated for Video of the Year by the Country
Music Association.
Mr. Brian Doyle has been an Executive Vice President and a director of the
Company since its inception in 1996. Since 1996, Mr. Doyle has been the Chief
Executive Officer of All Access and, since February 1997, has been the Chief
Executive Officer of Push Records. He founded All Access in 1994 and has been
the President and co-owner of All Access since its inception. He currently
manages Daryl Hall and John Oates, and others. From 1991 to 1994, Mr. Doyle
served as CEO/President of Horizon Entertainment and Management Group, Inc.
("Horizon"). Horizon's clients included Mariah Carey, John Mellencamp, and Daryl
Hall and John Oates. His responsibilities included managing the overall
achievement of the Company's strategic objectives, development and control of
the client roster, coordinating worldwide marketing efforts for clients, serving
as artists liaison to MTV, VH-1 and other media outlets, and interfacing on
behalf of clients with record companies and professional services consultants.
In addition, he provided specialized personal management services for clients
including career planning and development, music development, and song
acquisition. Mr. Doyle has also produced HBO and Lifetime television specials.
Mr. Richard Flynn has been an Executive Vice President and Secretary of the
Company since its inception, has been a director since October 9, 1996 and has
been Treasurer since December 1996. Since September 1996, Mr. Flynn has been
Vice President and General Manager of All Access. From September 1994 to
September 1996, Mr. Flynn has been the Managing co-owner of All Access. From
March 1990 until September 1994. Mr. Flynn served as General Counsel to Horizon.
He provided legal services to Horizon and its clients Mariah Carey, John
Mellencamp, Daryl Hall & John Oates, and other artists. In addition, Mr. Flynn
assisted in all aspects of artist management for Horizon's clients. Since 1983,
Mr. Flynn has been a practicing attorney in New York State specializing in
entertainment, corporate and public sector law. Since 1989, he has provided
legal representation, financial management, and consulting services to artists
and entertainers, including negotiating recording, publishing, production,
performance and endorsement contracts.
Mr. Paul Thomas Cohen has been a director of the Company since October 9, 1996.
Since 1987, Mr. Cohen has been an investment banker and a consultant to the
media and entertainment industries. As an advisor to such clients as Time-Life,
Time Inc., The New York Times, NBC, and Rolling Stone Magazine, he has been
involved in licensing, alliances and other strategic initiatives involving new
media activities in both the on-line services and CD-ROM arenas. From 1984 to
1987, Mr. Cohen served as Co-Executive Officer of Herzfeld & Stern, a mid-size
brokerage firm. Mr. Cohen graduated from Williams College in 1974 and received
an MBA from Columbia University in 1976.
Mr. Thomas J. Edelman has been a director of the Company since October 1996. Mr.
Edelman has served as Chairman and Chief Executive Officer of Patina Oil & Gas
Corporation since its formation in 1996. He co-founded Snyder Oil Corporation
and was its President and a director from 1981 through February 1997. Prior to
1981, he was a Vice President of The First Boston Corporation. From 1975 through
1980, Mr. Edelman was with Lehman Brothers Kuhn Loeb Incorporated. Mr. Edelman
received his Bachelor of Arts Degree from Princeton University and his Masters
Degree in Finance from Harvard University's Graduate School of Business
Administration. Mr. Edelman also serves as Chairman of Range Resources
Corporation, and is a director of Petroleum Heat & Power Co. and Star Gas
Corporation. Mr. Edelman is also a Trustee of The Hotchkiss School.
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<PAGE>
Mr. Philip G. Nappo III joined the Company as its Chief Operating Officer In May
1998. In addition to his responsibilities with the Company, Mr. Nappo is a
partner in the corporate and securities law firm of Nappo/Every, Attorneys at
Law, LLP with offices in New York, New York. The firm is a successor in interest
to a private practice founded by Mr. Nappo in 1988. In addition, Mr. Nappo has,
since 1990, been the managing director of Ronin Partners, LLC, which firm is
engaged in investment banking, strategic block investing, and public company
restructuring activities. Ronin Partners, LLC has offices in New York City and
Putnam County, New York, and in Greenwich, Connecticut. Mr. Nappo graduated from
Princeton University in 1981 with a degree in English Literature and Creative
Writing and NYU Law School in 1984.
Mr. Joseph A. Gallo, has been Senior Vice President and Chief Financial Officer
of the Company since October 1997. Mr. Gallo was a consultant to the Company
from March 1997 to September 1997. From 1988 to 1996, Mr. Gallo was Treasurer of
JWP Inc., a contracting and computer reseller. From 1991 to 1993, Mr. Gallo was
also a Vice President and from 1993 to 1996, a Senior Vice President of JWP Inc.
From 1983 to 1988, Mr. Gallo served as a Assistant Treasurer and as Director of
Auditing of the Allen Group Inc., an automotive company. From 1974 to 1983, Mr.
Gallo was an auditor with Coopers & Lybrand. Mr. Gallo received a degree in
accounting from Seton Hall University in 1974. Mr. Gallo is a certified public
accountant.
All directors of the Company are elected by the stockholders, or in the case of
a vacancy, by the directors then in office, to hold office until the next annual
meeting of stockholders and until their successors are elected and qualified or
until their earlier resignation or removal.
All officers of the Company serve at the discretion of the Board of Directors.
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<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires officers and directors of the Company and holders of more than
10% of the Common Stock (collectively "Reporting Persons") to file reports of
intial ownership, ownership and changes in ownership of the Common Stock with
the Securities and Exchange Commission within certain time periods and to
furnish the Company with copies of all such reports. Based solely on its review
of copies of such reports furnished to the Company by such Reporting Persons or
on the written representations of such Reporting Persons that no reports on Form
5 were required, the Company believes that during the fiscal year ended June 30,
1998, all of the Reporting Persons complied with their Section 16(a) filing
requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate compensation
paid or accrued by the Company or its subsidiaries for the fiscal years ended
June 30, 1998, 1997 and 1996 to John Loeffler, the Company's Chief Executive
Officer and to Jon Small, Brian Doyle and Richard Flynn, each an Executive Vice
President of the Company (collectively the "Named Executive Officers"). No other
executive officer received annual compensation in excess of $100,000 for the
fiscal years ended June 30, 1998, 1997 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation (1) Awards
------------------------------------------- -------------
Securities
All Other Underlying
Name and Principal Position Year Salary Bonus Compensation (2) Options
- --------------------------- --------- --------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
John Loeffler 1998 $ 310,000 $ - $ 33,805 -
Chief Executive Officer 1997 150,000 191,000 34,000 5,000
1996 218,000 71,000
Jon Small 1998 $ 310,000 $ 150,000 $ 60,365 -
Executive Vice President 1997 150,000 189,000 36,000 5,000
1996 88,000 89,000
Brian Doyle 1998 $ 300,000 $ - $ 27,613 -
Executive Vice President 1997 150,000 162,500 7,000
1996 101,000 48,000
Richard Flynn 1998 $ 300,000 $ - $ 15,306 -
Executive Vice President 1997 150,000 162,500
1996 101,000 48,000
</TABLE>
(1) The Company was incorporated in July 1996. Compensation for the fiscal
year ended June 30, 1996 represents amounts paid by Rave, Picture Vision
and All Access. Compensation for the fiscal years ended June 30, 1998 and
1997 represents amounts paid by Rave, Picture Vision, All Access and Push.
(2) Includes amounts paid by the Company which the Company deemed to be for
the benefit of such executive, including amounts paid for pension,
lodging, transportation, insurance, entertainment and other perquisites.
-21-
<PAGE>
Option Grants in Last Fiscal Year
There were no options or stock appreciation rights granted to any of the
Named Executive Officers during fiscal 1998.
Aggregated Option/SAR Exercises During Fiscal 1998 and Year End Option/SAR
Values
The following table provides information related to options exercised by
the Named Executive Officers during fiscal 1998 and the number and value
of options and stock appreciation rights held at fiscal year end which are
currently exercisable. No options or stock appreciation rights were
exercised during fiscal 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in the Money Options/
Options/SARs at FY-End SARs at FY-End
Shares
Acquired on Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
J. Loeffler 0 0 5,000 0 $ 0 $ 0
J. Small 0 0 5,000 0 0 0
R. Flynn 0 0 0 0 0 0
B. Doyle 0 0 0 0 0 0
</TABLE>
Directors' Compensation
Directors who are not employees of the Company ("Outside Directors") are
entitled to receive compensation in the amount of $18,000 per annum, 50%
of which is payable in cash and 50% in stock. Such amounts are payable
quarterly in arrears.
For the year ended June 30, 1998, Outside Directors each received
compensation in the amount of $18,000; $6,750 was paid in cash and the
remainder with 4,030 common shares of the Company's stock. For the fourth
quarter of fiscal 1998, 100% of their compensation was paid in stock. In
addition, all directors are reimbursed for certain expenses in connection
with attendance at Board of Directors and committee meetings. Other than
with respect to reimbursement of expenses, directors who are employees or
officers of the Company or who are associated with the Company do not
receive compensation for service as a director.
Outside Directors are entitled to receive non-qualified options to
purchase 5,000 shares of common stock for each year of service, payable in
advance on July 1 of each year. The initial options are exercisable at the
initial public offering price of $6.00. Thereafter, the option exercise
price will be the closing bid price of the common stock on the first
trading day of each fiscal year, commencing July 1, 1997. Accordingly,
5,000 options were granted at $4.00 on July 1, 1997 and at $2.0625 on July
1, 1998 to each Outside Director.
-22-
<PAGE>
Employment Agreements
On October 1, 1997, the Company entered into an employment agreement (the
"Employment Agreement") with an individual who manages the Company's Los
Angeles commercial music division. The Agreement provides for the
individual to receive as compensation an amount equal to 75% of the first
$350,000 of the division's gross margin and 15% of the division's gross
margin above $350,000. In addition, this individual has been granted
options to purchase 100,000 shares of the Company's common stock at $4.75
per share which vest at various times during the term of the Employment
Agreement.
In October 1996, the Company entered into employment agreements, as
amended (the "Executive Agreements"), with each of Messrs. Loeffler,
Doyle, Flynn and Small (the "Executives"). Each of the Executive
Agreements was for a period of three years, and provided for annual base
salaries of $150,000 plus bonuses.
Effective July 1, 1997, these Executive Agreements were replaced by New
Agreements (the "New Agreements"). Each of the New Agreements is for a
period of two years and provides for annual salaries between $300,000 and
$325,000. If an Executive's subsidiary reports a pretax loss, such related
Executive's salary will be reduced, but not below $150,000 per annum, to
reflect a pretax breakeven and such reduction will be recorded as an
advance with interest payable at prime plus 1% and will be payable over
three years. In addition, such Executive's salary will be reduced for the
subsequent year by the amount of such reduction but not below $150,000.
Based on the performance of one of the Company's subsidiaries
approximately $150,000 of compensation should have been recorded as
advances pursuant to the Executive Agreements but remained as compensation
following approval by the Compensation Committee. Pursuant to these New
Agreements, two bonus plans have been established for the benefit of the
Executives based upon attainment of certain financial results.
For the years ended June 30, 1998 and 1997, approximately $1,480,000 and
$973,000 have been expensed under the bonus plans and Employment,
Executive and New Agreements and are included in marketing, selling,
general and administrative expenses.
On or about September 28, 1998, Messrs. Loeffler, Small, Doyle and Flynn
entered into a letter agreement (the "Employment Modification Agreement")
with the Company which amended certain provisions of the New Employment
Agreements. In the case of Messrs. Doyle and Flynn, the Employment
Modification Agreement is subject to approval by the Compensation
Committee of the Board of Directors of a definitive budget for fiscal year
1999 for Push. The Employment Modification Agreement provides for, among
other things a reduction in the base salaries of each of Messrs, Loeffler,
Flynn and Doyle (starting October 1, 1998) by $100,000 per annum, and
establishes a new bonus program for such executives pursuant to which such
executives receive 50% of the Net Profits (as defined therein) of the
subsidiaries they manage until they have recouped the $100,000 in salary
reductions described above. Thereafter, Net Profits are allocated 85% to
the Company and 15% to the executives. In recognition of his performance
for fiscal year 1998, Mr. Small's base compensation will remain at the
fiscal year 1998 level (i.e., $320,000) for so long as Picture Vision
generates at least $320,000 in Net Profits. In the event that Net Profits
from Picture Vision for any fiscal year fall below $320,000, Mr. Small's
base salary will also be reduced by the amount of such shortfall but not
below $200,000 per annum. Mr. Small's bonus plan provides that Mr. Small
shall be allocated (i) 100% of Picture Vision's Net Profits until he has
received a total of $320,000 in compensation, (ii) then the next $200,000
shall be allocated to the Company, and (iii) then any remaining Net
Profits shall be allocated 75% to the Company and 25% to Mr. Small.
-23-
<PAGE>
The Employment Modification Agreement also imposes stronger restrictions
on executives who leave the employ of the Company either voluntarily or
for cause. In contrast to the New Employment Agreements, the Employment
Modification Agreement provides that an executive who leaves the employ of
the Company voluntarily or for cause, will have to forfeit up to 291,000
shares of the Company's common stock received by such executive pursuant
to the Exchange Agreement (as hereafter defined). Also, in contrast to the
New Employment Agreements, the Employment Modification Agreement requires
the executive to pay the Company an override of 25% of the gross margin
earned by any firm or entity that employs the executive following his
departure from the Company (again, either voluntarily or for cause) on
work performed for any client or artist that the executive first worked
with while employed by the Company.
In consideration of the reduced base salaries, other compensation
concessions and more stringent non-compete terms reflected in the
Employment Modification Agreement (and, in the case of Mr. Doyle,
conditioned upon approval of the Push budget for fiscal year 1999), the
compensation committee of the Board of Directors treated all monies paid
to the executives in fiscal year 1998 as compensation, as opposed to
treating any portion thereof as "advances" subject to recoupment. In
recognition of Picture Vision's profitability for fiscal year 1998 and the
other achievements of Mr. Small, the Compensation Committee also awarded
Mr. Small a bonus of $150,000 for fiscal year 1998, which bonus was paid
in July 1998.
Effective October 1, 1997, the Company entered into a one-year employment
agreement with Mr. Joseph A. Gallo, subject to renewal. The agreement
provides for annual compensation of $125,000 and the executive may be
entitled to bonuses. The agreement further provides for the grant of
options to acquire 25,000 shares of the Company's common stock at $3.125
per share and for the grant of options to acquire an additional 25,000
shares of the Company's common stock at $4.125 per share. These options
vest equally over a three year period and expire in five years.
In May 1998, the Company entered into an agreement with Mr. Philip G.
Nappo to function as interim Chief Operating Officer. The agreement
provides for cash payments of $20,000 per month and equipment rental
charges of $1,000 per month for the term of the agreement which cannot
exceed nine months and the issuance of stock valued at approximately
$45,000 during the term. As of June 30, 1998, the Company charged to
operations cash payments of $52,500 and issued 5,000 shares of its common
stock pursuant to such agreement, which shares were valued at a price of
$2 per share.
-24-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth certain information as of September 10, 1998,
with respect to each beneficial owner of five percent (5%) or more of the
outstanding shares of Common Stock of the Company, each Named Executive Officer,
each director of the Company and all officers and directors as a group. The
table does not include options or SARs that have not yet vested or are not
exercisable within 60 days of the date hereof.
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership (1) Class
- ------------------------------------ ---------------- -----
John Loeffler 322,367 (2)(6) 14.2%
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Paul Thomas Cohen 29,863 (8)(10)(11) 1.3%
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Brian Doyle 145,500 6.5%
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Thomas J. Edelman 76,918 (3)(4)(8)(12) 3.3%
c/o Patina Oil & Gas Corporation
667 Madison Avenue
New York, New York 10021
Richard Flynn 145,500 6.5%
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Jon Small 299,000 (2) 13.2%
c/o Paradise Music & Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
All executive officers and directors
as a group (8 persons) 1,059,103 (5)(6)(7)(9) 44.5%
-25-
<PAGE>
(1) All shares are beneficially owned and sole voting and investment
power is held by the persons named, except as otherwise noted.
(2) Includes options to purchase 5,000 shares of common stock.
(3) Includes options to purchase 30,000 shares of common stock.
(4) Includes 4,500 shares of common stock earned.
(5) Includes options to purchase 71,667 shares of common stock.
(6) Includes 3,600 and 3,800 shares of common stock purchased by Mr.
Loeffler's Pension and his wife's Keogh Plans, respectively.
(7) Includes 23,538 shares of common stock earned by the Outside
Directors and officers.
(8) Includes debentures which are convertible into 8,334 shares of
common stock.
(9) Includes debentures which are convertible into 47,973 shares of
common stock.
(10) Includes 3,750 shares of common stock earned.
(11) Include options to purchase 15,000 shares of common stock.
(12) Includes debentures which are convertible into 31,305 shares of
common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 9, 1996, the Company entered into an Exchange Agreement (the
"Exchange Agreement") with each of John Loeffler, Jon Small, Brian Doyle and
Richard Flynn, each of whom was an executive officer and a director of the
Company. Pursuant to the Exchange Agreement, John Loeffler and Jon Small were
each issued 291,000 shares of common stock and Brian Doyle and Richard Flynn
were each issued 145,500 shares of common stock in exchange for all of the
outstanding stock of each of Rave, Picture Vision and All Access. The Company
believes that this transaction was fair from a financial point of view. This
belief is based on the fact that the Exchange Agreement, and the transactions
consummated thereby, were analyzed and approved by the Company's Board of
Directors and by all of its then existing stockholders.
John Loeffler, the President, Chief Executive Officer and a director of the
Company, is also a consultant to Grey Advertising, which is a major client of
the Company's commercial music production division. For such consulting
services, Mr. Loeffler is paid approximately $45,000 per year by Grey
Advertising. The Company derived approximately $303,000 and $361,000 of
commercial music production revenues (approximately 24% and 40% of commercial
music production revenues) from Grey Advertising for the years ended June 30,
1998 and 1997, respectively.
In January 1997, the Company entered into an eighteen month consulting agreement
with Thomas J. Edelman, an Outside Board member for $90,000. On or about July 1,
1998, the full amount of such consulting fee was unpaid and converted into a one
year convertible promissory note bearing interest at the rate of one percent
(1%) per month. In addition, Outside Board members have also received consulting
fees of $55,500 in cash and 4,750 shares in common stock for the year ended June
30, 1998.
-26-
<PAGE>
In January 1997, the Company entered into a one year consulting agreement with
Mr. Cohen, a director, for $60,000.
The Company has a promissory note receivable with Mr. Loeffler providing for
borrowings up to $150,000, with interest at 8.5% per annum. The promissory note
is collateralized by 200,000 shares of the executive's common stock of the
Company and provides for mandatory prepayments as defined in the agreement. As
of June 30, 1998, $129,000 is outstanding under this promissory note. On or
about August 6, 1998, Mr. Loeffler repaid approximately $58,000 of such loan.
-27-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant (1)
4.1 Specimen of Registrant's Common Stock Certificate (1)
4.2 Specimen of Registrant's Warrant Certificate (1)
4.3 Form of Representative's Warrant Agreement including form of
Warrant (1)
4.4 Form of Warrant Agreement between Registrant and Continental Stock
Transfer and Trust Company (1)
10.1 Exchange Agreement dated as of October 9, 1996 among the
Registrant, Brian Doyle,
Richard Flynn, John Loeffler and Jon Small (1)
10.2 Employment Agreement dated as of October 9, 1996 between the
Registrant and Brian Doyle (1)
10.3 Employment Agreement dated as of October 9, 1996 between the
Registrant and Richard Flynn (1)
10.4 Employment Agreement dated as of October 9, 1996 between the
Registrant and John Loeffler (1)
10.5 Employment Agreement dated as of October 9, 1996 between the
Registrant and Jon Small (1)
10.6 Expense Allocation Agreement dated as of October 9, 1996 among the
Registrant, Rave, Picture Vision, All Access and Robert Klein (1)
10.7 Form of The Registrant's 1996 Stock Option Plan (corrected version)
10.8 Lease Agreement dated June 24, 1992 between Not Just Jingles, Inc.
and Newmark & Company Real Estate, Inc. (1)
10.9 Lease Agreement dated October 28, 1994 between the Registrant and
Silk & Halpern Realty Associates, Inc. (1)
10.10 Lease Agreement dated April 4, 1995 between the Registrant and
Cummins Station L.L.C. (1)
10.11 Sublease Agreement dated September 29, 1996 between the Registrant
and Not Just Jingles, Inc. (1)
10.12 Financial Consulting Agreement (1)
10.13 Form of Consulting Agreement dated as of January 1, 1997 between
the Company and Thomas J. Edelman (1)
10.14 Lease Agreement dated as of October 21, 1996 between the Registrant
and Twenty Third Street joint Venture, together with Escrow Letter
dated December 11, 1996 (1)
10.15 Form of Amended and Restated Employment Agreement dated as of
January 17, 1997 between the Registrant and Brian Doyle (1)
10.16 Form of Amended and Restated Employment Agreement dated as of
January 17, 1997 between the Registrant and Richard Flynn (1)
10.17 Form of Amended and Restated Employment Agreement dated as of
January 17, 1997 between the Registrant and John Loeffler (1)
10.18 Form of Amended and Restated Employment Agreement dated as of
January 17, 1997 between the Registrant and Jon Small (1)
10.19 Distribution Agreement with BMG Music d/b/a BMG Entertainment and
Push Records, Inc. (3)
-28-
<PAGE>
10.20 Lease Agreement dated July 10, 1997 between the Registrant and
Twenty-third Street Joint Venture (3)
10.21 Consulting Agreement dated August 15, 1997 between the Registrant
and Consulting for Strategic Growth, Ltd. (3)
10.22 Personal Services Agreement dated August 13, 1997 between Push
Records and Luxx (3)
10.23 Form of Service Agreement dated September 22, 1997 between Daryl
Hall & John Oates and Push Records (3)
10.24 Employment Agreement dated as of October 1, 1997 between Rave and
Paul Hoffman (4)
10.25 Employment Agreement dated as of July 1, 1997 among the Registrant,
Rave and John Loeffler (4)
10.26 Employment Agreement dated as of July 1, 1997 among the Registrant,
All Access and Richard Flynn (4)
10.27 Employment Agreement dated as of July 1, 1997 among the Registrant,
Push Records and Brian Doyle (4)
10.28 Employment Agreement dated as of July 1, 1997 among the Registrant,
Picture Vision and Jon Small (4)
10.29 Employment Agreement Amended dated as of July 1, 1997 among the
Registrant, Rave and John Loeffler (5)
10.30 Employment Agreement Amended dated as of July 1, 1997 among the
Registrant, All Access and Richard Flynn (5)
10.31 Employment Agreement Amended dated as of July 1, 1997 among the
Registrant, Push Records and Brian Doyle (5)
10.32 Employment Agreement Amended dated as of July 1, 1997 among the
Registrant, Picture Vision and Jon Small (5)
10.33 Employment Agreement dated as of December 1, 1997 between
Registrant and Joseph Gallo (5)
10.34 Consulting Agreement dated as of January 15, 1998 between
Registrant and Thomas J. Edelman (5)
10.35 Consulting Agreement dated as of January 15, 1998 between
Registrant and Thomas Cohen (5)
10.36 Outside Director Compensation Agreement dated January 15, 1998
between Registrant and Thomas J. Edelman (5)
10.37 Outside Director Compensation Agreement dated January 15, 1998
between Registrant and Thomas Cohen (5)
10.38 Personal Services Agreement between Push Records and Bruce M.
Somers and Nancy Free p/k/a/ Kidney Thieves (5)
10.39 Form of Licensing Agreement dated November 4, 1997 between Push
Records and Eagle Rock Entertainment, PLC. (5)
10.40 Promissory Note and Stock Pledge Agreement dated December 31, 1997
between Registrant and John Loeffler (6)
10.41 Interim Chief Operating Officer Consulting Agreement dated May 5,
1998 between the Registrant and Philip G. Nappo III.
10.42 Personal Services Agreement dated June 18, 1998 between Push
Records and Legend Entertainment Corporation.
10.43 Promissory Note in the amount of $23,960 dated as of August 7, 1998
between Registrant and Thomas Edelman.
10.44 Promissory Note in the amount of $90,000 dated as of July 1, 1998
between Registrant and Thomas Edelman.
-29-
<PAGE>
10.45 Promissory Note in the amount of $23,960 dated as of August 7, 1998
between Registrant and Paul Thomas Cohen.
10.46 Employment Modification Letter Agreement dated as of September 24,
1998 among Registrant and Messrs, Doyle, Flynn, Loeffler and Small.
10.47 Financial Advisory Agreement dated as of September 24, 1998 between
Registrant and CCF Capital Group, Inc.
10.48 Investment Agreement dated as of October 6, 1998 between Registrant
and Pines International Resorts, Inc.
21.1 Subsidiaries of Registrant (1)
27.1 Financial Data Schedule.
(1) Incorporated by Reference to the Company's Registration
Statement on Form SB-2 (Reg. No. 333-13941)which was
declared effective by the Securities and Exchange
Commission on January 22, 1997.
(2) Filed with the Securities and Exchange Commission on
March 17, 1997.
(3) Filed with the Securities and Exchange Commission on
September 26, 1997.
(4) Filed with the Securities and Exchange Commission on
November 14, 1997.
(5) Filed with the Securities and Exchange Commission on
February 12, 1998.
(6) Filed with the Securities and Exchange Commission on May
15, 1998.
(b) Reports on Form 8-K
None
-30-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized
Date: October 8, 1998
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
----------------------------------------
John Loeffler, Chairman of the Board,
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
By: /s/ John Loeffler
----------------------------------------------------------------------------
John Loeffler, Chairman of the Board, Chief Executive Officer, President
(Principal Executive Officer)
Date: October 8, 1998
By: /s/ Jon Small
----------------------------------------------------------------------------
Jon Small, Executive Vice President and Director
Date: October 8, 1998
By: /s/ Brian Doyle
----------------------------------------------------------------------------
Brian Doyle, Executive Vice President and Director
Date: October 8, 1998
By: /s/ Richard Flynn
----------------------------------------------------------------------------
Richard Flynn, Executive Vice President, Treasurer, Secretary and Director
Date: October 8, 1998
By: /s/ Paul Thomas Cohen
----------------------------------------------------------------------------
Paul Thomas Cohen, Director
Date: October 8, 1998
By: /s/ Thomas J. Edelman
----------------------------------------------------------------------------
Thomas J. Edelman, Director
Date: October 8, 1998
By: /s/ Joseph A. Gallo
----------------------------------------------------------------------------
Joseph A. Gallo, Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: October 8, 1998
-31-
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONTENTS
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6-F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-F-18
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Paradise Music & Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Paradise Music &
Entertainment, Inc. and Subsidiaries as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paradise Music &
Entertainment, Inc. and Subsidiaries as of June 30, 1998, and the results of
their operations and their cash flows for the years ended June 30, 1998 and
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 3 and
13 to the consolidated financial statements, the Company's significant operating
losses and need for working capital to continue to fund its operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 3 an 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
July 28, 1998, except for Note 6 as
to which the date is August 6, 1998
and Note 13 as to which the date is
October 6, 1998
F-2
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 863,860
Restricted cash 464,603
Accounts receivable, less reserve for returns
of $271,188 806,586
Prepaid production costs 52,882
Prepaid record master costs 93,750
Other current assets 129,985
-----------
Total current assets $ 2,411,666
PROPERTY AND EQUIPMENT, net 1,262,465
OTHER ASSETS:
Note receivable, officer 70,878
Restricted cash 350,000
Other 26,826
-----------
447,704
-----------
$ 4,121,835
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenues $ 266,636
Accrued payroll and related expenses 152,599
Accrued expenses and other current liabilities 1,754,733
-----------
Total current liabilities $ 2,173,968
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares, none issued
Common stock, $.01 par value,
authorized 20,000,000 shares,
issued and outstanding 2,245,143 shares 22,451
Capital in excess of par value 5,861,499
Accumulated deficit (3,936,083)
-----------
Total stockholders' equity 1,947,867
-----------
$ 4,121,835
===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
June 30,
---------------------------
1998 1997
------------ ------------
REVENUES $ 13,593,426 $ 5,568,286
------------ ------------
OPERATING EXPENSES:
Cost of sales 9,761,508 3,447,005
Marketing, selling, general and administrative 6,828,087 3,199,901
------------ ------------
Total operating expenses 16,589,595 6,646,906
------------ ------------
LOSS FROM OPERATIONS (2,996,169) (1,078,620)
INTEREST INCOME 139,040 94,100
------------ ------------
LOSS BEFORE INCOME TAXES (2,857,129) (984,520)
INCOME TAXES 12,000 9,432
------------ ------------
NET LOSS $ (2,869,129) $ (993,952)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.29) $ (.65)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED
LOSS PER COMMON SHARE 2,230,042 1,529,736
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Common
Common Stock Capital in Earnings Stock
---------------------- Excess of (Accumulated Subscription
Shares Amount Par Value Deficit) Receivable
---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1996 998,000 $ 9,980 $ 12,090 $ 119,160 $ (1,250)
RECLASSIFICATION OF PRIOR
"S" CORPORATION RETAINED
EARNINGS 192,162 (192,162)
SALE OF COMMON STOCK, net
of expenses 78,333 783 209,804
COMMON STOCK, issued for
services relating to the initial
public offering 4,000 40 11,960
SALES OF COMMON STOCK,
net of expenses 1,146,000 11,460 5,318,571
COMMON STOCK, issued to
outside directors 2,000 20 7,730
PAYMENT OF COMMON STOCK
SUBSCRIPTION RECEIVABLE 1,250
NET LOSS (993,952)
---------- --------- ---------- ----------- ----------
BALANCES, June 30, 1997 2,228,333 22,283 5,752,317 (1,066,954) --
COMMON STOCK, issued to
outside directors and
executive officer 16,810 168 39,832
WARRANTS GRANTED FOR
SERVICES 71,017
INITIAL PUBLIC OFFERING
EXPENSES (1,667)
NET LOSS (2,869,129)
---------- --------- ---------- ----------- ----------
BALANCES, June 30, 1998 2,245,143 $ 22,451 $5,861,499 $(3,936,083) $ --
========== ========= ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,869,129) $ (993,952)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 753,015 46,544
Expenses recorded in connection with warrants granted 71,017
Provision for returns 588,500
Common stock issued to outside directors and executive
officer 40,000 7,750
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accrued interest receivable (23,162)
Restricted cash (464,603)
Accounts receivable (1,342,846) 77,475
Prepaid production costs 182,763 (218,390)
Prepaid record master costs (215,054) (350,160)
Other current assets (168,569) (46,216)
Deferred revenues (234,437) 451,461
Accrued payroll and related expenses (221,991) 374,590
Accrued expenses and other current liabilities 1,383,675 230,641
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (2,497,659) (443,419)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (1,243,932) (112,144)
Restricted cash (350,000)
Note receivable, officer (129,000)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (1,722,932) (112,144)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable, bank 100,000
Payment on note payable, bank (100,000)
Proceeds from sales of common stock, net of expenses (1,667) 5,557,618
Payment of common stock subscription receivable 1,250
----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,667) 5,558,868
----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,222,258) 5,003,305
CASH and CASH EQUIVALENTS, beginning of year 5,086,118 82,813
----------- ----------
CASH and CASH EQUIVALENTS, end of year $ 863,860 $5,086,118
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30,
-----------------------
1998 1997
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ -- $ 5,322
========== ==========
Cash paid during the year for income taxes $ 7,092 $ 58,660
========== ==========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS:
Paradise Music & Entertainment, Inc. ("Paradise") was formed on July 18,
1996 and in July 1996 issued 125,000 shares of common stock at $.01 par
value (see Note 10). In October 1996, Paradise entered into an exchange
agreement (the "Agreement") (see Note 10). Paradise exchanged 873,000
shares of common stock in exchange for the outstanding stock of its three
original subsidiaries in a transaction accounted for as a pooling of
interests, whereby the financial statements for all periods prior to the
combination were restated to reflect the combined operations of its
original subsidiaries: All Access Entertainment Management Group, Inc.
("All Access"), a musical artist management company incorporated in New
York, Picture Vision, Inc. ("Picture Vision") a video production company
incorporated in Tennessee, and John Leffler Music, Inc. (which operates
under the name of Rave Music and Entertainment) ("Rave") a creator of
music scores and advertising themes for television and radio, which was
incorporated in New York. In February 1997, the Company incorporated its
record label in Delaware, Push Records, Inc. ("Push"). In October 1997,
Rave established its Los Angeles operations (Rave West).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements give
effect to the execution of the Agreement (see Note 10) and include the
accounts of Paradise and its wholly-owned subsidiaries, Rave, Picture
Vision, All Access and Push collectively (the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition - Commercial music production revenues and the related
production costs are recognized upon acceptance of the music production by
the client. Royalty and residual income which relates to musical
compositions used in television series are recognized when earned and the
amount can be reasonably estimated. All other royalty and residual income
is recognized when received as it cannot be reasonably estimated. For
projects which are short in duration, (primarily less than one month)
video production revenues and related production costs are recorded upon
completion of the video. For projects that have a longer term, video
production revenues and related production costs are recorded using the
percentage-of-completion method which recognizes income as work on the
project progresses. In accordance with industry custom, the Company
currently operates its music artist management business based on oral
agreements and purchase orders with certain artists and customers.
Pursuant to these arrangements the Company receives up to 20% of the gross
revenues received in connection with artist entertainment related earnings
less certain standard industry costs. Record label revenues are recognized
when records are shipped and costs which are directly related to
production, manufacture and sale of records are capitalized as recoverable
from future revenues and amortized over the expected life of the records,
to the extent there is reasonable assurance that these costs will be
recoverable from future sales. The Company is accounting for these costs
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 50 "Financial Reporting in the Record and Music Industry."
Cash and Cash Equivalents - Cash and cash equivalents consist of cash on
hand and a highly liquid investment account with maturity of less than
three months from the purchase date, and at times exceeds the Federal
Deposit Insurance Corporation Coverage of $100,000 per institution.
Management regularly monitors the financial condition of the financial
institutions in order to keep the potential risk to a minimum.
F-8
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
is computed as follows:
Estimated
Asset Useful Lives Principal Method
----- ------------- ----------------
Furniture, fixtures and equipment 5-7 Years Straight-line
Leasehold improvements Term of Lease Straight-line
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amount of long-lived assets, including
intangible assets. A loss is recognized when expected future cash flows
(undiscounted and without interest) are less than the carrying amount of
the asset. The impairment loss is determined as the difference by which
the carrying amount of the asset exceeds its fair value.
Income Taxes - Rave and All Access were "S" corporations prior to the
execution of the exchange agreement and, as a result, earnings and losses
have been included in the personal income tax returns of the respective
stockholders. As a result of the Agreement the "S" elections were
terminated. Accordingly, the financial statements reflect a
reclassification of $192,162 from retained earnings to capital in excess
of par value for the year ended June 30, 1997.
The Company complies with SFAS No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial reporting for
income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred income
tax assets to the amount expected to be realized.
Loss Per Common Share - Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Prior period loss
information has been restated as required by SFAS No. 128. The restatement
had no effect on previously reported loss per share.
Fair Value of Financial Instruments - The fair value of the Company's
assets and liabilities which qualify as financial instruments under SFAS
No. 107 approximate the carrying amounts presented in the consolidated
balance sheet.
F-9
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3 - LIQUIDITY:
The Company's consolidated financial statements have been prepared on the
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred net losses of approximately $2,869,000
and $994,000 for the years ended June 30, 1998 and 1997, respectively, and
will require working capital to continue to fund its operations. The
Company is in the process of seeking additional equity or debt financing.
Continuation of the Company as a going concern is dependent on its ability
to resolve its liquidity problem and attain future profitable operations.
The financial statements do not include any adjustments that might result
from this uncertainty (see Note 13).
NOTE 4 - RESTRICTED CASH:
The Company holds approximately $465,000 of cash in foreign banks on
behalf of a third party. The Company has a corresponding liability to the
third party and is not exposed to currency risk.
The Company has a letter of credit for $350,000 collateralized with cash
for security on a lease.
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
Furniture, fixtures and equipment $ 671,944
Leasehold improvements 913,952
----------
1,585,896
Less accumulated depreciation and amortization 323,431
----------
$1,262,465
==========
F-10
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTE RECEIVABLE, OFFICER:
The Company has a promissory note receivable with an executive providing
for borrowings up to $150,000, with interest at 8.5% per annum. The
promissory note is collateralized by 200,000 shares of the executive's
common stock of the Company and provides for mandatory repayments as
defined in the note. On or about August 6, 1998, approximately $58,000 of
such loan was repaid.
NOTE 7 - INCOME TAXES:
The provision for income taxes consists of the following:
Years Ended June 30,
---------------------
1998 1997
--------- ---------
Current:
Federal $ -- $ --
State and city 12,000 9,432
--------- ---------
Total $ 12,000 $ 9,432
========= =========
At June 30, 1998, the Company recorded deferred federal, state and city
income tax assets aggregating approximately $1,745,000, arising from net
operating loss carryforwards. A valuation allowance in the same amount has
been recorded, since management has no assurance that the tax benefit will
be realized.
At June 30, 1998, the Company has federal and New York State and City net
operating loss carryforwards of approximately $3,585,000 and $4,400,000
respectively, which expire beginning in 2012.
The following reconciles income tax expense (benefit) computed at the
federal statutory rate to the actual provision for income taxes.
Years Ended June 30,
---------------------
1998 1997
--------- ---------
Tax benefit computed
at federal statutory rate (34.00)% (34.00)%
State and city provision .42 1.00
Valuation allowance 34.00 34.00
-------- --------
.42% 1.00%
======== ========
F-11
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS
In May 1998, the Company entered into an agreement with an executive to
function as interim Chief Operating Officer. The Agreement provides for
cash payments of $20,000 per month and equipment rental charges of $1,000
per month through the term of the agreement which cannot exceed nine
months, and the issuance of stock valued at approximately $45,000 during
the term. As of June 30, 1998, the Company charged to operations cash
payments of $52,500 and issued 5,000 shares of its common stock valued at
$2 per share.
Effective October 1, 1997, the Company entered into a one-year employment
agreement with an executive subject to renewal. The agreement provides for
annual compensation of $125,000 and the executive may be entitled to
bonuses. The agreement further provides for the grant of options to
acquire 25,000 shares of the Company's common stock at $3.125 per share
and for the grant of options to acquire an additional 25,000 shares of the
Company's common stock at $4.125 per share. These options vest equally
over a three-year period and expire in five years.
On August 15, 1997 Push entered into a three-year distribution and
manufacturing agreement, ("the BMG Agreement"), with BMG Music d/b/a BMG
Entertainment ("BMG"). Such BMG Agreement, which expires on August 15,
2000, contains an option to extend for one additional year, and provides
that BMG will provide distribution and manufacturing services within the
United States, its territories and possessions and Puerto Rico for all
sound recordings derived from record masters owned or controlled by Push,
excluding products geared primarily toward non-audio personal computer
use. As part of the BMG Agreement, BMG will retain a distribution and a
manufacturing fee based on the cumulative net sales before any adjustments
for special terms as defined in the BMG Agreement.
Effective August 1, 1997, the Company entered into a 10-year lease. The
lease requires the Company to pay for certain operating expenses. The
Company's Corporate, Rave, All Access and Push employees utilize this
space. Picture Vision rents office space under a lease which expires in
2001 and Rave's Los Angeles operation rents space under a lease which
expires in 2003. Rent expense for the years ended June 30, 1998 and 1997
was approximately $322,000 and $122,000, respectively.
The aggregate future minimum annual rental payments are approximately as
follows:
Years ending June 30,
1999 $ 233,000
2000 336,000
2001 324,000
2002 324,000
2003 321,000
Thereafter 1,265,000
----------
$2,803,000
==========
F-12
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
In October 1996, the Company entered into employment agreements, as
amended (the "Executive Agreements"), with four of its executives (the
"Executives"). Each of the Executive Agreements was for a period of three
years, and provided for annual base salaries of $150,000 plus bonuses.
(See Note 13)
Effective July 1, 1997, these Executive Agreements were replaced by New
Agreements (the "New Agreements"). Each of the New Agreements is for a
period of two years and provides for annual salaries between $300,000 and
$325,000. If an Executive's subsidiary reports a pretax loss, such
Executive's salary will be reduced, but not below $150,000 per annum, to
reflect a pretax breakeven and such reduction will be recorded as an
advance with interest payable at prime plus 1% and will be payable over
three years. In addition, such Executive's salary will be reduced for the
subsequent year by the amount of such reduction but not below $150,000.
Based on the performance of one of the Company's subsidiaries
approximately $150,000 of compensation should have been recorded as
advances pursuant to the Executive Agreements but remained as compensation
upon approval by the Compensation Committee. Pursuant to these New
Agreements, two bonus plans have been established for the benefit of the
Executives based upon attainment of certain financial results. (See Note
13)
On October 1, 1997, the Company entered into an employment agreement (the
"Employment Agreement") with an individual who manages Rave's Los Angeles
commercial music division. The Employment Agreement provides for the
individual to receive as compensation an amount equal to 75% of the first
$350,000 of the division's gross margin and 15% of the division's gross
margin above $350,000. In addition, this individual has been granted
options (outside the option plan (see Note 11)) to purchase 100,000 shares
of the Company's common stock at $4.75 per share which vest at various
times during the term of the Employment Agreement.
For the years ended June 30, 1998 and 1997, approximately $1,480,000 and
$973,000 has been expensed under the bonus plans and Employment, Executive
and New Agreements and are included in marketing, selling, general and
administrative expenses. (See Note 13)
The Company has agreed to pay its outside directors an aggregate of
$36,000 per fiscal year payable quarterly in cash and the Company's common
stock valued on the last day of the applicable quarter. For the years
ended June 30, 1998 and 1997, the Outside Directors earned in the
aggregate $13,500 and $12,000 in cash respectively, and 8,060 and 2,000
shares of common stock, respectively.
The Company has entered into various consulting agreements with its
outside Board members. These agreements provide for monthly consulting
fees ranging between $1,000 and $5,000 through January 2000. An aggregate
of $55,500 was paid in cash, $90,000 was accrued and 3,750 shares of the
Company's common stock were issued at $2 per share and charged to
operations. As of June 30, 1998, the consulting agreements provide for an
aggregate consulting fee to the Board members of $2,500 per month through
January 2000 payable in the Company's common stock.
F-13
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - ECONOMIC DEPENDENCY:
Approximately $303,000 and $361,000 of commercial production revenues for
the years ended June 30, 1998 and 1997, respectively, were derived from
one advertising agency. Approximately $750,000 and $675,000 of musical
talent management revenues for the years ended June 30, 1998 and 1997,
respectively, were derived from two musical artists, respectively. For the
years ended June 30, 1998 and 1997, approximately $7,402,000 and
$1,867,000, respectively, of video production revenues were derived from
two artists and one artist, respectively. For the year ended June 30,
1998, approximately $2,056,000 of record label revenues were derived from
one customer. At June 30, 1998, approximately $96,000 was owed in the
aggregate by the Company to these artists and customers.
NOTE 10 - STOCKHOLDERS' EQUITY
The Company has reserved for issuance 80,500 shares of its common stock
relating to common stock purchase warrants outstanding as of June 30, 1998
with exercise prices of $4.03 and $5.00. At June 30, 1998, 38,500 common
stock purchase warrants are exercisable.
In September 1997, Push reached a worldwide exclusive recording agreement
("the Agreement"), with an artist. Such Agreement provides for Push to
have the exclusive right to distribute one album and, in addition, the
agreement provides for two consecutive options for two additional albums
only if performance plateaus are met by the preceding album as defined in
the Agreement. Additionally, under the Agreement warrants to purchase
30,000 shares of the Company's common stock were granted and vested
immediately.
In January 1997, the Company completed its initial public offering.
Through the offering the Company sold 1,000,000 units consisting of
1,000,000 shares of common stock and 1,000,000 warrants at $6.00 per unit.
For each two warrants owned, the holder is entitled to purchase one share
of common stock through January 21, 2001 at $7.20. In February 1997, an
additional 146,000 units were sold upon the exercise of the underwriter's
over allotment option. The aggregate net proceeds were approximately
$5,330,000, after underwriters' commissions and offering expenses of
approximately $1,546,000.
On October 9, 1996, the Company issued 4,000 shares of its common stock in
consideration for legal services to the Company relating to the initial
public offering.
On October 9, 1996, the Company completed a private placement to sell
78,333 shares of common stock for approximately $235,000 ($3.00 per share)
prior to deducting fees and expenses of approximately $25,000.
On October 9, 1996, Paradise issued 873,000 shares of its common stock in
exchange for the outstanding stock of Rave, Picture Vision and All Access
in a transaction accounted for as a pooling of interests (see Notes 1 and
2).
F-14
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
On July 18, 1996, a new Delaware corporation was formed, Paradise Music &
Entertainment, Inc. which on July 22, 1996 issued 125,000 shares of common
stock at $.01 par value (see Notes 1 and 2).
NOTE 11 - STOCK OPTIONS:
On October 8, 1996, the Board of Directors adopted and the stockholders
approved the Option Plan. The Option Plan provides for the granting of
incentive stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), non-qualified
stock options ("NQSOs") and/or Stock Appreciation Rights (SARs) to certain
directors, agents and employees of, and consultants to the Company. The
purpose of the Option Plan is to attract and retain exemplary employees,
agents, consultants and directors. Options and SARs granted under the
Option Plan may not be exercisable for terms in excess of 10 years from
the date of grant. In addition, no options or SARs may be granted under
the Option Plan later than 10 years after the Option Plan's effective
date. The total number of shares of Common Stock with respect to which
options and SARs will be granted under the Option Plan is 185,000. The
shares subject to and available under the Option Plan may consist, in
whole or in part, of authorized but unissued stock or treasury stock not
reserved for any other purpose. Any shares subject to an option or SAR
that terminates, expires or lapses for any reason, and any shares
purchased pursuant to an option and subsequently repurchased by the
Company pursuant to the terms of the option, shall again be available for
grant under the Option Plan. At June 30, 1998, options under the Option
Plan to purchase 109,000 shares of common stock are outstanding, none of
which have been exercised.
In addition, the Board of Directors approved the adoption of the Outside
Directors Stock Option Program (the "Program"). The Program provides for
the granting of an aggregate of 100,000 stock options to eligible
directors of the Company (as defined in the Program). Each eligible
director shall receive 5,000 stock options per annum, subject to
adjustment, for their services on the Board on each July 1, that they are
serving as an eligible director. The options are exercisable at the fair
market value of common stock on the last date preceding the date of grant.
The Program further provides that the maximum term of stock options may
not exceed 5 years and the stock options may be exercised at any time for
a period of 5 years after the date of grant. At June 30, 1998, options to
purchase 35,000 shares of common stock were outstanding, none of which
have been exercised.
F-15
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTIONS (CONTINUED):
The activity in the Option Plan and the Program are as follows:
Exercise Price Per Share
-----------------------------------
Number of
Options Range
----------- ------------
Balance outstanding,
July 1, 1997 35,000 $ 6.00
Granted 109,000 3.31 - 6.00
----------- ------------
Balance outstanding,
June 30, 1998 144,000 $3.31 - 6.00
=========== ============
Exercisable,
June 30, 1998 45,000 $4.00 - 6.00
=========== ============
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock- Based Compensation". The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its stock Option Plan and Program. Had compensation for the Company's
stock options been determined based on the fair value at the grant dates,
consistent with the provisions of SFAS No. 123, the Company's consolidated
net loss and loss per common share would have been adjusted to the pro
forma amounts indicated below:
Years Ended June 30,
---------------------------
1998 1997
----------- -----------
Net loss:
As reported $(2,869,129) $ (993,952)
Pro forma (2,975,323) (1,081,102)
Basic and diluted loss per common share:
As reported $ (1.29) $ (.65)
Pro forma (1.33) (.71)
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following assumptions for
grants for the year ended June 30, 1998: risk-free interest rate 6.0%, no
dividend yield, expected life of 5 years and expected volatility of 44
percent.
F-16
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS
Profit Sharing Plan
Effective July 1, 1997, the Company formed a Profit Sharing Plan (the
"Plan") covering substantially all employees who meet certain eligibility
requirements. The Company can contribute, on a discretionary basis, up to
3% of the employees base salary to the Plan. For the year ended June 30,
1998, profit sharing expense was $38,000.
401(k) Plan
Effective July 1, 1997, the Company formed a 401(k) plan covering
substantially all employees. Employees can contribute up to 15% of their
annual base salary, not to exceed $10,000 in 1998 and $9,500 in 1997. The
Plan does not provide for a Company match.
NOTE 13 - SUBSEQUENT EVENTS:
In September 1998, Messrs. Loeffler, Small, Doyle and Flynn
entered into a letter agreement (the "Employment Modification Agreement")
with the Company which amended certain provisions of the New Employment
Agreements. In the case of Messrs. Doyle and Flynn, the Employment
Modification Agreement is subject to approval by the Compensation
Committee of the Board of Directors of a definitive budget for fiscal year
1999 for Push. In consideration of the reduced base salaries, other
compensation concessions and more stringent non-compete terms reflected in
the Employment Modification Agreement (and, in the case of Mr. Doyle,
conditioned upon approval of the Push budget for year 1999), the
Compensation Committee of the Board of Directors treated all monies paid
to the executives in fiscal year 1998 as compensation, as opposed to
treating any portion thereof as "advances" subject to recoupment. In
recognition of Picture Vision's profitability for fiscal year 1998 and the
other achievements of Mr. Small, the Compensation Committee also awarded
Mr. Small a bonus of $150,000 for fiscal year 1998, which bonus was paid
in July of 1998.
On October 6, 1998, the Company entered into an investment agreement (the
"Pines Investment Agreement") with Pines International Resorts, Inc.
("Pines") pursuant to which, among other things, Pines agreed to purchase
500,000 shares of the Company's common stock in consideration for payment
to the Company of $775,000 in tranches of $345,000 and $430,000,
respectively. Under the terms of this agreement the Company will receive
the first payment of $345,000 no later than October 14, 1998. In addition,
the Company has agreed to grant warrants to Pines for the purchase of
350,000 shares of the Company's common stock at prices ranging from $1.55
to $2.50 per share. The warrants became exercisable on October 6,1998 and
expire at various dates through December 31, 1999. In accordance with the
Pines Investment Agreement, Pines is required to pay to the Company
$430,000 within one week of filing a Registration Statement on Form S-3.
If the Company fails to have an effective Registration Statement covering
the shares issued to Pines within 90 days following the payment by Pines
of $345,000, a monthly penalty, at the option of Pines, of $50,000 or the
issuance of 100,000 shares of the Company's common stock shall be imposed
until the Registration Statement becomes effective.
In September 1998, the Company entered into a non-exclusive financial
advisory relationship with CCF Capital Group, Inc. ("CCF Capital")
pursuant to which, among other things, CCF Capital would receive a monthly
retainer of $6,500 per month and certain success fees and bonuses for
assisting the Company in raising monies through the sale of debt, equity
or a combination of the two. Upon closing of the Pines Investment
Agreement, CCF Capital will receive 100,000 shares of the Company's common
stock in connection with the rendering of its financial advisory services
and will earn a success fee of $75,000.
On a proforma basis, assuming the aforementioned equity financing occurred
on June 30, 1998, stockholders' equity at June 30, 1998 would have been
approximately $2,648,000. If the aforementioned equity financing occurred
on July 1, 1997, proforma loss per common share would have been $1.01.
The Company is pursuing debt and/or equity financing to provide for its
immediate, short-term and long-term cash requirements. In the event that
the Company cannot procure adequate financing, the Company may be required
to, among other things, reduce its operating costs, reduce its payroll,
curtail its on-going investment activities, especially in Push Records,
and curtail, restrict or even eliminate certain of the Company's
businesses or operating subsidiaries. Even if the Company is successful in
obtaining financing for its immediate cash needs, there can be no
assurance that the actions outlined above will ensure the Company's
survival as a going concern and if the Company does continue,
implementation of the cash containment measures outlined above could
materially adversely affect the long-term profitability or potential
future value of the Company's business and operating subsidiaries.
The Company's tangible net asset value as of June 30, 1998 was below the
threshold required by NASDAQ for continued listing of the Company's
securities. The Company believes that the financing activities described
above especially the financing provided pursuant to the Pines Investment
Agreement will result in an increase of the Company's tangible net asset
value above the threshold established for continued NASDAQ listing.
However, there can be no assurance that failure to consummate the Pines
Investment Agreement or continuing losses will not result in a net
tangible asset value in the future which again falls below the requirement
for continued NASDAQ listing. If the Company's securities are delisted,
the value of the Company's
F-17
<PAGE>
PARADISE MUSIC & ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED):
securities would be materially adversely affected and the Company would,
in all likelihood, find it more difficult to consummate any financing
transactions.
In late July of 1998, all six members of the Company's Board of Directors
sold in the aggregate approximately 105,000 shares of the Company's Common
Stock in one or more open market transactions at a price per share of
$2.875. The Company's two outside directors lent the proceeds of such open
market sales (an aggregate of approximately $48,000) to the Company
pursuant to convertible promissory notes that would allow the holders of
such notes to convert the outstanding principal and interest accrued
thereunder into shares of the Company's Common Stock at a price per share
equal to $2.875. Three of the Company's Board members took the proceeds of
their open market sales (approximately $190,000) and reinvested them into
the Company in exchange for restricted shares of Common Stock at a
purchase price per share of $2.875. One of the Company's Board members,
Mr. Loeffler, used the proceeds of his open market sales to repay
approximately $58,000 of a loan that had been advanced to him by the
Company. In all, the Company received approximately $302,000 in gross
proceeds from such transactions.
F-18
Philip G. Nappo III
25 Broad Street - Suite 7T
New York, NY 10004
212-943-1921x41
May 5, 1998
Board of Directors
Paradise Music & Entertainment, Inc.
53 West 23rd Street - 11th Floor
New York, NY 10010
Gentlemen:
This letter will memorialize our agreement with respect to my joining Paradise
Music & Entertainment, Inc. (the "Company") as its interim Chief Operating
Officer ("COO").
1. The appointment will be effective upon the execution of a counterpart
of this letter (the "Effective Date") by all of the members of the Board of
Directors (the "Board") of the Company.
2. The term of this interim appointment (the "Term") will be from the
Effective Date through the sooner of (i) the closing of a secondary public
offering (the "Secondary Closing") of the Company's stock in an amount that
yields net proceeds to the Company of at least $5 million, or (ii) the ninth
month anniversary of the Effective Date. The appointment can be terminated by me
at any time during the Term upon 60 days written notice, or immediately and
without prior notice if for any reason the Weekly Draw as set forth below is not
paid in a timely manner or the Company has breached this agreement. The
appointment can be terminated at any time during the Term by the Board on 60
days written notice, or immediately and without prior notice in the event that
the Board terminates the appointment because it has determined that I have acted
with gross negligence or willful misconduct in fulfilling my duties as COO. Any
compensation payable in accordance with Section 4 below shall be paid through
the effective date of termination or expiration, as the case may be.
3. My duties and the scope of my authority as COO will be as set forth in
that certain memorandum dated as of even date hereof and heretofore presented to
the Board (the terms of which are incorporated herein by reference), together
with such substantive changes as the Board and I mutually agree upon hereafter
in good faith.
4. My compensation for rendering services to the Company as its COO shall
be as follows:
(a) $10,000 payable on each of the first and fifteenth of each month, in
arrears. In addition, you have agreed to assume up to $1,000 per month of the
costs related to the furniture, Dell 4200 power server, Ricoh 64 page per minute
scanner, fax server, scanner PC, laptops, 10base 100x hubs, desktop, and other
computer equipment that the Company will be using throughout the Term, and
thereafter if the position becomes permanent. The Company also agrees to award
me 45,000 shares of the Company's common stock, either in the form of options at
a nominal per share strike price or in the form of restricted stock awards (the
"Shares"), which Shares will vest on a pro rata basis bi-monthly throughout the
Term.
(c) The Company also agrees to pay all of my ordinary and reasonable
out-of-pocket expenses in furtherance of my performance of services hereunder,
as and when the same are presented with reasonably sufficient detail and
supporting documentation as may be required by the Board from time to timer.
(d) The Company also agrees to pay for the services of any secretarial,
paralegal, or financial analyst support staff provided by me at such hourly,
weekly, per diem or other rates as are approved in advance by the Executive
Committee of the Board. A separate statement detailing the support services so
provided shall be rendered bi-monthly and promptly paid upon submission.
5. In rendering services as COO, the Company agrees to indemnify and hold me
harmless in the performance of such duties to the same extent as it has
indemnified each of the Company's Executive Vice Presidents or other
<PAGE>
Board of Directors
Paradise Music & Entertainment, Inc.
May 5, 1998
Page 2 of 3
corporate officers. The Company shall also take all steps reasonably necessary
and appropriate, if any, to cover such services under the Company's existing
insurance policies, and to keep the same in effect throughout the Term.
6. Other than as set forth above, I shall be entitled to no other benefits
or perquisites, and I shall provide my own office furniture and computer or
other equipment required for me to render the services required; provided,
however, that the Company agrees to pay for (a) the reimbursement set forth in
4(a) above, and (b) the cost of moving such furniture and equipment to and from
the Company's premises and to insure the same while they are located at the
Company's premises.
7. The Company and each Board member executing this agreement acknowledges
that I am entering into this agreement in the expectation that if the
performance of my duties is satisfactory hereunder, that upon the Secondary
Closing I shall be offered an employment agreement as COO (to perform
substantially similar duties with a substantially similar scope of
responsibility) at a base rate of compensation at least equal to $225,000 per
annum. Such employment agreement shall provide for incentive compensation in the
form of cash bonuses or stock awards (or the combination of the two) upon
achieving certain performance objectives as we shall mutually agree upon and
memorialize in such employment agreement. Other than as specifically set forth
herein, the employment agreement shall be on the same terms and conditions, and
subject to the same benefits, entitlements and perquisites as are enjoyed by the
Company's Executive Vice Presidents under the terms of their present employment
agreements.
8. The Company and each Board member executing this agreement acknowledges
that I am leaving the full time practice of law to accept the position of
interim COO, but will need to devote some time, from time to time, during the
Term to the servicing of my law clients and to insure a smooth transition from
private practice. The Company agrees to permit me to perform such services for
the benefit of my clients so long as such legal services do not materially and
adversely effect the performance of my obligations as COO.
If the above accurately reflects our understanding, please execute a counterpart
of this letter in the space provided below.
Very truly yours,
/s/ Philip G. Nappo III
- ----------------------------
Philip G. Nappo III
AGREED TO AND ACCEPTED BY:
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
-----------------------------
John Loeffler, Chairman
/s/ John Loeffler
----------------------------- -----------------------------
John Loeffler, Director Paul Thomas Cohen, Director
<PAGE>
Board of Directors
Paradise Music & Entertainment, Inc.
May 5, 1998
Page 3 of 3
/s/ Brian Doyle
----------------------------- -----------------------------
Brian Doyle, Director Thomas Edelman, Director
/s/ Richard Flynn /s/ Jon Small
----------------------------- -----------------------------
Richard Flynn, Director Jon Small, Director
AGREEMENT made and entered into as of this day of this 18th day of June, 1998
and between PUSH RECORDS, INC. ("Company"), located at 53 West 23rd Street,
Suite 1100, New York, New York 10010, and LEGEND ENTERTAINMENT CORPORATION
("you" or "your"), located at 9423 Old Forest Lane, Loveland, Ohio 45140, f/s/o
Jeff Pence and Eliot Sloan p/k/a BLESSID UNION OF SOULS ("Artist"), whose
address is: c/o David Werchen, Esq. 845 Third Avenue, Suite 1400, New York, New
York 10022.
1. EXCLUSIVE SERVICES
Company hereby engages you to furnish the exclusive personal services of
Artist (the "Artist") as a recording artist in connection with the production of
Records and you hereby accept such engagement and agree to exclusively furnish
such services for Company in the Territory during the initial period of this
agreement and all extensions and renewals (the "Term").
2. TERM
The Term shall commence on the date hereof and shall continue for an
initial period (the "Initial-Period") ending on the date ten (10) months
following Delivery of all Recordings constituting the Recording Commitment for
such Initial Period. Provided that worldwide sales for Album 1 for the first
eighteen (18) months following the initial commercial release thereof equal or
exceed three hundred thousand (300,000) units, Company shall have two (2)
consecutive separate options to extend the Term for further periods (the "Option
Periods"), each upon the same terms and conditions applicable to the Initial
Period, except as otherwise set forth herein. Each Option Period for which
Company has exercised its option shall commence upon the expiration of the
immediately preceding Contract Period and shall continue until the date ten (10)
months following Delivery of all Recordings constituting the Recording
Commitment for the applicable Option Period. You shall be required to serve
notice of expiration of the term upon Company no more than forty five (45) days
and no less than thirty (30) days prior to the end of each respective period,
including the initial period and each option period, if any, and Company shall
thereafter have thirty (30) days within which to exercise, if at all, the
option(s), if any, provided for herein. Company may, at its sole discretion,
exercise each respective option, if at all, by notice to you at any time prior
to the date the Term would otherwise expire. As used herein, the term "Contract
Period" shall mean the Initial Period or any Option Period of the Term, as such
may be suspended or extended as provided herein.
3. RECORDING COMMITMENT: DELIVERY
(a)(i) During each Contract Period you will cause Artist to perform and
record for Company a sufficient number of Masters to constitute the required
number of Albums specified in the following schedule (the "Recording
Commitment"):
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- --------------------------------------------------------------------------------
Contract Period Recording Commitment
- --------------------------------------------------------------------------------
Initial Period One (1) Album (the "First Album")
- --------------------------------------------------------------------------------
First Option Period One (1) Album (the "Second Album")
- --------------------------------------------------------------------------------
Second Option Period Two (2) Albums (the "Third and Fourth Albums")
- --------------------------------------------------------------------------------
(b)(i) You shall Deliver the First Album of the Recording Commitment to
Company within five (5) months following commencement of the Initial Contract
Period.
(ii) You shall Deliver the Second through Fourth Albums of the
Recording Commitment, if any, no earlier than ten (10) months and no later than
eighteen (18) months after Delivery of the immediately preceding Album of the
Recording Commitment, unless you and Company mutually agree in writing to an
earlier or later Delivery date.
(c) You shall not commence recording any Album earlier than seven (7)
months following the date of Delivery of the immediately preceding Album.
(d)(i) Upon your written request and as a courtesy, Company will notify
you of the date of Delivery with respect to any Album of the Recording
Commitment, provided, however, that Company's inadvertent failure to provide
such information shall not constitute a breach of this agreement and Company's
providing you with such information shall not constitute a waiver by Company of
your obligations with respect to Delivery of Masters hereunder. If you dispute
the date of Delivery with respect to any Album of the Recording Commitment as
provided in the notice from Company, you shall give notice of such objection in
writing to Company within thirty (30) days of Company's notice to you. Your
failure to so notify Company shall be deemed your acceptance of the date
contained in Company's notice to you.
(ii) If you have not received any notice from Company pursuant to
paragraph 3(d)(i) above within thirty (30) days after the date you deem to be
such applicable delivery date, then you shall notify Company within ten (10)
days after such thirty (30) day period of the date you deem the applicable
delivery date. Company shall have the right to object to such date within thirty
(30) days after receipt of your notice.
(iii) If either party objects to the date contained in the notice
given by the other party, Company and you shall mutually and in good faith agree
in writing on the date to be deemed the delivery date. If the parties do not
reach such agreement or if neither party gives notice of the delivery date of
any Album of the Recording commitment earlier than thirty (30) days prior to the
date of initial release in the United States of such Album, then the delivery
date of such Album shall be deemed to be sixty (60) days prior to such date of
initial release.
4. RECORDING PROCEDURE
(a)(i) Prior to the commencement of recording each Album, you and Company
shall mutually agree on each of the following before you proceed further: (A)
selection of producer and the financial terms of the agreement between you and
such producer; (B) selection of material, it being
2
<PAGE>
understood that some songs are written while recording, which songs shall be
subject to acceptance by Company, including the number of Compositions to be
recorded; and (C) the dates of recording and mixing and the studios where
recording and mixing are to take place. Subject to Company's approval of budget
and financial terms, EMOSIA is deemed approved and accepted as the Producer of
Album 1. With regard to Albums 1 through 4, Company shall be deemed to have
approved any first-class recording studio including as to the First Album,
Ligosa Sound Studio (Cincinnati, OH) for both recording and mixing, subject to
and consistent with an approved budget. In addition, at least fourteen (14) days
prior to the date of the first recording session for the Album concerned, you
shall submit to Company in writing a proposed recording budget setting forth, in
itemized detail, all anticipated Recording Costs for the album concerned. Upon
receipt of Company's written approval of such recording budget, which shall not
be unreasonably withheld, you shall commence such sessions. A proposed Recording
Budget will be deemed approved which is not more than ninety percent (90%) of
the applicable Recording Advance.
(ii) Nothing in this agreement shall obligate Company to continue or
permit the continuation of any recording sessions, even if previously approved
hereunder, if Company reasonably anticipates that the Recording Costs for the
applicable Masters will exceed the applicable Recording Advance or that Masters
constituting the applicable Recording Commitment will not be Commercially
Satisfactory.
(iii) It is of the essence of this agreement that you obtain prior
to each applicable recording session and deliver to Company within seventy-two
(72) hours following each such recording session, a duly completed and executed
Form 1-9 or such similar or other forms as may be prescribed by the United
States Immigration and Naturalization Service or other government agency
regarding citizenship, permanent residency or so-called "documented worker"
status which Company notifies you of in respect of each individual employed to
render recording services hereunder. You shall simultaneously obtain and deliver
to Company true and complete copies of all evidentiary documents relating to the
contents or subject matter of said forms. In the event you fail to comply with
any of the foregoing requirements, Company may deduct any resulting penalty
payments from all monies payable to you under this agreement.
(b) No Recordings shall be made by or include unauthorized Sampling.
("Sampling," as used herein, refers to the use and reproduction of pre-existing
musical material, hereinafter "Sampled Material," which is owned or controlled
by any Person other than you, in a Recording hereunder, but is not intended to
refer to Artist's newly recorded performance hereunder of a musical composition
previously recorded by other recording artist(s) and heretofore released.)
Concurrently with your delivery to Company of a Recording, you shall notify
Company in writing of the names and addresses of all recording artists, record
companies, songwriters and publishers and/or any other Persons who have any
right, title or interest of any kind in any Sampled Material embodied in that
Recording. You shall be solely responsible for obtaining all consents and
licenses necessary or desirable in connection with the use, reproduction and
licensing by Company, of any Sampled Material in any Recording hereunder for
Records and Audiovisual Records and reproductions thereof, so that Company shall
enjoy the full and perpetual rights granted to Company pursuant to paragraph 5
with respect to Recordings hereunder; at Company's request, you shall supply
Company with fully executed copies of any such consents, licenses and other
related documentation. You shall be solely responsible for and shall account for
and pay to any and all Persons who own or control Sampled Material any monies or
other compensation to which such Persons are entitled as a result of any use
hereunder by Company of any Recording embodying such Sampled Material.
Notwithstanding anything to the contrary expressed or implied
3
<PAGE>
herein, no royalties, Advances or other monies shall be earned by or payable to
you hereunder or under any other agreement in connection with any Record
embodying any Sampled Material, and no Recording embodying Sampled Material
shall be deemed Delivered hereunder unless and until you have obtained, on
Company's behalf, all rights required hereunder with respect to such Sampled
Material, and, if Company requests, until Company receives documentation
satisfactory to Company with respect thereto.
(c) Each Album Delivered by you as part of the Recording Commitment shall
only contain newly-recorded studio Masters of previously unrecorded Compositions
(other than demonstration recordings) made specifically for the applicable
Album, unless an authorized signatory on behalf of Company consents otherwise in
writing, which consent Company may withhold in its unrestricted discretion.
5. GRANT OF RIGHTS
(a) All Recordings made or furnished to Company by you or Artist embodying
Artist's performances under this agreement or during the Term from the inception
of the recording thereof, and all reproductions derived therefrom, together with
the performances embodied thereon, shall be the property of Company in
perpetuity for the Territory free from any claims whatsoever by you or Artist or
any other Person. Company shall have the exclusive right throughout the
Territory to copyright those Recordings in Company's name as the author and
owner of them and to secure any and all renewals and extensions of copyright
throughout the Territory. Each such Recording shall be considered a "work made
for hire" for Company; if any such Recording is determined not to be a "work
made for hire," it will be deemed transferred to Company by this agreement,
together with all rights in it. You and Artist hereby irrevocably and
unconditionally waive any and all moral and like rights, that Artist has in the
Recordings and in the performances embodied therein and hereby agree not to make
any claim against Company or any Person authorized by Company to exploit the
Recordings based on such moral or like rights, but Company shall not have the
right to modify the masters in any way once same are accepted by Company,
without limiting the generality of the foregoing, Company and any Person
authorized by Company shall have the exclusive and unlimited right to all the
results and proceeds of Artist's recording services rendered during the Term,
including, but not limited to, the exclusive, unlimited and perpetual rights
throughout the Territory:
(i) to manufacture, advertise, sell, lease, license, distribute or
otherwise use, exploit or dispose of, in any or all fields of use by any method
now or hereafter known, Records embodying Masters;
(ii) to release Records derived from Masters under any name,
trademark or label which Company or its subsidiaries, affiliates or licensees
may from time to time elect, provided that such label is company's top label
imprint, currently Push Records.
(iii) to perform such Masters publicly and to permit public
performances thereof by means of radio broadcast, television or any other method
now or hereafter known, provided that fifty percent (50%) of public performance
income paid directly to and received by Company therefrom will promptly be paid,
(without regard to recoupment), to you without regard to the recouped status of
your account.
4
<PAGE>
(iv) to reproduce, adapt, transmit, communicate or otherwise use
Masters, all upon such terms and conditions as Company may elect, or at its
discretion, to refrain therefrom.
(b) In accordance with subparagraph 6(a) of this agreement, Company and
any Person authorized by Company, including Company's licensees and
institutional advertisers, shall have the exclusive right during the term and
the non exclusive and perpetual right after the term hereof, without any
liability to any Person, to use and to authorize other Persons to use the names
(including any professional names heretofore or hereafter adopted), and any
likenesses, whether or not current (including photographs, portraits,
caricatures and stills from any Videos made hereunder), autographs (including
facsimile signatures) and biographical material of or relating to Artist, to any
producer and to any other Person performing services in connection with Masters
hereunder, on and in the packaging of Records hereunder, and for purposes of
advertising, promotion and trade and in connection with the marketing and
exploitation of Records hereunder and general goodwill advertising (i.e.,
advertising designed to create goodwill and prestige and not for the purpose of
selling any specific product or service), without payment of additional
compensation to you or Artist or any other Person. Notwithstanding the
foregoing, Company shall comply with any contractual limitations on the use of
the name and likeness of any such producer or other Person that exist prior to
the execution of your or Artist's agreement with such producer or other Person,
provided you have given Company prior written notice of any such limitation: you
agree to use your reasonable efforts to obtain the fullest rights to use the
name and likeness of any such producer or other Person consistent with the
custom and practice in the United States record industry. No such names,
likenesses, or biographical material shall be used in connection with product
(other than Records hereunder) or service endorsements or merchandising
provided, however, that Company may use such names, likenesses, and biographical
material in connection with the promotion of Records hereunder, with your prior
written consent which may be reasonably withheld, including, without limitation,
the distribution of promotional merchandise solely on a gratis basis. You
represent and warrant that you own the exclusive right to so use such names,
likenesses, autographs (including facsimile signatures) and biographical
materials and that the use of same will not infringe upon the rights of any
third party. If any Person challenges Artist's right to use a professional name,
Company may, at its election and without limiting Company's rights, require
Artist to adopt another professional name approved by Company. Company shall
have the right to do, but shall not be required to do, a Trademark and or
Service Mark search of each and every professional name and or mark which Artist
uses or by which Artist is known. During the Term, Artist will not change the
name by which Artist is professionally known without Company's prior written
approval which shall not be unreasonably withheld.
(c) In addition to our other rights hereunder, we shall have the right, at
our election and for any reason, with or without cause, to terminate the Term at
any time by written notice to you. Additionally, we shall have the right, at our
election, with or without cause, to refuse to permit you to fulfill your
then-current Recording Commitment for any Contract Period including, without
limitation, by discontinuing recording sessions for any Masters and ceasing the
payment of Recording Costs for any Masters. If we refuse to permit you to
fulfill your minimum Recording Commitment for any Contract Period, other than as
a result of an event or contingency referred to in subparagraph 13(b), we shall
have no obligations or liabilities to you in connection therewith unless within
forty five (45) days after our refusal you shall notify us of your desire to
fulfill your minimum Recording Commitment for that Contract Period and within
thirty (30) days after our receipt of that notice we shall fail to advise you in
writing that we shall permit you to fulfill your minimum Recording Commitment
for that Contract Period. If we shall fail to so advise you in writing that we
shall permit you to fulfill your minimum Recording Commitment for that Contract
Period, the Term shall expire as of the end of that thirty (30)
5
<PAGE>
day period and we shall have no obligations or liabilities to you whatsoever in
connection with our failure to permit you to fulfill your Recording Commitment
for that Contract Period. We shall, however, pay to you promptly after the
expiration of that thirty (30) day period, as an advance recoupable from
royalties hereunder, an amount equal to:
(A) If the term expires pursuant to subparagraph 5(c) during the Initial
Period (the "First Album"): one-third (1/3) of the applicable
Recording Advance; one half (1/2) if recording has actually
commenced, or
(B) If the term expires pursuant to subparagraph, 5(c) during the First
Option Period (the "Second Album"): one-third (1/3) of the
applicable Recording Advance; one half (1/2) if recording has
actually commenced, or
(C) If the term expires pursuant to subparagraph 5(c) during the Second
Option Period (the "Third Album" and "Fourth Album"):
(i) prior to commencement of recording the Third Album, one-third
(1/3) of the Recording Advance for the Third Album or;
(ii) if recording of the Third Album has actually commenced, one
half (1/2) of the Recording Advance for the Third Album or;
(iii) if the Third Album has been recorded and delivered but prior
to commencement of recording of the Fourth Album, one third
(1/3) of the Recording Advance for the Fourth Album or;
(iv) if recording of the Fourth Album has actually commenced, one
half (1/2) of the Recording Advance for the Fourth Album.
Any such payment shall be less any advances including amounts previously paid or
incurred by Company which may or were intended to reduce, be applied against or
be charged against the applicable Recording Advance and shall be inclusive of
the minimum union scale payments which would have been required to have been
paid to Artist for each Required Album for that Contract Period that we did not
permit you to record, which such payment shall be deemed to be in full
satisfaction of any and all of Company's obligations hereunder in connection
with such Master Recordings (other than those which survive the expiration of
the Term, such as warranties, recording re-restrictions, and royalty
accountings), and the Term shall automatically terminate as of the date of any
such notice and payment pursuant to this subparagraph 5(e). Company shall have
the right to charge any payment to you or Artist pursuant to this subparagraph
5(e) against and/or deduct same from any and all monies (excluding mechanical
royalties) accruing or becoming payable hereunder.
6. CREATIVE AND MARKETING MATTERS
(a)(i) During the Term, all photographs, likenesses and biographical
material concerning you or Artist which Company uses for the purposes herein
stated shall be subject to your approval, which shall not be unreasonably
withheld and which approval (or disapproval) shall be given to Company within
five (5) days after such photographs or biographical material are submitted to
you by Company. Your failure to give such notice to Company shall be deemed to
be approval as to the material for which said approval is sought. Promptly
following the execution of this agreement, you shall furnish Company with a
reasonable number of photographs of Artist and biographical material concerning
Artist. All photographs and biographical material concerning Artist furnished by
you to Company, or approved by you, shall be deemed approved by you for the
purposes hereof unless you notify Company in writing to the contrary thereafter.
Anything to the contrary notwithstanding, approved photographs of Artist which
Company uses, for purposes other than for record packaging,
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shall be subject to your re-approval, which shall not be unreasonably withheld
and which approval (or disapproval) shall be given to Company within five (5)
days after such photographs or biographical material are submitted to you by
Company if such use first occurs or is to occur more than two (2) years after
initially approved. Your failure to give such notice to Company shall be deemed
to be approved as to the material for which said approval is sought. An
inadvertent failure by Company to obtain your approval pursuant to this
subparagraph 6 (a) shall not constitute a breach of this agreement by Company.
Company will use reasonable efforts to cure such failure in any future
production runs following notice from you or Artist.
(ii) You shall cause Artist, subject to Artist's prior professional
commitments, and at Company's sole non-recoupable expense, to cooperate with
Company's efforts to promote any Albums released hereunder, including, but not
limited to, Artists appearing for interviews with trade press, in-store
promotional events, and other promotional appearances, which appearances shall
be mutually selected by you and Company.
(iii) With respect to the initial release in the United States of
each Album of the Recording Commitment, Company shall consult with you in good
faith in a meaningful manner regarding marketing plans Company intends to
implement for the Album concerned, however, the inadvertent failure by Company
to consult with you shall not constitute a breach hereof.
(iv) Company may remix Albums delivered hereunder however, remixing
costs incurred by Company in excess of $30,000 per Album shall not be
recoupable. Additionally, Company may remix masters to be released as Singles,
however, remixing costs in excess of $20,000 per Single shall not be recoupable.
All such remixing costs shall not be deductible from or otherwise reduce the
applicable Recording Fund.
(b) During the Term, you shall not record or Deliver a Multiple Record Set
without Company's prior approval, which approval may be withheld in Company's
sole discretion nor shall Company require Artist to record and you to Deliver a
Multiple Record Set without your consent.
(c)(i) Company shall not, without your approval, which approval may be
withheld in your sole discretion:
(A) sell Records hereunder as Premium Records.
(B) license any Master hereunder in connection with any
political or commercial advertisements.
(C) license any Master hereunder for synchronization in any
theatrical motion picture, television motion picture, television soundtrack or
any home video devices which have received a rating of "X" or "NC-17" or its
equivalent from the Motion Picture Association of America (or it's counterpart
for television), where Company has a reasonable belief that such rating would be
given at the time of Company's licensing of the applicable Master.
(D) release any demonstration recordings or "outtakes".
(ii) During the Term in respect of Records manufactured for sale in
the Territory, Company shall not, without your approval, not to be unreasonably
withheld:
7
<PAGE>
(A) license any Master for synchronization with theatrical
motion pictures, or television motion pictures, television programs, or any
other audiovisual productions;
(B) license any Master for use in radio programs or radio
commercials (other than radio commercials advertising Records made hereunder).
(C) license any Master for synchronization with television
commercials (other than television commercials advertising Records made
hereunder).
(iii) During the Term in respect of Records manufactured for sale in
the United States, Company shall not, without your approval:
(A) couple, or, license to a third party for coupling, more
than two (2) Masters on any particular Record offered for sale to the public,
which Record embodies Recordings that do not embody the performances of Artist,
except with respect to samplers, uses on transportation carriers, and Consumer
Compilations. The term "Consumer Compilation" means a Record embodying
Recordings (including one (1) or more Masters) that are sequenced and/or
selected by the consumer (e.g., the Personics system);
(B) release any Mid-Price Record comprised solely of Masters
Delivered hereunder prior to eighteen (18) months following Company's initial
United States release of a full-priced Record embodying such Masters. If Company
releases any such Mid-Price Record prior to the expiration of said eighteen (18)
month period without your approval, your sole remedy shall be that the royalty
to which you are otherwise entitled for any royalty-bearing units of such
Mid-Price Record sold prior to the expiration of said eighteen (18) month period
shall not be reduced pursuant to subparagraph 9(c)(i);
(C) release any Budget Record comprised solely of Masters
Delivered hereunder prior to twenty four (24) months following Company's initial
United States release of a full-priced Record embodying such Masters. If Company
releases any such Budget Record prior to the expiration of said twenty four (24)
month period without your approval, your sole remedy shall be that the royalty
to which you are otherwise entitled for any royalty-bearing units of such Budget
Record sold prior to the expiration of said twenty four (24) month period shall
not be reduced pursuant to subparagraph 9(c)(i);
(D) commercially release any Single derived from Masters
delivered hereunder without engaging in a meaningful, good-faith consultation
with you regarding the selections to be embodied on the "A" side of any such
Single. With respect to the "B" side of any such Single, Company shall obtain
your prior consent as to the selection to be embodied thereon;
(E) release more than one (1) Album in the form of a "Greatest
Hits" compilation consisting entirely of Masters recorded hereunder until you
have Delivered the first three (3) Albums of the Recording Commitment. During
the Term in respect of Records manufactured for sale in the United States,
Company shall not, without your approval, release a Greatest Hits Album without
your prior approval of the Masters to be included thereon; provided, however,
that such approval right shall not delay the scheduled release date of any such
Greatest Hits Album. All Masters embodied on any Singles listed at any time
among the top fifty (50) Singles in the weekly chart of best-selling popular
Singles published in Billboard magazine, i.e., the chart titled "Hot 100
Singles", or the
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<PAGE>
chart corresponding most closely to that chart if it is retitled or
discontinued, shall be deemed approved by you and Company for inclusion on
Greatest Hits Albums. In the event of a dispute, with respect to Masters not
subject to the preceding sentence, fifty percent (50%) of such Masters shall be
selected by you, and fifty percent (50%) of such Masters shall be selected by
Company; and
(iv) The failure of Company's licensees to obtain your approval for
such use(s) shall not constitute a breach by Company. You shall provide Company
specific notice and Company shall request or direct the licensee to seek your
approval for said use.
(d)(i) Notwithstanding anything to the contrary herein, provided you have
fulfilled all of your material obligations under this agreement, Company agrees
to commercially release each Album constituting the Recording Commitment in the
United States within one hundred twenty (120) days following Delivery of the
Album concerned (the "U.S. Release Deadline Period"). If Company shall have
failed to so release any such Album in the United States, you shall have the
right, within sixty (60) days following the expiration of the U.S. Release
Deadline Period to notify Company in writing of Company's failure and of your
desire that the Term be terminated if Company does not, within forty-five (45)
days after Company receives such notice from you ("U.S. Release Cure Period"),
to commercially release the Album concerned in the United States. If Company
then fails to release the Album concerned in the United States during the U.S.
Release Cure Period, Company shall have no liability other than payment of
royalties and any other monies due or becoming due to you whatsoever and your
only remedy shall be to terminate the Term by written notice to Company within
thirty (30) days following the expiration of the U.S. Release Cure Period. If
you terminate the Term of this Agreement pursuant to, and in accordance with,
the immediately preceding sentence of this subparagraph 6(d)(i), you shall have
the option to purchase all of the Masters ,but no less than all constituting
such recorded and unreleased Album from Company (the "Unreleased Masters")
provided you notify Company of your election in the written notice specified in
the immediately preceding sentence.
(ii) If you exercise your right to purchase the Unreleased Masters,
Company will transfer to you the Unreleased Masters no later than fifteen (15)
days after the date of your notice of exercise of your option to acquire
Company's rights in the Unreleased Masters and Company will deliver them to you
at Company's offices. You shall reimburse Company for the Recording Costs and
all Advances paid to you in connection with the Unreleased Masters
simultaneously with your acquisition of the unreleased Masters, by certified or
bank check. The unreleased Masters will be delivered to you and accepted "as is"
at the time of delivery and no warranty or representation, express or implied,
is or will be made by Company in connection therewith; provided, however, that
Company shall not further impair or encumber the rights in or to the Unreleased
Masters prior to your purchase of them. Any use by you or any other Person of
the Unreleased Masters will be in accordance with subparagraph 13(d)(ii) of this
agreement.
(e)(i) Provided you have fulfilled all of your material obligations under
this agreement and not withstanding subparagraph 5 (a)(iv), Company agrees to
commercially release each Album constituting the Recording Commitment in the
following periods after Company commercially releases such Album in the United
States: in Canada within sixty (60) days; the United Kingdom within ninety (90)
days, Germany, France, Italy, Belgium, the Netherlands and Luxembourg within one
hundred twenty (120) days; Japan, Australia, and New Zealand within one hundred
fifty (150) days.
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<PAGE>
(ii) If Company fails to comply with paragraph 6(e)(i) in any
Foreign Release Territory, you may notify Company, within forty-five (45) days
following the end of the respective release deadline concerned, that you intend
to invoke this section 6(e)(ii) if Company does not release that Album in that
Foreign Release Territory within seventy-five (75) days following Company's
receipt of your notice (the "Foreign Release Cure Period"). If Company then
fails to release the Album concerned in the Foreign Release Territory concerned
during the Foreign Release Cure Period, you shall have the right ("Outside
License Option") to require Company to enter into an agreement with a licensee
designated by you, who is actually engaged in the business of manufacturing and
distributing Records in the Foreign Release Territory, authorizing the licensee
to manufacture and distribute Records derived from that Album in that Foreign
Release Territory. You may exercise your Outside License Option by giving
Company notice within ninety (90) days after the end of the Foreign Release Cure
Period. Your only remedy for any failure by company to release a particular
Album in a particular Foreign Release Territory shall be to exercise your
Outside License Option in accordance with this subparagraph (6)(e)(ii). If you
fail to give Company any of the notices described in the foregoing provisions of
this subparagraph (6)(e)(ii) within the appropriate time period specified
herein, your rights under this subparagraph (6)(e)(ii) shall lapse. Fifty (50%)
of Company's Net Receipts from licenses entered into pursuant to this
subparagraph (6)(e)(ii) shall be credited to your royalty account under this
agreement and paid to you (if such account is fully recouped) for Records sold
under those licenses, in lieu of any other royalties set forth in paragraph 9.
Each license agreement shall provide for such compensation for Company as you
negotiate with the licensee, and shall contain other provisions as Company shall
reasonably require, including, but not limited to, the following:
(A) the licensee shall be required to obtain and deliver to
Company, in advance: (1) all consents by Artist or third parties which Company
may reasonably require (including but not limited to consents by recording
artists); and (2) all agreements arising in connection with the manufacture or
distribution of Records under the license (including such agreements, if any, by
unions and funds established under union agreements). The licensee shall if
applicable to sales in the respective territory(ies), also become a first party
to the Record Manufacturers' Special Payments Fund Agreement dated October 1993
(or any successor agreement then in effect) with the American Federation of
Musicians of the United States and Canada. The license shall not become
effective until the licensee has complied with all the provisions of this
subparagraph 6(e)(ii)(A);
(B) the licensee shall make all payments (other than to you,
Artist producers and other royalty participants), required in connection with
the manufacture, sale and distribution in that Foreign Release Territory of
Records made from Masters after the effective date of the license, including,
without limitation, any royalties and other payments to other performing
artists, producers, owners of copyrights in Compositions, the Music Performance
Trust Fund and Special Payments Fund, if applicable and any other unions and
union funds. The licensee, if necessary, shall comply with the applicable rules
and regulations of the American Federation of Musicians and any other union
having jurisdiction and any other applicable laws, rules and regulations
covering any rights from the licensee, in the manufacture and sale of Records or
otherwise;
(C) Company shall make no warranty of merchantability or
fitness for a particular purpose or any other warranty or representation,
express or implied, in connection with the Masters, the license, or otherwise.
Company will deliver to the licensee a so-called "1630" (or other format in
Company's sole but reasonable discretion) embodying the Masters of a quality
sufficient for the manufacture of Records. You and licensee shall indemnify and
hold harmless Company and Company's licensees against all claims, damages,
liabilities, costs, and expenses, including, without
10
<PAGE>
limitation, reasonable counsel fees and legal expenses, arising out of any use
of the Masters in the Foreign Release Territory or exercise of such rights by
the licensee or any third party deriving rights from the licensee in the Foreign
Release Territory;
(D) Company shall instruct its licensees in the Foreign
Release Territory concerned in writing not to manufacture Records derived from
those Recordings for sale in that Release Territory, except as permitted under
subparagraph 6(e)(ii)(H) below. If you or the licensee notifies Company of any
such manufacture, Company shall instruct the Company's licensee concerned in
writing to discontinue it and Company shall use other reasonable efforts to
discontinue such manufacture, but neither Company nor the Company licensee shall
have any liability by reason of any manufacture occurring before Company's
receipt of such notice, and Company shall have no liability by reason of any
such manufacture at any time;
(E) each record released under the license shall bear a sound
recording copyright notice identical to the notice used by Company for Company's
initial United States release of the Master concerned and such other notice as
Company shall reasonably require, and any other notice as may be required by the
law of such country. Otherwise, those Records shall not be identified directly
or indirectly with Company;
(F) Upon reasonable notice, Company shall have the right to
examine the books and records of the licensee and all others authorized by the
licensee to manufacture or distribute Records under the license, for the purpose
of verifying the accuracy of the accountings rendered to Company by the
licensee:
(G) the licensee shall not have the right to authorize any
other person or entity to exercise any rights pursuant to the license without
Company's prior written consent, not to be unreasonably withheld; and
(H) Company and Company's licensees shall, as provided herein,
have the continuing right at all times to manufacture and sell Greatest Hits
Albums and Compilation Albums, which may embody those Masters subject to the
license, in that Foreign Release Territory. (A "Compilation Album" means an
Album containing Recordings hereunder coupled with other Recordings (e.g., "Best
of the 90's").
(f) The U.S. Release Deadline Period and the U.S. Release Cure Period
shall be suspended and the expiration date postponed for the period of any
suspension of the running of the Term under subparagraph 13 (b).
7. ADVANCES AND RECORDING COSTS
Company shall pay to you the following sums which shall be Advances:
(a)(i) For any Album of the Recording Commitment which Company is paying,
at your written request, Recording Costs, Company shall, upon receipt of
invoices therefor, pay directly all such Recording Costs actually incurred in
the production of Masters comprising each such Album constituting the Recording
Commitment, provided such costs have been approved by Company in writing
pursuant to subparagraph 4(a)(i). Such Recording Costs shall be deducted from,
and shall not exceed, the applicable Advances for Recording Costs (the
"Recording Advances") set forth below.
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<PAGE>
(ii) With respect to the First Album, a Recording Advance shall be
payable to you in the amount of Three Hundred Seventy Five Thousand Dollars
($375,000), which amount shall be administered by you and payable as follows:
(A) Twenty five percent (25%) of the recording advance for Album
One upon complete execution of this agreement and the Artist
Inducement letter attached hereto as Exhibit A, from which you
irrevocably authorize and direct that Fifteen Thousand Dollars
($15,000) be paid to "David Werchen, As Attorney" and be sent
to him at 845 Third Avenue, Suite 1400, New York, New York
10022.
(B) Twenty five percent (25%) of the applicable Recording Advance
for Album One shall be payable promptly following receipt by
company of your written notice to Company that recording of
Masters to comprise Album One has commenced.
(C) Twenty five percent (25%) of the applicable Recording Advance
for Album One (1) Shall be payable promptly, following receipt
by company of your written notice to company that basic
tracking of all Masters to comprise Album One has been
completed.
(D) The balance, if any, of the applicable Recording Advance shall
be paid promptly to you after deducting all Recording Costs
and other Advances from the First Album Recording Advance,
paid or incurred by Company in connection with the First
Album, following Delivery to Company and acceptance thereby of
the First Album and Receipt by Company of all invoices for all
Recording Costs incurred in connection therewith.
(iii) The Recording Advances for the Second and each subsequent
Album of the Recording Commitment, if any, for which Company administers the
funds, shall be payable by Company following your written notice to Company that
recording of Masters to comprise the applicable Album constituting the Recording
Commitment has commenced, and is scheduled to proceed, without interruption, to
completion. The balance, if any, of the applicable Recording Advance shall be
paid to you after deducting all Recording Costs excluding mastering and other
Advances paid or incurred by Company in connection with the applicable Album,
following Delivery to Company of the applicable Album and receipt by Company of
all invoices for all Recording Costs incurred in connection therewith. Company
shall have the right to withhold a reasonable portion of such payment to provide
for anticipated Recording Costs (e.g., union payments in respect of recording
sessions and sampling costs) in an amount not to exceed Ten Thousand Dollars
($10,000), which Recording Costs have not yet been paid by Company or billed to
Company and which are otherwise deductible from payments to be made to you.
Provided that Company shall have received all invoices relating to all such
costs, Company shall not withhold such sums for a period of more than thirty
(30) days following Delivery.
(b)(i) You shall have the right to administer the Fund for any Album.
With respect to any Album subsequent to the first album of the Recording
Commitment, if any, for which you pay Recording Costs, Company shall pay you a
Recording Advance as set forth below, from which you shall promptly pay, when
due and owing, all Recording Costs and all other costs of meeting your
obligation to Deliver Masters hereunder. Without limiting the generality of the
foregoing, you shall be solely responsible for the payment of (A) any union
scale payments (including, without limitation, fees or royalties) or any other
payments, (other than per record royalties) required to be made to "Artist",
producer and all Persons (excluding Company personnel) whose services are
rendered in connection
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<PAGE>
with the Masters Delivered hereunder; (B) all expenses relating to cartage
instrument rental, concert hall rental, technical equipment, and except as
otherwise provided herein personnel, including engineers for the purpose of
recording, editing, remixing, mastering, remastering and re-recording the
Masters hereunder prior to Company's acceptance of such Masters as Technically
Satisfactory; and (C) all amounts payable pursuant to the requirements of any
collective bargaining agreements based upon or calculated by reference to union
scale payments. If however, Company pays any such costs for which you are
responsible, any such payment shall be deducted from your Recording Advance
pursuant to subparagraphs 7(a)(ii)(D) 7(d)(ii)(D) and 7(d)(iii).
(ii) With respect to the Second and each subsequent Album
constituting the Recording Commitment, if any, a Recording Advance shall be
payable to you in an amount equal to sixty-six and two-thirds percent (66-2/3%)
of the amount of royalties credited to your royalty account hereunder in respect
of USNRC Net Sales of the immediately preceding Album constituting the
Recording Commitment, subject to subparagraphs 7(c) and 7(d) of this agreement.
(c) For the purposes of making the computations pursuant to subparagraph 7
(b), Company shall refer to accounting statements rendered to you and Company's
good faith estimate of royalties that have accrued, but have not yet been
credited to your record royalty account through the end of the accounting period
following the date twelve (12) months following Company's initial release in the
United States of the immediately preceding Album constituting the Recording
Commitment (the "Computation Date") and, solely for the purposes of making such
computation, reserves shall be limited to fifteen percent (15%) of shipments,
prior to the Computation Date, of the prior Album whose Net Sales form the basis
for such computation.
(d)(i) Notwithstanding the foregoing, the Recording Advance for each
Album, other than the First Album, constituting the Recording Commitment shall
be no less than the applicable minimum amount and no more than the applicable
maximum amount set forth below:
- --------------------------------------------------------------------------------
Album Minimum Maximum
- --------------------------------------------------------------------------------
Second Album $425,000 $ 850,000
- --------------------------------------------------------------------------------
Third Album $500,000 $1,000,000
- --------------------------------------------------------------------------------
Fourth Album $600,000 $1,200,000
- --------------------------------------------------------------------------------
(ii) The Recording advances for each subsequent Album of the Recording
Commitment, if any, for which you administer the funds, shall be payable as
follows:
(A) Twenty five percent (25%) of the Recording Advance for the
applicable album of the Recording Commitment shall be payable, if at all, upon
exercise of the applicable option. For the purpose of clarity, twenty five
percent (25%) of the Recording Advance for album three shall be payable upon
exercise of the second option and no payment shall be required at that time with
regard to the Recording Fund for album four.
(B) Twenty five percent (25%) of the applicable Recording
Advance for the applicable album shall be payable promptly following receipt by
company of your written notice to Company that recording of Masters to comprise
the applicable Album has commenced, except that as to
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album number four, fifty percent (50%) of the applicable Recording Advance shall
be payable upon receipt of such written notice.
(C) Twenty five percent (25%) of the applicable Recording
Advance for each Album Shall be payable promptly, following receipt by company
of your written notice to company that basic tracking of all Masters to comprise
the applicable Album constituting the Recording commitment has been completed.
(D) The balance, if any, of the applicable Recording Advance
shall be promptly paid to you after deducting all Recording Costs and other
Advances from the applicable Album Recording Advance paid or incurred by Company
in connection with the applicable Album, following Delivery to Company and
acceptance thereby of the applicable Album and Receipt by Company of all
invoices for all Recording Costs incurred in connection therewith.
(iii) With respect to payments to be made pursuant to subparagraph
7(a)(ii)(D) or 7(d)(ii)(D), Company shall have the right to withhold a
reasonable portion of such payments to provide for anticipated Recording Costs,
(e.g., union payments in respect of recording sessions and sampling costs) of
Fifteen Thousand Dollars ($15,000), which Recording Costs have not yet been paid
by Company or billed to Company and which are otherwise deductible from payments
to be made to you. Provided that you have provided Company with such
documentation, Company shall not withhold such sums for a period of more than
thirty (30) days following Delivery.
(e) All monies paid to you or Artist or on behalf of you or Artist with
your or Artists approval or consent or if required by law or to or on behalf of
any Person representing you or Artist, other than royalties payable pursuant to
paragraphs 9, 12 and 18, shall constitute Advances, unless otherwise provided
herein or unless Company shall otherwise consent in writing.
(f) All Recording Advances paid by Company pursuant to the terms of
paragraph 7, and Advances paid by Company pursuant to subparagraph 18 (a)(iv),
as applicable, shall specifically include the prepayment of session union scale,
as provided in the applicable union codes, and you agree to complete any
documentation required by the applicable union to effectuate the terms of this
sentence. All Recording Costs excluding the actual cost of mastering, incurred
in excess of the applicable approved Recording Advance, shall be your sole
responsibility. All mastering costs shall be paid by Company and although
recoupable, shall not reduce the Recording Advances. You hereby agree to
forthwith pay and discharge all such excess Recording Costs. In the event that
Company elects to pay, on your behalf, any such Excess Recording Costs which
exceed the applicable Recording Advance, Company shall have the right to deduct
such excess Recording Costs from any monies otherwise due you other than
mechanical royalties under this agreement; if such monies are insufficient, you
shall reimburse Company, upon notice, to the extent of such insufficiency.
(g) Fifty percent (50%) of all expenses paid or incurred by Company in
connection with the independent promotion of Masters (i.e., promotion by Persons
other than regular employees of Company) which expenses shall not exceed One
Hundred Thousand Dollars ($100,000) per single unless approved in writing by
you, shall constitute Advances. You and Company agree that Video Production
shall not constitute independent promotion under this subparagraph 7(g).
(h) Any cost, not to exceed Six Hundred Dollars ($600.00) incurred by
Company in connection with a trademark and/or service mark search to confirm
Artist's right to use any professional name shall constitute an Advance.
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(i) Promptly following the initial release in the United States of
each Greatest Hits Album as provided in paragraph 6(c)(iii)(F) above, if
any, during the term, Company will pay to Artist an advance in an amount
equal to the difference between One Hundred and Fifty Thousand Dollars
($150,000.00) and the unearned balance in Artist's royalty account
hereunder, if any, determined as of the last day of the month preceding
the month of the initial United States release of such Greatest Hits
Album. Each such Advance shall be inclusive of all Recording Costs for the
applicable Greatest Hits Masters, but in no event shall the Advance paid
pursuant to this subparagraph 7(i) be less than Seventy Five Thousand
Dollars ($75,000.00) with respect to any Greatest Hits Album released on
or before the scheduled release date established by Company or after the
scheduled release date established by Company if the delay in the release
of the Greatest Hits Album is not caused by Artist.
8. PRODUCER SERVICES
(a) Each Recording recorded hereunder shall be produced, subject to
paragraph 4, by a producer mutually approved by you and Company. You shall be
solely responsible for the engagement of such producer and for the payment of
all monies becoming payable to such producer, unless such producer is a Staff
Producer as defined in subparagraph 8 (b). In the event Company elects to pay
any such producer directly, Company may deduct or recoup such payment from all
record royalties payable to you under this agreement. Company agrees to comply
with your reasonable request to pay any producer directly, however, failure of
Company to comply with your request shall not be deemed to be a breach hereof.
Provided that you provide Company with a copy of the payment provisions of your
agreement with such mutually approved producer, Company shall not refuse to
comply with your request to pay such producer solely on the basis that such
request is for the Producer royalty to be paid to such producer retroactive to
record one after recoupment of Recording Costs, other than the Producers
advance, at the royalty rate payable to you hereunder net of any such royalty
requested to be paid to such producer, (i.e. Artist Royalty less the Producer
Royalty).
(b) With respect to Recordings produced by a mutually approved producer
rendering services pursuant to an agreement with Company (other than an
agreement relating solely and specifically to those particular Recordings)
("Staff Producer"), Company shall deduct from the applicable Recording Advance
for such Recordings a sum equal to Four Thousand Dollars ($4,000.00) times the
number of such Recordings, which sum shall constitute Recording Costs.
Additionally, you hereby direct Company to deduct from all monies payable to you
under this agreement or any other agreement a royalty computed at a Basic U.S.
Rate of four percent (4%) for Net Sales of Singles, Maxi-Singles, EPs and Albums
with royalties for all other uses (e.g., foreign sales, clubs, licensing, etc.)
calculated, reduced and paid in the same manner as your royalties are
calculated, reduced and paid for similar Net Sales under this agreement.
9. ROYALTIES
Company shall credit to your royalty account royalties as described below.
Royalties shall be computed by applying the applicable royalty rate specified
below to the applicable Royalty Base Price in respect of Net Sales of the Record
concerned:
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(a)(i) The royalty rate (the "Basic U.S. Rate") on USNRC Net Sales of
Records consisting entirely of Masters recorded hereunder during the applicable
Contract Periods specified below shall be as follows:
- --------------------------------------------------------------------------------
TYPE OF RECORD CONTRACT PERIOD BASIC U.S. RATES
- --------------------------------------------------------------------------------
Singles, Maxi-Singles All 13%
- --------------------------------------------------------------------------------
EPs All 14%
- --------------------------------------------------------------------------------
First Album Initial 15%
- --------------------------------------------------------------------------------
Second Album First Option 15.5%
- --------------------------------------------------------------------------------
Third and Fourth First and Second Albums of 16% (3rd)
Albums Second Option 16.5% (4th)
- --------------------------------------------------------------------------------
(ii) The royalty rate (the "Escalated U.S. Album Rate") solely on
USNRC Net Sales of each Album constituting the Recording Commitment in excess of
the following number of units shall be the applicable rate set forth below
rather than the otherwise applicable Basic U.S. Rate or any prior and otherwise
applicable Escalated U.S. Album Rate: The royalty rates for each album
subsequent to the First Album shall be no lower than highest royalty rate of the
immediately previous album.
- --------------------------------------------------------------------------------
RECORDING COMMITMENT USNRC NET SALES ESCALATED U.S.
ALBUM RATES
- --------------------------------------------------------------------------------
First Album 250,000 units 15.5%
- --------------------------------------------------------------------------------
500,000 units 16%
- --------------------------------------------------------------------------------
Second Album 250,000 units 16%
- --------------------------------------------------------------------------------
500,000 units 16.5%
- --------------------------------------------------------------------------------
Third Album 250,000 units 16.5%
- --------------------------------------------------------------------------------
500,000 units 17%
- --------------------------------------------------------------------------------
Fourth Album 250,000 units 17%
- --------------------------------------------------------------------------------
500,000 17.5%
- --------------------------------------------------------------------------------
(b) The royalty rate (the "Foreign Rate") on Net Sales of Top-Line
Records (other than Audiovisual Records) sold for distribution through normal
retail channels in the following territories outside the United States by
Company or its Principal Licensee shall be computed at the applicable percentage
of the Basic U.S. Rate (without regard to any applicable Escalated U.S. Album
Rate) that would otherwise apply to USNRC Net Sales of the Record concerned, as
follows:
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- --------------------------------------------------------------------------------
TERRITORIES PERCENTAGE OF APPLICABLE BASIC
U.S. RATE
- --------------------------------------------------------------------------------
Canada 85%
- --------------------------------------------------------------------------------
United Kingdom 85%
- --------------------------------------------------------------------------------
Japan, Australia, New Zealand and the 75%
European Union (as constituted on the
date hereof) other than the United Kingdom.
- --------------------------------------------------------------------------------
Rest of the World 66 2/3%
- --------------------------------------------------------------------------------
(c)(i) The royalty rate on Net Sales of the following categories of sales
of Records by Company or its Principal Licensee shall be computed at the
applicable percentage of the Basic U.S. Rate (without regard to any applicable
Escalated U.S. Album Rate) or Foreign Rate that would otherwise apply to such
Net Sales:
- --------------------------------------------------------------------------------
CATEGORY OF SALES PERCENTAGE OF APPLICABLE BASIC U.S.
RATE OR FOREIGN RATE
- --------------------------------------------------------------------------------
Government and Educational Institutions 50%
- --------------------------------------------------------------------------------
Premium Records 50%
- --------------------------------------------------------------------------------
Mid-Price Record 75%
- --------------------------------------------------------------------------------
Budget Record 66 2/3%
- --------------------------------------------------------------------------------
PX 90%
- --------------------------------------------------------------------------------
(ii) The royalty rate on Net Sales of: (A) any Record sold by
Company or a Principal Licensee through any direct mail or mail order
distribution method other than a Club Operation; and (B) any Record sold outside
the United States in conjunction with a major television advertising campaign,
during the calendar quarter-annual period in which that campaign begins and the
next two (2) calendar quarter-annual such periods, shall be fifty percent (50%)
of the otherwise applicable Basic U.S. Rate or Foreign Rate. Notwithstanding
anything to the contrary contained herein, the aggregate amount not accrued to
your account as a result of the royalty reduction permitted in this paragraph
9(c)(ii)(B) shall not exceed one-half (1/2) of the cost of any such major
television advertising campaign.
(iii) The royalty rate on Net Sales of any Multiple Record Set shall
be fifty percent (50%) of the otherwise applicable Basic U.S. Rate or Foreign
Rate set forth above if the Royalty Base Price of that particular Multiple
Record Set is the same as the Royalty Base Price applicable to Company's or a
Principal Licensees's single Top-Line Record in the same configuration in the
applicable country of the Territory where the particular Multiple Record Set is
sold. If a different Royalty Base Price applies to such Multiple Record Set, the
royalty rate shall be calculated by multiplying the
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applicable Basic U.S. Rate or applicable Foreign Rate by a fraction, the
numerator of which shall be the Royalty Base Price for such Multiple Record Set
and the denominator of which shall be the Royalty Base Price applicable to
Company's or its Principal Licensee's single Top-Line Record in the same
configuration multiplied by the number of Records in the Multiple Record Set.
(d) (i) The royalty rate on Net Sales of Records derived from Masters,
which Records are licensed by Company or a Principal Licensee for sale through
any Club Operation shall be fifty percent (50%) of Net Receipts solely
attributable to such Masters. No royalties shall be payable with respect to
Records received by members of any Club Operation in an introductory offer in
connection with joining it or purchasing a required number of Records including,
without limitation, Records distributed as "bonus" or "free" Records, or Records
for which the Club Operation is not paid.
(ii) (A) The royalty rate for Masters licensed by Company or a
Principal Licensee to a Person for use in the distribution of Records shall be
fifty percent (50%) of Net Receipts solely attributable to such Masters;
provided that such credit to your royalty account shall be the same royalty
amount that would otherwise be credited to your account hereunder for such use
if Company distributed the Records concerned.
(B) The royalty rate for Masters licensed by Company or a
Principal Licensee to a Person for use in synchronization with theatrical motion
pictures, television programs, or radio or television commercials, or on any
other "flat fee" basis, shall be fifty percent (50%) of Net Receipts solely
attributable to such Masters.
(e) Notwithstanding anything to the contrary contained herein and for
sales by Company or a Principal Licensee of Records in the following
configurations:
(i) With respect to audio-only Records in compact disc form, the
royalty rate ("the CD Rate") shall be ninety percent (90%) of the otherwise
applicable Basic U.S. Rate, Escalated U.S. Album Rate or Foreign Rate, however,
if during the term hereof, any Album released hereunder is certified Gold (sales
of 500,000 units) by the RIAA then the CD Rate shall be increased prospectively
to one hundred percent (100%) for such Album and all subsequent Albums in the
compact disc form.
(ii) With respect to Records in any form, configuration, format or
technology not herein described, which is now known but not widely distributed
or which hereafter becomes known, including Enhanced CD, CD Extra, CD-ROM and
DVD ("New Technology Configurations"), the royalty rate shall be ninety percent
(90%) of the otherwise applicable Basic U.S. Rate, Escalated U.S. Album Rate or
Foreign Rate. At any time but no sooner than the later of (A) two (2) years
following the date of this agreement or (B) one (1) year following the first
release of a Record hereunder in the New Technology Configuration concerned,
upon your request, Company shall negotiate with you in good faith with respect
to the computation of royalties payable in respect of the New Technology
Configuration(s) concerned, which negotiations shall take into consideration
then current industry practices and Company's then current policies with respect
to recording artists of comparable sales stature for that particular form of
configuration or exploitation, however, the failure of the parties hereto to
agree to, or of Company to set, a different rate as to New Technology
Configurations, shall not be a breach and shall not prevent Company from
exploiting or continuing to exploit Records in New Technology Configurations.
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(f) With respect to Records and other exploitations sold directly to
consumers (i) by Company in the United States, (ii) or by a Principal Licensee
outside the United States, or by their respective licensees throughout the
Territory (e.g., licensed web sites), other than by distribution of physical
Records to consumers, (e.g., without limitation, the downloading or other
conveyance of Artist's performances in Master(s) or Video(s) concerned via
telephone, satellite, cable, direct transmission over wire or through the air,
and on-line computer sales) (collectively, "Cybersales"), the royalty rate shall
be eighty percent (80%) of the otherwise applicable Basic U.S. Rate or Foreign
Rate. Such royalties shall be computed on the basis of ninety percent (90%) of
Net Sales of such Records in the United States, and one hundred percent (100%)
of Net Sales of such Records outside the United States. At any time during the
Term but no sooner than two (2) years after the date of this agreement, you may
request in writing that Company negotiate with you in good faith with respect to
the computation of royalties payable in respect of Cybersales, and, provided
such request is made, Company agrees to engage with you in such negotiations.
Those negotiations shall take into consideration then current industry practices
and Company's then current policies with respect to artists of comparable sales
stature to Artist for that particular form of configuration or exploitation,
however, the failure of the parties hereto to agree to, or of Company to set, a
different rate as to Cybersales, shall not be a breach and shall not prevent
Company from exploiting or continuing to exploit Records in Cybersales.
(g) The royalty rate on any Record embodying Masters hereunder coupled
with other Recordings shall be computed by multiplying the otherwise applicable
royalty rate by a fraction, the numerator of which is the number of Masters
hereunder embodied on such Record and the denominator of which is the total
number of Recordings embodied on such Record.
(h) As to any Master embodying the performances of Artist together with
the performances of any other artist(s), the royalty rate otherwise payable
hereunder with respect to sales of any Record derived from such Master shall be
computed by multiplying such royalty rate by a fraction, the numerator of which
shall be one (1) and the denominator of which shall be the total number of
artists whose performances are embodied on such Master, including Artist;
provided, however, that members of the same group shall constitute one royalty
earning artist for purposes of such apportionment. The Recording Costs for any
such Master shall be pro-rated in accordance with the formula specified in the
preceding sentence. Company shall not require Artist to record with any other
artist(s), without Artist's consent.
(i) No royalties shall be payable to you in respect of: (A) Records given
away or furnished on a "no-charge" basis to "one-stops", rack jobbers,
distributors or dealers, whether or not affiliated with Company, which Records
do not exceed Three Hundred (300) "no-charge" Singles out of every One Thousand
(1,000) Singles distributed and Two Hundred (200) "no-charge" Albums out of
every One Thousand (1,000) Albums distributed provided that such "no charge"
Records shall, where distributed by a third party distributor/licensee, not
exceed the number of "no charge" Records shipped thereby; (B) such additional
"no-charge" Records distributed during short term special promotions or
marketing campaigns, which such Records do not exceed the limits set forth in
subparagraph 9(i)(A) plus an additional ten percent (10%) of the total number of
Records distributed; (C) Records given away or sold at below fifty percent (50%)
of the stated wholesale prices for promotional purposes to disc jockeys, Record
reviewers, radio and television stations and networks, motion picture companies,
music publishers, Company's employees, Artist, or other customary recipients of
promotional Records or for use on transportation facilities; (D) Records sold as
scrap, salvage, overstock or "cut-outs"; (E) Records sold below cost; and (F)
"sampler" Records intended for free distribution to automobile purchasers and
containing not more than two (2) Masters hereunder. Company shall have the right
to include or to
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license others to include any one or more Masters hereunder in promotional
Records on which such Masters and other Recordings are included, which
promotional Records are sold at a more than fifty percent (50%) below the
regular price of Company's Albums. No royalties shall be payable on sales of
such promotional Records.
(j) As to Records sold at a discount to "one-stop", rack jobbers,
distributors or dealers, whether or not affiliated with Company, in lieu of the
Records given away or furnished on a "no-charge" basis as provided in sections
9(i)(A) and (E), the applicable royalty rate otherwise payable hereunder with
respect to such Records shall be reduced in the proportion that said discount
Wholesale Price bears to the usual stated Wholesale Price, provided that said
reduction in the applicable royalty rate does not exceed the percentage
limitations set forth in subparagraphs 9(i)(A) and (B).
(k) Notwithstanding anything to the contrary expressed or implied in this
paragraph 9, this paragraph 9 shall not be deemed to apply to (i) any payments
received by Company pursuant to any statute or other legislation (including,
without limitation, payments for the public performance of Recordings, or
royalties payable for the sale of blank cassettes or for the sale of recording
equipment) or (ii) any so-called "blanket licenses" (including, without
limitation, performance licenses) between Company and a licensee under which the
licensee is granted access to all or a significant portion of Company's
catalogue of master recordings unless it is possible to accurately calculate a
portion of such payment which is specifically and directly attributable to
royalty bearing master recordings of Artist.
10. ACCOUNTING.
(a) Statements as to royalties payable hereunder shall be sent by Company
to you within ninety (90) days after the expiration of each semi annual period
for the preceding semi annual period ending the last fiscal day of June or
December. Notwithstanding the foregoing, Company may, if Company elects, change
the aforesaid time and dates, provided, however, in the event of such change,
statements shall be rendered to you no less frequently than semi-annually.
Concurrently with the rendition of each statement, Company shall pay you all
royalties shown to be due by such statement, after deducting all Recording Costs
paid by Company, all payments made therefore to you and Artist, and all Advances
made to you and Artist prior to the closing date of such statement. Advances and
any payments which Company is permitted to deduct from royalties made by Company
subsequent to the last date of a particular accounting period shall not reduce
the accrued royalties, if any, payable to you hereunder in respect of such
accounting period. The preceding sentence shall not apply to any Advances
Company is not obligated to pay hereunder or any Advances where the reason for
payment of such Advance after the end of the applicable accounting period is
pursuant to your request, your late Delivery of an Album, (i) where such
lateness exceeds seventy five (75) days and is not approved or requested by
Company, or your delay in the timely fulfillment of any of your other material
obligations hereunder. No statements need be rendered by Company for any such
period after the expiration of the Term for which there are no sales of Records
derived from Masters hereunder or liquidation of reserves hereunder or other
exploitation of Masters hereunder, however, following your written request,
Company shall render a statement for any other such period, if Company is
reasonably able to do so. All payments shall be made to the order of: Legend
Entertainment Corporation and sent to: 9423 Old Forest Lane, Loveland, Ohio,
45140. Company shall be entitled to maintain a single account with respect to
all Recordings subject to this agreement. Company may maintain reasonable
reserves; each such royalty reserve shall be liquidated evenly and not later
than the end of the third semi-annual accounting period following the accounting
period in which it is established. Company shall not establish any royalty
reserve during any particular accounting period: (i) with respect to Albums in
excess of thirty percent (30%), or (ii) with
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respect to Singles, Maxi-Singles, and EPs in excess of forty percent (40%), of
the aggregate number of Albums or Singles, or Maxi-Singles, or EPs, as the case
may be, shipped to Company's customers, unless Company anticipates in its good
faith judgment returns and credits which justify the establishment of a larger
reserve, (ii) provided that reserves held shall not exceed or duplicate reserves
held by Company's distributor where such distribution is by a third party
distributor. You shall be deemed to have consented to all accountings rendered
by Company hereunder and said accountings shall be binding upon you and not
subject to any objection by you for any reason unless specific objection, in
writing, stating the basis thereof is given to Company within two (2) years
after the date Company has rendered the applicable statement, and after such
written objection, unless suit is instituted within three (3) years after the
date Company has rendered the applicable statement.
(b) (i) You shall have the right at your sole cost and expense to appoint
a Certified Public Accountant who is not then currently engaged in an
outstanding audit of Company to examine Books and Records as same pertain to
sales of Records subject hereto as to which royalties are payable hereunder,
provided that any such examination shall be for a reasonable duration, shall
take place at Company's offices during normal business hours on reasonable prior
written notice and shall not occur more than once in any calendar year. You may
examine Books and Records with respect to a particular statement only once.
(ii) Notwithstanding anything to the contrary contained in
subparagraph l0(b)(i), if Company notifies you that the Certified Public
Accountant designated by you to conduct an audit under subparagraph l0(b)(i) is
engaged in an outstanding audit of Company on behalf of another person ("Other
Audit"), you may nevertheless have your audit conducted by such accountant, and
the running of the time within which such audit may be made and the time within
which to commence legal action shall be suspended until such accountant has
completed the Other Audit, subject to the following conditions:
(A) You shall notify Company of its election to that effect
within fifteen (15) days after the date of Company's said notice to you;
(B) You shall use your reasonable efforts to cause your
accountant to proceed in a reasonably continuous and expeditious manner to
complete the Other Audit and render the final report thereon to the client and
Company; and
(C) Your audit shall not be commenced by your accountant
before the delivery to Company of the final report on the Other Audit, shall be
commenced within thirty (30) days thereafter, and shall be conducted in a
reasonably continuous manner. It shall not be a material breach if Company shall
inadvertently under account to Artist.
(iii) The provisions of subparagraph l0(b)(ii) will not apply if
Company elects to waive the provisions of subparagraph l0(b)(i) which require
that your accountant shall not be engaged in any Other Audit.
(c) Company shall compute your royalties in the same national currency in
which Company's licensee pays Company for that sale, and Company shall credit
those royalties to your account at the same rate of exchange at which the
licensee pays Company. For purposes of accounting to you, Company shall treat
any sale outside of the United States as a sale made during the semi annual
period in which Company receives Company's licensee's accounting and payment for
that sale. If any
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licensee deducts any taxes from its payments to Company, Company may deduct a
proportionate amount of those taxes from your royalties. If any law, any
government ruling, or any other restriction affects the amount of the payments
which a Company licensee can remit to Company, Company may deduct from your
royalties an amount proportionate to the reduction in the licensees's
remittances to Company. If Company cannot collect payment in the United States
in U.S. Dollars, Company shall not be required to account to you for that sale,
except as provided in the next sentence. Company shall, at your request and at
your expense, deduct from the monies so blocked, and deposit in a foreign
depository, the equivalent in local currency of the royalties which would be
payable to you on the foreign sales concerned, to the extent such monies are
available for that purpose, and only to the extent to which your royalty account
is then in a fully recouped position. All such deposits shall constitute royalty
payments to you for accounting purposes. To the extent possible, Company will
allow you to select the foreign depository referred to in this subparagraph 10
(c).
11. NOTICES.
Except as otherwise specifically provided herein, all notices under this
agreement shall be in writing and shall be given by courier or other personal
delivery requiring the signature of the recipient, by overnight delivery by an
established overnight delivery service (e.g., Federal Express or United Parcel
Service), or by registered or certified mail return receipt requested at the
appropriate address below, or at a substitute address designated in a written
notice sent by the party concerned to the other party hereto.
TO YOU: LEGEND ENTERTAINMENT CORPORATION
9423 Old Forest Lane
Loveland, Ohio 45140
CC: David Werchen
TO COMPANY: PUSH RECORDS, INC.
53 West 23rd Street, 11th Floor
New York, NY 10010
Each notice to Company shall be addressed to the attention of Company's Vice
President of Business & Legal Affairs, and a copy of each notice to Company
shall be sent simultaneously to the attention of Company's Executive Vice
President/General Counsel. Notices shall be deemed given when mailed or
deposited into the custody of an overnight delivery service for overnight
delivery, or, if personally delivered, when so delivered, except that a notice
of change of address shall be effective only from the date of its receipt.
12. LICENSES FOR MUSICAL COMPOSITIONS
(a) For the purposes of this paragraph 12, the following definitions shall
apply:
(i) "Controlled Compositions": Any Composition, or material recorded
pursuant to this agreement, which, in whole or in part, is written or composed,
and/or owned or controlled, directly or indirectly, by you and/or any individual
member of Artist and/or any producer of a Master.
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(ii) "Effective Date": The date on which the applicable record is
released which embodies a Controlled Composition provided that such delivery is
no later than provided for in paragraph 3(b)(i) and 3(b)(ii) and if Company has
not requested or approved such late delivery and if such delivery is later than
as provided therein the date on which Artist commences recording the Recording
which embodies a Controlled Composition.
(iii) "U.S. 100% Rate": A royalty per Controlled Composition equal
to one hundred percent (100%) of the United States minimum compulsory license
rate applicable to the use of Compositions on phonorecords under the United
States Copyright Law (without regard to playing time) in effect on the Effective
Date, or, if there is no statutory rate in the United States on the Effective
Date, one hundred percent (100%) of the per Composition rate (without regard to
playing time) generally utilized by major record companies, where such companies
are deemed to be paying the equivalent of a full "statutory rate".
(b) (i) Controlled Compositions shall be and are hereby licensed to
Company and its licensees.
(A) For the United States, at a royalty per Controlled
Composition equal to the U.S. 100% Rate;
(B) For Canada, at a royalty per Controlled Composition equal
to the Canadian 100% Rate.
(ii) Notwithstanding the foregoing, the maximum aggregate mechanical
royalty rate which Company shall be required to pay with respect to:
(A) any Single hereunder, regardless of the total number of
Compositions embodied thereon, shall not exceed two (2) times the U.S. 100% Rate
or Canadian 100% Rate, as the case may be;
(B) any Maxi-Single hereunder, regardless of the total number
of Compositions embodied thereon, shall not exceed three (3) times the U.S. 100%
Rate or the Canadian 100% Rate, as the case may be;
(C) any EP hereunder, regardless of the total number of
Compositions embodied thereon, shall not exceed five (5) times the U.S. 100%
Rate or the Canadian 100% Rate, as the case may be;
(D) any Album other than a multiple LP set in any form other
than compact disc, regardless of the total number of Compositions embodied
thereon, shall not exceed eleven (11) times the U.S. 100% Rate or the Canadian
100% Rate, as the case may be;
(E) any Album in compact disc form, regardless of the total
number of Compositions embodied thereon, shall not exceed eleven (11) times the
U.S. 100% Rate or the Canadian 100% Rate, as the case may be. Notwithstanding
the foregoing, in the event that any Album of the Recording Commitment contains
non-Controlled Compositions, then the maximums set forth in subparagraphs
12(b)(ii)(D) and (E) shall be increased by the difference, if any, between (a)
the mechanical royalty required to be paid with respect to up to two (2) such
non-Controlled Compositions (but in no event more than the U.S. 100% Rate or the
Canadian statutory per Composition rate (without
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regard to playing time) in effect on the Effective Date, as the case may be, for
two (2) Compositions, and (b) the mechanical royalty that would be payable if
such non-Controlled Compositions were Controlled Compositions.
(F) A Multiple Record Set shall be the same amount prescribed
in section 12(b)(ii)(D) or (E) as applicable, if the Royalty Base Price of that
Multiple Record Set is the same as the Royalty Base Price applicable to the Top
Line single-unit Albums marketed by Company or Company's principal Licensee in
the territory concerned at the beginning of the royalty accounting period
concerned. If a different Royalty Base Price applies to a Multiple Record Set,
the maximum Mechanical Royalty shall be adjusted in proportion to the variance
in the Royalty Base Price, provided that in no event shall it be more than twice
the maximum royalty prescribed in section 12(b)(ii)(D). That adjustment of the
maximum Mechanical Royalty shall be made by using the following formula:
(X divided by Y) multiplied by Z = adjusted Mechanical Royalty
("X" represents the Royalty Base Price for the Multiple Record Set concerned;
"Y" represents the Royalty Base Price for a Top Line single-unit Album described
in the first sentence of this section 12(b)(ii)(F); and "Z" equals the maximum
Mechanical Royalty otherwise applicable under section 12(b)(ii)(D).)
(c) (i) In the event that any Single, Maxi-Single, EP or Album contains
other Compositions in addition to Controlled Compositions and the aggregate
mechanical royalty rate for said Single, Maxi-Single, EP or Album exceeds the
applicable maximum aggregate mechanical royalty rate provided in subparagraph
12(b)(ii), the aggregate mechanical royalty rate for the Controlled Compositions
contained thereon shall be reduced by the aforesaid excess over said applicable
rate. Additionally, Company shall have the right with respect to any Single,
Maxi-Single, EP or Album, the aggregate mechanical royalty rate for which
exceeds the applicable maximum aggregate mechanical royalty rate provided in
subparagraph 12(b)(ii), to deduct the excess payable thereon from all monies
payable to you pursuant to this agreement.
(ii) All mechanical royalties payable hereunder shall be paid on the
basis of Net Sales of Records for which royalties are payable to you pursuant to
this agreement, except that mechanical royalties shall be payable, for
Controlled Compositions embodied on any Album single or other record of the
Recording Commitment with respect to fifty percent (50%) of such Albums singles
or other records which are for all other purposes non-royalty bearing pursuant
to the terms of subparagraph 9(i)(A)(B) and subparagraph 9(j) herein. Company
may maintain reasonable reserves with respect to the payment of mechanical
royalties which reserves shall be liquidated after the third accounting period
following the accounting period in which such reserve(s) are established. If
Company makes an overpayment to you of mechanical royalties in respect of
Compositions recorded under this agreement, you will reimburse Company for same,
failing which Company may recoup any such overpayment from all monies becoming
payable to you pursuant to this agreement. Mechanical royalty payments on
Records subsequently returned are considered overpayments.
(iii) Notwithstanding anything to the contrary contained herein,
mechanical royalties payable in respect of Controlled Compositions for Net Sales
of Records for any use other than as described in subparagraphs 9(a), (b),
(c)(iii), (e), (f), (g), (h), (i) and (j) shall be seventy-five (75%) percent of
the otherwise applicable U.S. 100% Rate or Canadian 100% Rate, as the case may
be. Mechanical royalties for Controlled Compositions which are arranged versions
of any Compositions in
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the public domain shall be paid in the same proportion as the appropriate
performing rights society grants performing credits to the publisher of such
Controlled Composition, provided you have furnished Company with a copy of the
letter from such performing rights society setting forth the percentage of the
otherwise applicable credit which the publisher will receive.
(iv) Any assignment of the ownership or administration of copyright
in any Controlled Composition shall be made subject to the provisions hereof and
any inconsistencies between the terms of this agreement and mechanical licenses
issued to and accepted by Company shall be determined by the terms of this
agreement.
(v) If any Single, Maxi-Single, EP or Album contains other
Compositions in addition to the Controlled Compositions, you will use
your reasonable efforts to obtain for Company's benefit mechanical licenses
covering such Compositions on the same terms and conditions applicable to
Controlled Compositions pursuant to this paragraph 12.
(d) You hereby agree that all Controlled Compositions shall be available
for licensing by Company and Company's licensees, for reproduction and
distribution in each country of the Territory outside of the United States and
Canada through the author's society or other licensing and collecting body
generally responsible for such activities in the country concerned. You shall
use your best efforts to cause the issuance of effective licenses, under
copyright and otherwise, to reproduce each Controlled Composition on Records and
distribute those Records outside the United States and Canada, on terms not less
favorable to Company or Company's licensees than the terms prevailing on a
general basis in the country concerned with respect to the use of Compositions
on comparable Records.
(e) (i) In respect of all Controlled Compositions, Company and its
licensees are hereby granted: the irrevocable perpetual worldwide right to
reprint the lyrics on the jackets, sleeves and other packaging of Records
derived from Masters hereunder, and to reproduce such lyrics on, or cause the
reproduction of lyrics by, any New Technology Configurations. Company shall
provide appropriate copyright notices and writer and publisher credits with
respect to such reprinted lyrics; provided that Company's inadvertent and
isolated failure to do so in any instance shall not constitute a breach of this
agreement.
(ii) You also grant to Company and Company's licensees an
irrevocable license under copyright to reproduce each Controlled Composition in
Videos, to reproduce, distribute and perform those Videos in any manner
(including, without limitation, publicly and for profit), to manufacture and
distribute Audiovisual Records and other copies of those Videos, and to exploit
them otherwise, by any method and in any form known now or in the future,
throughout the Territory, and to authorize others to do so. Company and
Company's licensees shall not be required to make any payment in connection with
those uses, and that license shall apply whether or not Company receives any
payment in connection with any use of any Video. If any exhibition of a Video is
also authorized under another license (such as a public performance license
granted by ASCAP or BMI), that exhibition shall be deemed authorized by that
license instead of this agreement. (In all events, Company and Company's
licensees shall have no liability by reason of any such exhibition.)
Notwithstanding the foregoing, with respect to Net Sales of Audiovisual Records
hereunder which are sold, paid for and not returned, Company shall pay a
synchronization fee for Controlled Compositions equal to four percent (4%) of
the Royalty Base Price for Audiovisual Records (defined in subparagraph
24(z)(iii)) below therefor, prorated on the basis that the playing time of
Controlled Compositions bears to the total playing time of such Audiovisual
Record.
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(f) Notwithstanding anything to the foregoing provisions of this paragraph
12 to the contrary, if a particular Controlled Composition recorded hereunder is
embodied more than once on a particular Record, Company shall pay mechanical
royalties in connection therewith at the applicable rate for such Controlled
Composition as if the Controlled Composition concerned were embodied thereon
only once.
13. EVENTS OF DEFAULT
(a) If you do not fulfill timely any portion of the Recording Commitment
hereunder or any of your other material obligations hereunder in accordance with
all of the terms and conditions of this agreement, then, in addition to any
other rights or remedies which Company may have, Company shall have the right,
upon written notice to you at any time prior to the expiration of the
then-current Contract Period, (i) to terminate the Term; and (ii) to require you
to repay to Company the unrecouped amount of any Advance previously paid to you
and not attributable under paragraph 7 to an Album which has actually been
Delivered, except as expressly provided in the next sentence, unless your
default is due solely to your death or disability. You shall not be required to
repay any such Advance to the extent to which you furnish Company with
documentation satisfactory to Company establishing that you have actually used
the Advance to make payments to Persons not affiliated with you and in which you
do not have an interest, for Recording Costs incurred in connection with the
Album concerned prior to Company's demand for repayment. Company may exercise
any or all of its rights pursuant to subparagraph 13(a), by sending you the
appropriate notice. Notwithstanding anything to the contrary in this agreement,
if you Deliver Masters for any Album hereunder at any time within sixty (60)
days from the later of the date such Delivery was required pursuant to
subparagraph 3(b)(i) or a date approved by Company, Company shall not exercise
its rights under this subparagraph 13(a) on the basis of such delayed Delivery.
No exercise by Company of its rights under this paragraph shall limit Company's
rights to recover damages by reason of your default or to exercise any of its
other rights and remedies.
(b) Company reserves the right, at its election, to suspend the operation
of this agreement for the duration of any of the following contingencies, if by
reason of any such contingency, it is materially hampered in the performance of
its obligations under this agreement or its normal business operations are
delayed or become impossible or commercially impracticable: Act of God, fire,
catastrophe, labor disagreement, acts of government, its agencies or officers,
any order, regulation, ruling or action of any labor union or association of
artists, musicians, composers or employees affecting Company or the industry in
which it is engaged, delays in the delivery of materials and supplies, or any
other cause beyond Company's control. Any such suspension due to a labor
controversy which involves only Company shall be limited to a period of three
(3) months. Notwithstanding such suspension, Company shall continue to account
and pay royalties to you as and when due unless the contingency resulting in
such suspension materially hampers Company in carrying out such obligation. No
suspension shall continue past three (3) months, unless industry wide where it
shall last up to nine (9) months.
(c) If Artist's voice or Artist's ability to perform as an instrumentalist
should be materially or permanently impaired for a period in excess of seven (7)
consecutive months, then, in addition to any other rights or remedies which
Company may have, Company shall have the right, upon written notice to you, to
terminate the Term.
(d) (i) If Company exercises any of its termination rights pursuant to
this paragraph 13, you shall have the option to purchase any recorded but
undelivered or unreleased Masters from
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Company. Company will transfer to you such Masters as you wish to purchase (the
"Subject Masters") no later than fifteen (15) days after the date of your notice
of exercise of your option to acquire Company's rights in the Subject Masters
and upon receipt by Company of certified funds fully reimbursing Company for the
Recording Costs of the Subject Masters, Company will deliver the Subject Masters
to you at Company's offices. You shall reimburse Company for the Recording Costs
of the Subject Masters simultaneously with your acquisition of the Subject
Masters, by certified or bank check. The Subject Masters will be delivered to
you and accepted "as is" at the time of delivery and no warranty or
representation, express or implied, is or will be made by Company in connection
therewith; provided, however, that Company shall not further impair or encumber
the rights in or to the Subject Masters prior to your purchase of them.
(ii) You shall be solely responsible for paying for, discharging and
performing, as and when due, all obligations and liabilities relating to the
Subject Masters and the Unreleased Masters. Without limiting the foregoing, you
shall make all payments required in connection with manufacture, sale or
distribution of Records derived from the Subject Masters and/or the Unreleased
Masters and all other payments required by reason of your use of the Subject
Masters and/or the Unreleased Masters, including, without limitation, all
royalties and other payments to performing artists, producers, owners of
copyrights in musical compositions, the Music Performance Trust Fund and Special
Payments Fund, and any other unions and union funds. You shall comply with the
applicable rules and regulations of the American Federation of Musicians and any
other union having jurisdiction and any other applicable laws, rules and
regulations covering any use of the Subject Masters and/or the Unreleased
Masters by you, or any Person deriving rights from you, in the manufacture and
sale of Records or otherwise. You warrant and represent that you have obtained
or will obtain all necessary rights, licenses, permissions, clearances, consents
and approvals which you are required to obtain from other Persons relating to
the exploitation of the Subject Masters and/or the Unreleased Masters. You will
indemnify and hold harmless Company and its licensees from and against any and
all claims, damages, liabilities, costs and expenses, including legal expenses
and reasonable counsel fees, arising out of any use of the Subject Masters
and/or the Unreleased Masters by you or your successors, assigns or licensees.
(e) It is understood and agreed that the active participation of Brian
Doyle in the management and operation of Company is a vital part of this
Agreement. Upon the death or incapacity of Brian Doyle and/or if he shall cease,
for whatever reason, to be actively engaged in the management and operation of
Company as a senior executive thereof you shall have the right, by giving the
Company written notice, to terminate the Term of the Agreement, within forty
five (45) days after the active participation of Brian Doyle ceases, provided,
however, that the term of the Agreement shall not terminate unless Company shall
fail to cause the active participation of Brian Doyle to continue within forty
five (45) days after receipt by Company of such notice.
14. INJUNCTIVE RELIEF
You expressly acknowledge that Artist's services hereunder are of a special,
unique intellectual and extraordinary character which gives them peculiar value,
and that in the event of a breach or threatened breach of any term, condition,
representation, warranty, agreement or covenant hereof Company Will be caused
immediate irreparable injury, including loss of goodwill and harm to reputation,
which cannot be adequately compensated in monetary damages. Accordingly, in the
event of any such breach, actual or threatened, Company shall have, in addition
to any other legal remedies, the right to seek injunctive or other equitable
relief. The preceding sentence shall not be construed to preclude you from
opposing
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Company's application for injunctive relief based upon a challenge of the
factual or legal basis alleged by Company in support of its application.
15. WARRANTIES AND REPRESENTATIONS; INDEMNITIES
(a) You warrant and represent that:
(i) Artist is over the age of eighteen (18) and have the right and
that you and Artist have legal capacity to enter into this agreement, and you
are not subject to any prior obligations or agreements, whether as a party or
otherwise, which would restrict or interfere in any way with the full and prompt
performance of your obligations hereunder, and you shall fully and promptly
perform your obligations to Artist.
(ii) There exist no prior unreleased Recordings embodying Artist's
performances collectively as Blessid Union of Souls, except as set forth on
Schedule A attached to this agreement.
(iii) Company shall not be required to make any payments of any
nature for or in connection with the acquisition, exercise or exploitation of
any of Company's rights hereunder, except as specifically provided in this
agreement. You shall be solely responsible for: (A) all royalties (except
mechanical royalties) payable to producers, mixers, remixers and others
contributing to the recording of Masters engaged by you or with your consent
(subject to subparagraph 8(a) and (b) above); (B) all Recording Costs in excess
of the Recording Advances set forth in paragraph 7, unless such excess is caused
or requested by or approved by Company; (C) all mechanical royalties in excess
of the applicable rates and/or the applicable maximum aggregate mechanical
royalty rates set forth in subparagraph 12(b)(ii); (D) video shoot cancellation
costs pursuant to the terms of subparagraph 18(b)(iii); (E) all Special
Packaging Costs which you have requested or submitted; (F) all other costs, if
any, which are in excess of the fixed amounts provided herein which Company has
agreed to pay which have not been incurred solely as a result of Company's acts
or omissions or upon Company's request or approval; and (G) all other amounts
which you agree in writing to pay herein. You shall promptly pay all of the
amounts set forth in this subparagraph 15(a)(iii), or reimburse Company if
Company pays them. Such amounts may also be deducted from all monies, other than
mechanical royalties, becoming payable to you by Company under this agreement to
the extent to which they have not been paid by you or you have not reimbursed
Company.
(iv) The Materials or any use thereof, shall not violate any law and
shall not infringe upon or violate the rights of any Person (including, without
limitation, contractual rights, copyrights, rights of publicity and rights or
privacy); and that each track-by-track list identifying the performers on each
Master and describing their performances which you furnish to Company is and
shall be true, accurate and complete. "Materials," as used in this subparagraph
15(a)(iv), means: Masters hereunder (including any Sampled Material embodied
therein); all Controlled Compositions; each name used by Artist, individually or
as a group, in connection with Masters hereunder; all photographs and likenesses
of Artist; and all other musical, dramatic, artistic and literary materials,
ideas, and other intellectual properties furnished by you or artist, contained
in or used in connection with any Masters hereunder or their packaging, sale,
distribution, advertising, publicizing or other exploitation supplied by or
approved by you or Artist. Company's acceptance and/or utilization of Masters,
Materials, or track-by-track lists hereunder shall not constitute a waiver of
your representations, warranties or agreements in respect thereof, or a waiver
of any of Company's rights or remedies.
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(v) You will make no changes in the personnel comprising Artist
without Company's prior written consent which shall not be unreasonably
withheld. You shall not, during the Term, assign Artist's professional name set
forth on Page 1 hereof, or any other names utilized by Artist in connection with
Masters, or permit the use of said names by any other individual or group of
individuals in respect of the Masters without Company's prior written consent,
and any attempt to do so shall be null and void and shall convey no right or
title. You hereby warrant and represent that you or Artist are and shall be the
sole owner of all such professional names, and that no other Person has the
right to use said names or to permit said names to be used in connection with
Records (except previously released records set forth in Schedule A), and that
you have the authority to grant Company the exclusive right to use said names in
the Territory in accordance with all of the terms and conditions of this
agreement and Company shall have the exclusive right to use said professional
name as set forth herein.
(vi) Artist shall not perform, and neither you nor Artist shall
authorize or knowingly permit Artist's performances to be recorded for any
purpose, without an express written agreement with the Person for whom the
Recording is to be made for Company's benefit, prohibiting the use of such
Recording for making, promoting, or marketing Recordings or Records, or for
digital broadcasts or other transmissions, distributions or other communications
now or hereafter known, in violation of the applicable restrictions set forth in
subparagraphs 15(a)(i)(vii) and (viii). You shall furnish Company with a fully
executed copy of each such agreement promptly after the execution thereof.
Without limiting the generality of this subparagraph 15(a)(vi), Artist shall
have the right to (A) perform as an actor or singer/musician in motion picture
or other visual or audio-visual media, and (B) appear on musical shows on
television provided that neither you nor Artist permit the replication of such
television show(s) to be released as Audiovisual Records.
(vii) Artist shall not perform or render any services and Artist
shall not authorize the use of Artist's name, likeness, or other identification
for the purpose of distributing, selling, advertising or exploiting Records for
any Person other than Company during the Term in the Territory. Notwithstanding
the preceding sentence,
(A) Artist shall have the right to perform as a so-called
non-featured "back-up musician, background vocalist" or "sideman" with featured
artists for the purpose of making Records for any Person other than Company only
upon the following conditions:
(1) Artist's activities in this regard shall not
materially interfere with the prompt and timely performance of your Delivery
obligations hereunder;
(2) You shall undertake to provide Company with advance
written notice thereof and the Compositions to be performed and recorded shall
not be Compositions recorded pursuant to this agreement; provided, however, your
isolated failure to do so shall not constitute a breach of this agreement;
(3) If any such Recording is released in a Record,
Artist's name may only be used on the liner of such Record in a size, prominence
and type style as is customary in the recording industry for the names of such
non-featured "back-up musicians", "background vocalists" and "sidemen" whose
performances are embodied, and who are given credit on such Record, and in the
same place on the liner where all other such non-featured performers are listed,
and, Company shall be given appropriate courtesy credit in conjunction with any
use of Artist's name on the liner of such Record;
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provided, however, Artist's failure to procure such credit for Company shall not
be deemed a breach of this agreement; and
(4) Artist shall not perform any step-outs, solos or
duets in excess of fifteen (15) seconds in connection with such Recordings; and
(5) Except as otherwise provided above, Artist's name,
likeness, or photograph shall not be used in any manner by any third party in
connection with the performances of any member of Artist or in any advertising
thereof. No visual reproduction of Artist's performance shall appear in any
Video, New Technology Configurations, Cybersales or Audiovisual Record without
Company's prior written consent.
(B) The individual members of Artist shall have the right to
produce, mix, remix and engineer Recordings by other recording artists, but only
upon the following conditions:
(1) Such individual's activities as a producer shall not
materially interfere with the prompt and timely performance of you or Artist's
Delivery obligations or material obligations pursuant to subparagraph 6(a)(ii)
herein;
(2) You shall undertake to provide Company with advance
notice of any such activity; provided, however, your isolated failure to do so
shall not constitute a breach of this agreement;
(3) If any such Recordings are released in a Record, the
name of the individual member of Artist who produced, mixed, remixed, or
engineered such Recording may only be used on the liner notes, packaging and
advertising of such Record in a size, prominence and type style as is customary
in the recording industry for the names of producers, mixers, remixers, or
engineers who have produced or provided other applicable services in connection
with Recordings embodied, and who are given credit, on such Record, and in the
same place on the liner where all other producers, mixers, remixers and
engineers are listed, and Company shall be given appropriate courtesy credit in
connection with any use of the name of any individual member of Artist on the
liner of such Record; provided, however, Artist's failure to procure such credit
for Company shall not be deemed a breach of this agreement; and
(4) Artist's professional name, likeness, or photograph
shall not be used in any manner by any third party in connection with Artist's
production, mixing, remixing and engineering of Recordings or in any advertising
for such Record; provided, however, that the name of the individual member of
Artist concerned may be used as set forth above.
(viii) Artist shall not perform for the purpose of recording any
Composition, or any adaptation of a Composition, recorded hereunder for any
Person other than Company for use in the Territory on Records, or in radio or
television commercials except as provided in subparagraph 15(a)(vi) of this
agreement, or otherwise for synchronization with visual images, for a period
of (A) five (5) years after the date of Delivery to Company of all Recordings
made in the course of the same Album (or other recording project) as the
Recording of the restricted Composition concerned, or (B) two (2) years after
the expiration or other termination of the Term, whichever is later (the
"Re-recording Restriction"). In the event that a Composition recorded hereunder
is not embodied on any Record which is released
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hereunder prior to one (1) year after the expiration or other termination of
this agreement, there shall be no Re-recording restriction with respect to such
Composition.
(ix) All Persons rendering services in connection with Masters or
Videos shall fully comply with the provisions of the Immigration Reform Control
Act of 1986.
(x) The Recordings to be recorded will be subject to the AFM and
AFTRA collective bargaining agreements and/or any other applicable collective
bargaining agreements and you or an entity owned or controlled by you will be a
party to all such agreements.
(xi) You and Artist will comply with all union rules, regulations
and agreements applicable to the Recordings.
(xii) Before the Delivery of Recordings to Company hereunder; (1)
you will except as otherwise provided herein, make all payments to all Persons
rendering services for the Recordings concerned; (2) you will deliver or cause
to be delivered to Company all licenses required under copyright for the
recording of the musical compositions and any other copyrighted material
reproduced in the Recordings, and you will make all payments (except mechanical
royalties) required under those licenses; (3) you will pay or furnish Company
with waivers of all other payments (except "per-record" royalties) to which any
Person may become entitled and all other costs in connection with those
Recordings or their use in the manufacture and sale of Records; (4) you will
furnish Company with the name of each vocalist who may be a "covered artist"
under Appendix A to the AFTRA 1993-1996 National Code of Fair Practice for
Phonograph Recordings (or any applicable successor agreement), it being agreed
that your failure to notify Company of such vocalists will constitute your
warranty and representation that no such "covered artist" rendered services in
connection with the Recordings; and (5) you will furnish Company with all
required AETRA and AFM forms, duly completed and executed.
(xiii) If any claim is asserted against Company for payment of any
obligation required to be discharged by you pursuant to subparagraphs l5(a)(x)
through 15(a)(xv), Company will have the right to make any such payment and any
late penalties incurred due to your untimely delivery of or failure to deliver,
necessary paperwork required to make such payments, and shall deduct the amount
of such payment, including late payments, from any and all monies accruing or
becoming payable to you hereunder. No payments shall be made pursuant to
subparagraph 7(a)(iii) until Company receives the documentation required to be
furnished to Company pursuant to subparagraphs 15(a)(xii) and/or 15(a)(xvi).
(xiv) Except as otherwise provided herein, all unions concerned and
the owners of recording studios to be used, if any, have agreed not to look to
Company for payment of any scale compensation or other obligations arising in
connection with Masters recorded hereunder, except for "per-record" royalties.
(xv) Except as otherwise provided herein, all union scale payments
due all Persons who render or perform services in connection with Masters
recorded hereunder, as well as payroll taxes and any other taxes required to be
paid thereon, if any, shall be promptly paid by you when due.
(xvi) You will furnish Company with all information and all
instruments and documents which Company may reasonably require in connection
with Masters to confirm your compliance with the terms of subparagraphs 15(a)(x)
through 15(a)(xv) and 24(k) of this agreement.
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(xvii) You warrant and represent that Company will be granted
licenses for Controlled Compositions in accordance with paragraph 12 of this
Agreement.
(b) You agree to and do hereby indemnify, save and hold Company harmless
from any and all loss and damage (including court costs and outside reasonable
attorneys' fees) arising out of, connected with or as a result of any
inconsistency with, failure of, or breach or threatened breach by you of any
warranty, representation, agreement, undertaking or covenant contained in this
agreement including, without limitation, any claim by any third party in
connection with the foregoing, provided same has resulted in a final judgment
against Company or which has been settled with your written consent, which
consent shall not be unreasonably withheld, it being agreed that such consent
shall only be required for settlements in excess of Five Thousand Dollars
($5,000.00). In addition to any other rights or remedies Company may have by
reason of any such inconsistency, failure, breach, threatened breach or
claim, Company may obtain reimbursement from you, on demand, for any payment
made by Company at any time after the date hereof with respect to any loss,
damage or liability (including actual court costs and outside reasonable
attorneys' fees) resulting therefrom, provided the foregoing indemnity is
applicable to same. Such amounts may also be deducted from all monies becoming
payable to you by Company under this agreement to the extent to which they have
not been reimbursed to Company by you. If the amount of any such claim or loss
has not been determined, Company may withhold sums due you in an amount
consistent with such claim or loss pending such determination unless you post a
bond in a form and from a bonding company acceptable to Company in an amount
equal to Company's estimate of the amount of the claim. Such withheld sums shall
be released if suit is not filed within twelve (12) months after Company is
notified of or receives a communication with respect to such claim; provided,
however, that if such claim is thereafter asserted, Company shall maintain the
right to begin once again to withhold monies. Company shall give you notice of
any third party claim to which the foregoing indemnity applies and you shall
have the right to participate in the defense of any such claim through counsel
of your own choice and at your expense; provided that Company shall have the
right at all times, in Company's sole discretion, to retain or resume control of
the conduct thereof.
16. APPROVALS
(a) Except as otherwise expressly provided in this agreement, as to all
matters treated herein to be determined by mutual agreement, or as to which any
approval or consent is required, such agreement, approval or consent shall not
be unreasonably withheld.
(b) Your agreement, approval or consent, whenever required (including,
without limitation, written agreement, approval or consent), shall be deemed to
have been given unless you notify Company otherwise within ten (10) business
days following the date of Company's written request to: Mark Liggett, who is
hereby deemed an authorized agent to give approval on behalf of you.
17. COLLECTIVE BARGAINING AGREEMENTS
You hereby warrant and represent that, during the Term, Artist shall become and
remain a member in good standing of any labor unions with which Company may at
any time have agreements lawfully requiring such union membership, including,
but not limited to, the American Federation of Musicians and the American
Federation of Television and Radio Artists. All Masters hereunder shall be
produced in accordance with the rules and regulations of all unions having
jurisdiction. Those provisions of any
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collective bargaining agreement between Company and any labor organization which
are required, by the terms of such agreement, to be included in this agreement
shall be deemed incorporated herein.
18. VIDEOS
(a) Company agrees to cause to be produced at least one (1) promotional
Video in connection with each Album constituting the Recording Commitment.
(b) With respect to any Videos requested by Company:
(i) The Master to be embodied in such Videos, the concept for such
Videos, the creative aspects of the production of such Videos (including,
without limitation, preparation of the script and story board), and the dates
and locations for the shooting of such Videos, shall be mutually selected by
you and Company; provided that, each Master released as the "A" side of a Single
shall be deemed mutually selected by you and Company for inclusion in a Video.
(ii) The director of such Videos shall be mutually selected by you
and Company and Company shall engage the other production personnel for such
Videos. Artist shall fully cooperate with the director and all other production
personnel in the production of such Videos. Company shall determine the budget
for each Video, in consultation with you, subject to the preceding sentence and
the terms of subparagraph 18(a).
(iii) Company shall pay all Video Production Costs incurred in
connection with such Videos consistent with a production budget approved by
Company in good faith consultation with you. All Video Production Costs in
excess of the approved budget that have been incurred due solely as a result of
your acts or omissions shall be your sole responsibility, (unless approved in
writing by Company), and you hereby agree to forthwith pay and discharge all
such excess costs. In the event that Company agrees to pay any such excess costs
on your behalf, you shall, upon demand reimburse Company for such excess costs
or, in lieu of requesting reimbursement, Company may deduct such excess costs
from all monies payable to you other than mechanical royalties under this
agreement. In the event that Artist fails to appear at locations and/or on dates
which have been mutually approved by you and Company, without reasonable excuse,
the costs of cancellation of the shoot shall be fully deductible from all monies
payable to you under this agreement to the extent, if any, that the video
production costs exceed the budget as a result thereof.
(iv) All Video Production Costs paid or incurred by Company shall
constitute Advances, fifty percent (50%) of which shall be recoupable from
royalties credited to your account pursuant to paragraph 9, and one hundred
percent (100%) of which shall be recoupable from royalties derived from the
commercial exploitation of Videos credited to your account pursuant to paragraph
18. Company shall not be entitled to recoup more than one hundred percent (100%)
of the Video Production Costs for any Video. This subparagraph is subject to
subparagraph 18(b)(iii).
(v) Company shall not, without your consent, require Artist to
perform for the making of a so-called "long-form" Video consisting of Videos of
various musical Compositions and Company shall not commercially release such
"long-form" Video in the United States during the Term. The term "long-form"
Video shall mean a full-length audio-visual program, as such term is generally
understood in the recording industry, but specifically excludes any compilation
of so-called "short form" or promotional Video. During the Term hereof Company
shall not commercially release audiovisual
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material embodying Videos or portions thereof made hereunder together with other
audiovisual materials without your consent.
(c) With respect to Net Sales by Company of Audiovisual Records which
embody Videos, the royalty credited to your account hereunder shall be computed
in accordance with the provisions of paragraph 9, except that: (i) with respect
to Net Sales of Top Line Audiovisual Records in the United States through normal
retail channels, the Basic U.S. Rate shall be eighteen percent (18%); and (ii)
with respect to Net Sales of Top Line Audiovisual Records outside the United
Stated through normal retail channels, the Foreign Rate shall be fourteen
percent (14%). The Escalated U.S. Album Rate shall not apply.
(d) (i) The royalty rate for Videos, licensed by Company or a Principal
Licensee to a Person for use in the manufacture and distribution of Audiovisual
Records shall be fifty percent (50%) of Video Net Receipts solely attributable
to such Videos; provided that such credit to your royalty account shall not
exceed the same royalty amount that would otherwise be credited to your account
hereunder for such use if Company manufactured or distributed the Audiovisual
Record concerned.
(ii) The royalty rate for Videos licensed by Company or a Principal
Licensee to a Person for use in synchronization with theatrical motion pictures,
television programs, or radio or television commercials shall be fifty percent
(50%) of Video Net Receipts solely attributable to such Videos.
(e) Notwithstanding anything to the contrary in subparagraph 9(g), the
royalty rate on a Video which is coupled with videos by other artists on
Audiovisual Records shall in no event exceed the royalty rate that would apply
if such royalty were computed by apportionment based on the actual playing time
of each Recording embodied in the Audiovisual Record concerned.
(f) The terms of the following paragraphs of this agreement as same
specifically refer or logically relate to videos, are specifically incorporated
by reference into this paragraph 18, and shall apply to the exploitation of
Videos as if fully set forth herein: paragraph 5, subparagraph 6(c), paragraph
10, paragraph 15, paragraph 16, and paragraph 24.
(g) Notwithstanding anything to the contrary in this agreement as same
specifically refer or logically relate to videos, Company may reproduce on any
New Technology Configuration any Video without payment of a separate or
additional royalty for such use; the royalty to be credited to your Record
royalty account for Net Sales of such New Technology Configurations pursuant to
paragraph 9 shall cover the use of such Video.
19. BANKRUPTCY AND RELATED PROVISIONS
(a) Without limiting any other rights Company may have, if you file a
petition for relief under Title 11 of the United States Code (the "Bankruptcy
Code") or an order for relief is entered in respect of any petition filed
against you under the Bankruptcy Code and (i) you or a trustee of yours in a
case under the Bankruptcy Code fails to assume both this agreement and the
contract between you and Artist within sixty (60) days after the order for
relief, or (ii) the court having jurisdiction of the case under the Bankruptcy
Code determines that either this agreement or the contract between you and
Artist may not be assumed pursuant to Section 365 of the Bankruptcy Code, then
this agreement shall immediately terminate, and upon such termination, Artist
shall render Artist's personal services directly
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to Company for the purposes of making Records upon the terms and conditions set
forth in subparagraph 19(c).
(b) Without limiting any other rights Company may have, if (i) you
consent, acquiesce or take any action in support of a petition filed by or
against you looking to reorganization, arrangement, readjustment, liquidation,
dissolution, or similar relief under any other present or future federal or
state statute, law or regulation, or there is appointed, with the consent of
you, any receiver, liquidator, custodian, assignee, trustee, sequestrator or
other similar official of you or of any substantial part of your property, or
you make an assignment for the benefit of creditors, or you admit in writing
your inability to pay your debts generally as they become due; or (ii) a decree
or order is entered by a court having competent jurisdiction in respect of any
petition filed or action taken against you looking to reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any other present or future federal or state statute, law or
regulation, resulting in the appointment of a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of you or of any
substantial part of your property, or resulting in the winding-up or liquidation
of your affairs, and the continuance of any such decree or order is unstayed and
in effect for a period of thirty (30) consecutive days; or (iii) you shall lose
or fail to secure the exclusive rights to Artist's recording services or shall
otherwise fail to fulfill your material obligations under this agreement; then
at any time after the occurrence of any such event, Company shall have the
option, by notice in writing sent to you and Artist (at the same address as
you), to terminate this agreement and require that Artist render Artist's
personal services directly to Company for the purpose of making Records upon the
terms and conditions set forth in subparagraph 19(c). If Company exercises the
option to terminate in subparagraph 19(b) and/or exercises its option in
subparagraph 19(b) for Artist to render Artist's recording services directly to
Company, Company shall as to Albums delivered to Company after such termination
and/or option exercise: (1) As to record royalties, deposit all such royalties
otherwise due hereunder into an interest bearing escrow account; (2) As to
Recording Advances, Company shall administer all Recording Advances and shall
deposit any balance remaining from the applicable Recording Advance after paying
the Recording Costs of the applicable Album, into such escrow account.
As to any monies so deposited by Company into such escrow account, Company shall
not disburse any of such funds so held in such escrow account until so ordered
by a court order or pursuant to a written agreement entered into by you and
Artist relating to such funds held in escrow; except notwithstanding the
foregoing as to any monies held in escrow by Company for a period in excess of
two (2) years, Company may deposit such monies into an account administered by
the Clerk of the Supreme Court of New York County, New York.
As to any record royalties derived from Albums (and/or the Masters contained
therein) delivered to Company prior to such termination and/or option exercise,
Company shall continue to pay all such royalties to you.
(c) If this agreement terminates in accordance with subparagraph 19(a)
above or Company exercises the option set forth in subparagraph 19(b), Artist
shall render Artist's recording services directly to the Company for the
unexpired balance of the Term (as if the agreement had not been terminated),
including extensions thereof, upon all the same terms and conditions as are
herein contained.
(d) Without limiting any other rights you may have, if Company files a
petition for relief under Title 11 of the United States Code (the "Bankruptcy
Code") or an order for relief is entered in respect of any petition filed
against Company under the Bankruptcy Code and (i) Company or a trustee of
Company in a case under the Bankruptcy Code fails to assume both this agreement
and the Agreement between you and Artist referred to in the Artist Inducement
letter, attached hereto as Exhibit A, within sixty (60) days after the order for
relief, or (ii) the court having jurisdiction of the case under the Bankruptcy
Code determines that either this agreement and the Agreement between you and
Artist referred to in the Artist Inducement letter, attached hereto as Exhibit
A, may not be assumed pursuant to Section 365 of the Bankruptcy Code, then this
agreement shall immediately terminate.
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20. GROUP PROVISIONS
(a) (i) You warrant, represent and agree that, for the Term, Artist will
perform together as a group (the "Group") for Company. If any individual
comprising Artist refuses, neglects or fails to perform together with the other
individuals comprising Artist in fulfillment of the obligations under this
agreement or leaves the Group, you shall give Company prompt written notice
thereof. Said individual shall remain bound by this agreement, including, but
not limited to, the provisions of subparagraph 20(b) herein or Company may, by
notice in writing, (A) terminate this agreement with respect to such individual
or (B) terminate this agreement in its entirety without any obligation as to
unrecorded or undelivered Masters.
(ii) The individual whose engagement is so terminated or who
refuses, neglects or fails to perform with the Group or who leaves the Group,
may not perform for others for the purpose of recording any Composition as to
which the applicable Re-recording Restriction has not yet expired. Any member of
Artist who refuses, neglects or fails to perform with the Group or who leaves
the Group shall not thereafter use the professional name of the Group in any
commercial or artistic endeavor; said professional name shall remain for all
purposes the property of those members of the Group who continue to perform
their obligations hereunder and whose engagements are not terminated.
(iii) Each person permanently added to Artist, as a replacement or
otherwise, shall become bound by the terms and conditions of this agreement and
shall execute this agreement and any other documents required by Company as a
condition precedent to being so added.
(iv) In the event that an individual engagement is terminated by
notice from Company, or by mutual consent, (A) each party shall be relieved and
discharged from liability for Masters unrecorded at the time of such notice or
mutual consent and (B) you will be solely responsible for and shall pay all
monies required to be paid to such individual whose engagement is so terminated
in connection with any Masters theretofore or thereafter Delivered under this
agreement for which royalties are payable to such individual and you will
indemnify and hold harmless Company against any claims relating thereto,
pursuant to the terms of subparagraph 15(b).
(b) In addition to the rights provided in the preceding subparagraph
20(a), Company shall have, and each individual member of the Group hereby grants
to Company, an irrevocable option for the individual and exclusive services of
each of the individuals comprising Artist for the purpose of making Records.
Said option may only be exercised with respect to such individuals who have left
the Group and shall be exercised by Company giving you notice in writing within
sixty (60) days after Company receives the notice provided for in subparagraph
20(a) to the effect that each such individual has refused, neglected or failed
to perform with the other individuals comprising Artist or that each such
individual has left the Group or that the Group has disbanded. Company shall be
deemed to have exercised said option with respect to such individual(s) unless
you serve written notice to Company that the time for exercising said option has
run. In the event that you serve notice that the time to exercise the option(s)
for the individual and exclusive services has run then Company shall have thirty
(30) days within which Company shall provide written notice of the exercise of
the option set forth herein. In the event of Company's exercise of such option,
you and each such individual shall be deemed to have entered into a new and
separate agreement with Company with respect to each such individual's exclusive
recording services upon all the terms and conditions of this agreement except
that:
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(i) Company shall have the right to extend the term for option
periods so that Company shall have the right under such agreement to the same
number of Albums as Company then has rights or options for under this agreement.
(ii) Company shall pay a Recording Advance in respect of Masters to
be recorded by each such individual up to the amount of seventy-five percent
(75%) of the Recording Advance set forth in paragraph 7 for the immediately
preceding Album Delivered by Artist constituting the Recording Commitment, or if
Artist has not yet Delivered the First Album, of the Recording Advance for the
First Album. Each succeeding Recording Advance shall be at least seventy-five
percent (75%) of the minimum Recording Advance set forth in this agreement which
follows the Recording Advance on which the first Recording Advance to each such
individual concerned is computed;
(iii) Company's royalty obligation to you and Artist in respect of
Recordings by each such individual shall be the payment to you of the same Basic
U.S. Rate, Escalated U.S. Album Rate, and Foreign Rate as set forth in this
agreement, with royalties for all other uses (foreign sales, clubs, licensing,
etc.), calculated and reduced in the same manner as otherwise provided in
paragraph 9;
(iv) If your royalty account is in an unrecouped position at the
date of Company's exercise of its option for the individual concerned pursuant
to subparagraph 20(b)(ii), then the portion of such unrecouped balance
chargeable to your royalty account for such individual shall be determined by
multiplying such unrecouped balance by a fraction, the numerator of which shall
be one (1) and the denominator of which shall be the total number of royalty
artists constituting Artist (including such leaving individual as to whom
Company exercises its option), as of the date of Company's exercise of its
option.
(v) Recordings by such individual shall not be applied in diminution
of the Recording Commitment and Delivery obligations as set forth in paragraph
3.
21. ARTWORK
(a) You and/or Artist may, but are not obligated to, prepare and deliver
to Company, subject to approval by Company, the artwork for the album cover used
in connection with the release, during the Term, of each Album constituting the
Recording Commitment (hereinafter, the "Artwork") and any Greatest Hits Albums
during the Term, provided that:
(i) You deliver all such Artwork prepared by you and/or Artist,
together with all licenses and consents (if any) required in connection
therewith, to Company in New York City not less than sixty (60) days prior to
Company's projected release date for the Album. Time is of the essence of this
delivery obligation. Company shall advise you reasonably in advance of Company's
projected release date for each Album. If any of such material has not been
delivered to Company within the time prescribed herein (or if you have otherwise
advised Company that you and/or Artist do not intend to prepare and deliver
Artwork in respect of any specific Album), Company shall have the right to
prepare and use Company's own Artwork in good faith consultation with you.
Company shall not be obligated to make any such payments to you or any other
Person in connection with any Artwork produced by Company for the Album
concerned.
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(ii) You will deliver to Company, together with all such Artwork
produced by you and/or Artist, an itemized statement of your actual costs in
connection therewith. Following such delivery to Company and its acceptance of
such Artwork in accordance with this paragraph 21, Company shall reimburse you
in the amount of said costs, up to but not in excess of Ten Thousand Dollars
($10,000) with respect to each Album constituting the Recording Commitment,
excluding the cost of separations, which costs Company shall bear as a
non-recoupable expense. Unless Company specifically agrees in writing otherwise,
any costs incurred by you in excess of such said Ten Thousand Dollars ($10,000)
per Album and reimbursed by Company shall be recoupable against all royalties,
except mechanical royalties, payable hereunder.
(iii) The Artwork and all other related material delivered to
Company will be subject to mutual approval by Company and you. If Company
rejects any Artwork, Company shall notify you of the reason for such rejection,
and, if possible, recommend changes to the Artwork which might make it
acceptable, and you shall have the right to revise and resubmit it for Company's
approval, subject to all of the conditions above (including, without limitation,
the delivery deadline fixed in subparagraph 21(a)(i)), except that Company shall
have no obligation to make any payments in connection with the revising of the
Artwork in excess of the amount set forth in subparagraph 21(a)(ii) hereof.
(iv) All Artwork and related material delivered hereunder and all
rights therein shall be Company's property throughout the Territory in
perpetuity. All matters relating to Company's trademarks or any elements of the
album cover other than the Artwork shall be determined in Company's sole
discretion. Company shall have the right to affix to each record or container
hereunder an anti-counterfeiting or similar device which shall be determined in
Company's sole discretion. Company shall have the right to include or affix on
each record or container hereunder UPC bar coding. Artwork shall not be used in
connection with product, other than Records, provided however that Company may
use such Artwork in connection with the sale and promotion of Records including,
without limitation the distribution of promotional merchandise solely on a
gratis basis.
(v) No Artwork will be deemed delivered until accepted by Company
and all requirements hereof have been fulfilled; provided, however, the Artwork
should be deemed delivered and accepted by Company if the Artwork has been
utilized by Company on the applicable Album.
(b) You and/or Artist will not use or authorize the use of the Album cover
artwork or any other materials created by or furnished by Company or the
expenses of which are reimbursed to you by Company in connection with
merchandise of any sort, including, without limitation, in connection with
printed sheet music, unless you receive Company's prior written approval.
(c) In the event that:
(i) Company manufactures Album jackets (including any inserts or
other special elements or materials) for which the production costs (e.g.,
artwork production or origination costs, excluding costs of separations) exceed
Twelve Thousand Five Hundred Dollars ($12,500) solely as a result of materials
supplied by you, you shall pay Company, upon Company's request, an amount equal
to the amount of any such excess production costs;
(ii) If at your written request the tape inlay card for any Album
hereunder shall consist of more than five (5) panels, printed in four colors on
one side with the other side printed in one color ("Four Over One"), you shall
pay Company, upon Company's request, an amount equal to the
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difference between the standard manufacturing costs for a tape inlay card of
five (5) panels printed Four Over One and the manufacturing costs for such tape
inlay card, times the number of such tape inlay cards manufactured; and/or
(iii) If at your written request the compact-disc liner notes
booklet shall consist of more than eight (8) pages, printed in four colors on
the outside cover of the booklet with the remaining pages printed in one color
("Four Over One"), you shall pay Company, upon Company's request, an amount
equal to the difference between the standard manufacturing costs `for a
compact-disc liner note booklet of eight (8) pages printed Four Over One and the
manufacturing costs for such compact-disc liner note booklet, times the number
of such compact-disc liner note booklets manufactured.
(iv) All sums for Album jackets, tape inlay cards and compact disc
liner notes booklets, which you are required to pay Company pursuant to
subparagraphs (i), (ii) and (iii) above are herein referred to as "Special
Packaging Costs".
(b) If you shall not promptly pay all Special Packaging Costs to Company,
Company shall the right to deduct from all monies other than mechanical
royalties payable to you under this agreement an amount equal to such Special
Packaging Costs.
22. INSURANCE
Company shall have the right to secure insurance with respect to Artist for
Company's own benefit. In this connection, Artist agrees to be available for one
(1) physical examination by a physician of your choice (who is acceptable to the
insurance carrier concerned) as and when reasonably requested to do so and to
complete such questionnaires and other documents which Company or any insurance
carrier may from time to time require in connection with securing and
maintaining such insurance. Company shall keep such information confidential,
except that Company may disclose such information solely to the applicable
insurance carrier(s). The failure by or inability of Artist to be insurable
shall not constitute a breach of this agreement. If Artist shall so request, in
writing, within sixty (60) days after the expiration of the Term of this
agreement, Company shall cancel any then existing insurance policy with respect
to Artist secured pursuant to this paragraph for Company's benefit.
23. ASSIGNMENT
Company shall have the right without your consent to assign this agreement in
whole or in part to BMG, any subsidiary, parent company, affiliate, or to any
third party acquiring a substantial portion of Company's assets or stock;
provided, however, that Company shall remain liable for all payments required to
be made to you hereunder. Neither you nor Artist shall have the right to assign
this agreement or any of your rights or obligations hereunder, except that you
may assign your right to receive royalties hereunder to an entity owned or
controlled by you and/or by all members of Artist.
24. DEFINITIONS
For the purposes of this agreement, the following definitions shall apply:
(a) "Advance": A prepayment of royalties. Company may recoup Advances from
record royalties to be paid or accrued to or on behalf of you or Artist pursuant
to this agreement. Advances
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paid under paragraph 7 shall not be returnable to Company except as specifically
provided in this agreement. Mechanical royalties shall not be chargeable in
recoupment of any Advances. Notwithstanding anything to the contrary expressed
or implied elsewhere herein, nothing may be recouped, deducted, from or set-off
against mechanical royalties.
(b) "Album": A Record or a Multiple Record Set having no less than thirty
five (35) minutes of playing time, and which embodies at least, ten (10) Masters
of different Compositions sold in a single package.
(c) "Any other agreement": Any other agreement with Company relating to
Artist's Recordings or relating to Artist as a recording Artist or as a producer
of Recordings of Artist's own performances.
(d) "Audiovisual Record": A Record which embodies, reproduces, transmits
or communicates visual images, including, without limitation, any Video, but
excluding New Technology Configurations and Cybersales.
(e) "Books and Records": That portion of Company's books and records which
specifically reports: (i) sales and other distributions of Records embodying
Masters recorded hereunder; (ii) net royalty receipts or the net amount received
from any other exploitation of Masters hereunder; and (iii) Recording Costs
incurred in connection with Masters hereunder and any sums specifically charged
against royalties hereunder; provided that such defined term shall not be deemed
to include any manufacturing records (e.g., inventory and/or production records)
or any other of Company's records.
(f) "Budget Record": A Record which is sold by Company or its Principal
Licensee(s) at a price which is at least forty percent (40%) less than below
Company's or the applicable Principal Licensee's then-prevailing suggested
retail list price for Top Line Records, which price is consistently applied by
Company to such Records and which Records are sold by Company or its Principal
Licensee(s) as budget Records.
(g) "Club Operation": A business which is primarily engaged in the direct
marketing to consumers on a membership basis of audio and video products (for
example, Columbia House in the United States or Bertelsmann in Europe).
(h) "Commercially Satisfactory": Any Recording(s) required to be Delivered
hereunder shall not be considered satisfactory unless in Company's reasonably
applied business judgment: (i) it is technically satisfactory for Company's
requirements for the manufacture and sale of records; (ii) it embodies
performances by Artist that are "first class" (as the term is generally
understood in the record industry); and (iii) it is at least of the same
quality, and of a reasonably similar style of music, as Artist's recorded
performances of the immediately preceding Album previously released pursuant to
the terms of this agreement; provided, however, for the purpose of this
subparagraph (iii) only, in the case of the First Album, such Recording(s) shall
be of at least reasonably similar quality, and of the "same style" of music, as
Artist's LP entitled "Blessid Union Of Souls" submitted to, and reviewed by,
Company.
(i) "Composition": A musical composition or medley consisting of words
and/or music, or any dramatic material and bridging passages, whether in the
form of instrumental and/or vocal music, prose or otherwise, irrespective of
length.
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(j) "Container Charge": The applicable percentage, specified below, of the
Gross Royalty Base (net of all taxes included in such Gross Royalty Base Price)
applicable to the Records concerned:
(i) Analog cassette tape - twenty percent (20%) of the Gross Royalty
Base.
(ii) Vinyl LP configuration-ten percent (10%) of the Gross Royalty
Base.
(iii) Records in the following configurations: compact disc,
Audiovisual Record, New Technology Configurations, Cybersales, and Records, (not
including vinyl singles)- twenty percent (20%) of the Gross Royalty Base. There
shall be no Container Charge for Records packaged in Company's stock paper
sleeves without inserts or special elements.
(k) "Delivery," "Deliver," and "Delivered": The actual receipt by Company
of a completed, fully-edited, mixed, DAT master or 1/2" analog tape, as
requested by Company of each Master comprising the applicable Recording
Commitment, approved by Company as Commercially Satisfactory, which tapes shall
in all respects be in the proper form for the production of the parts necessary
for the manufacture or creation of Records, together with Company's receipt of
all materials, consents, approvals, licenses and permissions in respect of each
such Master. Your Delivery obligation shall include all union session reports
and the delivery of a track-by-track list identifying the performers on each
Master and describing their performances and a fully completed "AFFILIATION
EXHIBIT" in the form annexed hereto. Each Master shall be subject to Company's
approval as Commercially Satisfactory, and shall not be deemed Delivered unless
and until such approval is given. Upon the request of Company, Artist shall
re-record any Composition until a Commercially Satisfactory Master shall have
been obtained. Only Masters Delivered in full compliance with the material
provisions of this agreement shall be applied in fulfillment of the Recording
Commitment and no payments shall be made to you in connection with any Masters
which are not in full compliance. Each Master shall be delivered to Company at
PUSH Records located at 53 West 23rd Street, Suite 1100, New York, New York,
10010, or such other place as Company may notify you in writing. For the
purposes of calculating the Term and any other time periods computed on the
basis of the date of Delivery of the applicable Album Recording Commitment
(other than for purposes of any payments under subparagraphs 7(a)(ii)(D),
7(a)(iii)(B), 7(a)(iii), 7(d)(ii)(D), Delivery shall be deemed to have occurred
upon the last day in which Company has accepted and approved as Commercially
Satisfactory hereunder all of the Masters constituting such Album of the
Recording Commitment. All Recordings of Artist's performances made during the
Term, including, without limitation, multi-tracks, session tapes, and outtakes,
but excluding Masters Delivered hereunder, shall be maintained in good condition
at a location selected or approved by Company and Company shall own such
Recordings as provided in paragraph 5 whether or not such Recordings are
Delivered to Company. Any payments made by Company following the physical
delivery of Masters herein but prior to Delivery shall not constitute a waiver
of your Delivery obligations hereunder or of Company's right to approve Masters
as Commercially Satisfactory. If you administer Recording Advances pursuant to
subparagraph 7(b)(i) and thus you are responsible for paying Recording Costs,
then Delivery shall not be deemed complete until: (1) you make all of the
payments referred to in subparagraph 7(b)(i); (2) you pay or furnish Company
with waivers of all other payments (except "per-record royalties") to which any
third party may become entitled and all other costs in connection with those
Recordings or their use in the manufacture and sale of Records; and (3) you
furnish Company with the name of each vocalist who may be a "covered artist"
under Appendix A to the American Federation of Television and Radio Artists
1993-1996 National Code of Fair Practice for Phonograph Recordings (or any
applicable successor agreement) and all required American Federation of
Television and Radio Artists forms, duly completed and executed. Your failure to
notify
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Company of those vocalists shall constitute your warranty and representation
that no such "covered artist" rendered services in connection with the
Recordings.
(l) "EP": A Record embodying thereon four (4) to six (6) Masters.
(m) "Gross Receipts": All monies (including Advances other than
returnable Advances) actually received by Company in the United States, directly
from the applicable exploitation of Masters and/or Videos concerned. (For the
purposes of determining Gross Receipts, any royalties credited to Company's
account but charged in recoupment of a prior Advance made to Company and
retained by the payor by reason of that charge shall be deemed paid to Company
and received by Company when Company receives the accounting reflecting the
credit and charge concerned.) If any monies included in Gross Receipts is
attributable to a Master and/or Video hereunder and to other Recordings, the
amount of that item to be included in Gross Receipts hereunder shall be
reasonably apportioned. If a use of a Master and/or a Video on which a Net
Receipts royalty or a Video Net Receipts royalty is payable hereunder is made
by an affiliate of Company or by a joint venture as to which Company is a party,
Company's discretion in negotiating the amount of the compensation (if any) to
be paid or credited to Company for that use and included in Gross Receipts shall
be conclusive, provided that amount is fair and reasonable under the
circumstances. (The preceding sentence shall apply whether or not the user
derives revenues from the use, and the user's revenues shall not be deemed Gross
Receipts.) Any such amount shall be deemed fair and reasonable if it is
comparable to compensation then being negotiated by Company with unaffiliated
users for comparable uses, or if Company notifies you that it proposes to agree
to the amount concerned and you do not notify Company of your objection within
ten (10) business days. If you make any such objection you shall also notify
Company of your reasons therefor and shall negotiate with Company in good faith
to resolve the difference underlying such objection if Company so requests.
Notwithstanding the foregoing or anything to the contrary expressed or implied
elsewhere herein, with respect to receipts payable for sales through a Club
Operation, Gross Receipts shall specifically not include any profits received by
Company or any Principal Licensee as a joint venturer in such Club Operation
(e.g., The Columbia House Company).
(n) "Master": A Recording embodying a performance by Artist of a single
Composition, or a medley of Compositions, which consists of sound only and is
used or useful in the recording, production, manufacture, and/or exploitation of
Records.
(o) "Maxi-Single": A Record embodying thereon three (3) Masters.
(p) "Mid-Price Record": A Record which is sold by Company or its Principal
Licensee(s) at a price which is at least thirty percent (30%) less than
Company's or the applicable Principal Licensee's then-prevailing suggested
retail list price for Top Line Records and, which price is consistently applied
by Company to such Records and which Records are sold by Company or its
Principal Licensee(s) as mid-priced Records.
(q) "Multiple Record Set": Two or more Records packaged and/or marketed as
a single unit.
(r) "Net Receipts": Gross Receipts from the exploitation of Masters after
deduction by Company of all direct out-of-pocket expenses, taxes, included
therein, and adjustments incurred in the applicable exploitation of Masters
concerned, and/or in connection with the collection and receipt of those Gross
Receipts in the United States (including, without limitation, all copyright
payments, all re-use payments, all Trust Fund payments, and any other third
party payments and any legal fees incurred
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in collecting such monies). If any item deducted from Gross Receipts in
determining Net Receipts is attributable to a Master hereunder and to other
Recordings, the amount of that item to be deducted in determining Net Receipts
hereunder shall be determined by reasonable apportionment.
(s) "Net Sales": One hundred percent (100%) of gross sales, less returns,
credits, and reserves against anticipated returns and credits.
(t) "Person": Any natural person, legal entity or other organized group of
persons or entities. (All pronouns, whether personal or impersonal, which refer
to Persons include natural persons and other Persons.)
(u) "Premium Record": A Record produced for use in promoting the sale of
merchandise other than Records, and which bears the name of the sponsor for whom
the Record is produced.
(v) "Principal Licensee": Company's licensee for the majority of Records
sold on behalf of Company in the territory concerned.
(w) "Record": any form of reproduction, distribution, transmission or
communication of Recordings now or hereafter known (including reproductions of
sound alone, or together with visual images) which is manufactured, distributed,
transmitted or communicated primarily for home use, institutional (e.g., library
or school) use, jukebox use, or use in means of transportation, including,
without limitation, any computer-assisted media (e.g., CD-ROM, DVD, CD Extra,
Enhanced CD) and Cybersales.
(x) "Recording": Any recording of sound, whether or not coupled with a
visual image, by any method and on any substance or material, whether now or
hereafter known, which is used or useful in the recording, production, and/or
manufacture of Records or for any other commercial exploitation of sound.
(y) "Recording Costs": Wages, fees, advances and payments of any nature
(other than royalties) to or in respect of all musicians, vocalists, conductors,
arrangers, orchestrators, engineers, producers, copyists, etc.; payments to a
trustee or fund based on wages to the extent required by any agreement between
Company and any labor organization or trustee; union session scale payable to
Artist; all studio, tape, editing, mixing, re-mixing, mastering and engineering
costs; authoring costs; all costs of travel by persons other than Company
employees, per diems, rehearsal halls, non-studio facilities and equipment,
dubdown, rental and transportation of instruments; all costs occasioned by the
cancellation of any scheduled recording session; and all other costs and
expenses incurred in the production, but not the manufacture, of Masters and
Records hereunder, and any Demos hereunder, which are then customarily
recognized as recording costs in the recording industry. Notwithstanding
anything to the contrary contained herein, any Recording Costs for all remixes
from any particular Album or single which are paid, incurred or reimbursed by
Company after Delivery of the Masters constituting the Album concerned shall be,
to the extent they are recoupable at all, be recoupable solely from royalties
(other than mechanical copyright royalties) payable to you hereunder and shall
not be recoupable from Advances. If Company furnishes any of its own facilities,
materials, services or equipment for which Company has a standard rate, the
amount of such standard rate or if there is no standard rate, the market value
for the services or thing furnished shall be deemed Recording Costs. Payments to
the AFM Special Payments Fund and the Music Performance Trust Fund based upon
record
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sales (so-called "per-record royalties") shall not be recoupable from your
royalties or reimbursable by you.
(z) "Royalty Base Price": The amount specified below ("Gross Royalty
Base") applicable to the Record concerned, less the applicable Container Charge,
excise taxes, duties and other applicable taxes included within the Gross
Royalty Base:
(i) With respect to Records sold for distribution in United States,
the manufacturer's suggested retail price in the United States. Company may
elect, in Company's sole discretion, as of the date of commencement of any
accounting period hereunder (the "New Base Effective Date") to compute royalties
for Net Sales of Records (other than Audiovisual Records) in the United States
occurring on or after the New Base Effective Date (the "New Base Net-Sales")
utilizing a Royalty Base Price derived from the Wholesale Price of such Records
rather than the manufacturer's suggested retail price of such Records. Should
Company elect to do so, the following shall apply in computing royalties for New
Base Net Sales:
(A) The Gross Royalty Base shall be the Wholesale Price (as
defined in subparagraph 24 (hh)) rather than the manufacturer's suggested retail
price in the United States.
(B) New Basic U.S. Rates shall be determined for Singles,
Maxi-Singles. EPs and Albums in each form of Record other than New Technology
Configurations not previously released by Company and methods of Cybersales not
previously exploited by Company. The new Basic U.S. Rate for Singles,
Maxi-Singles, EPs and Albums in a particular form shall be determined by
multiplying the existing Basic U.S. Rate for such Records in such form by a
fraction, the numerator of which is the manufacturer's suggested retail price in
the United States for the majority of such Top Line Records in such form as of
the New Base Effective Date, and the denominator of which is the Wholesale Price
for the majority of such Top Line Records in such form as of the New Base
Effective Date. The New Basic U.S. Rates shall be utilized in lieu of the Basic
U.S. Rates to compute royalties for the New Base Net Sales and for no other
purpose. Notwithstanding the foregoing, on the date of the New Base Effective
Date only, the New Basic U.S. Rates when applied to the New Royalty Base Price
shall yield the same dollars-and-cents royalty amounts payable with respect to
Records immediately prior to the New Base Effective Date.
(C) In computing royalties for New Base Net Sales of New
Technology Configurations released prior to the New Base Effective Date, the
applicable New Basic U.S. Rate shall be reduced as set forth in subparagraph 9
(e) (ii).
(D) In computing royalties for New Base Net Sales through Cybersales, released
prior to the New Base Effective Date, the applicable New Basic U.S. Rate shall
be reduced as set forth in subparagraph 9 (f).
(ii) With respect to Records sold for distribution outside the
United States, the manufacturer's suggested retail price (or its equivalent
constructed price) in the country of manufacture or sale, as Company is paid,
provided that if a retail related base cannot be established in a particular
country, then the base 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
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percent (126%), provided, however, 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.
(iii) With respect to Audiovisual Records, the amount which Company
receives for each Audiovisual Record from Company's distributor, whether or not
affiliated with Company.
(iv) Notwithstanding anything to the contrary expressed or implied
elsewhere herein, the Gross Royalty Base for any Record sold by Cybersales shall
be the price paid by the consumer to Company or its Principal Licensee(s), as
applicable, for the Record concerned.
(aa) "Single": A Record embodying thereon one (1) or two (2) Masters.
(bb) "Top Line Record": A Record bearing the same Gross Royalty Base as
the majority (or plurality) of the new Record releases in the same configuration
of Company's best selling artists.
(cc) "Territory": The world.
(dd) "USNRC Net Sales" - Net Sales of Top Line Records (other than
Audiovisual Records), on which royalties are payable, consisting entirely of
Masters recorded hereunder and sold by Company through normal retail channels in
the United States.
(ee) "Video": An audiovisual work featuring, primarily, the audio
soundtrack of one (1) or more Masters hereunder.
(ff) "Video Net Receipts": Gross Receipts from the exploitation of Videos,
after deduction by Company of all direct expenses, taxes included therein, and
adjustments incurred in connection with the Video Production Costs, the
acquisition of rights in the Video concerned, the applicable exploitation of the
Video concerned, and/or in connection with the collection and receipt of those
Gross Receipts in the United States (including, without limitation, all
copyright payments, all re-use payments under Company's agreements with the
American Federation of Musicians and any other third party payments and any
legal fees incurred in collecting such monies). If any item deducted from Gross
Receipts in determining Video Net Receipts is attributable to a Video hereunder
and to other Recordings or Videos, the amount of that item to be deducted in
determining Video Net Receipts hereunder shall be determined by reasonable
apportionment. Video Net Receipts shall be determined after deducting the
foregoing as well as after deducting a marketing and distribution fee equal to
ten percent (10%) of the applicable Gross Receipts in respect of any broadcast,
telecast, cablecast or other exploitation (excluding the sale of Audiovisual
Records).
(gg) "Video Production Costs": All amounts paid or incurred in connection
with the production, conversion and delivery of Videos. Video Production Costs
include, without limitation, flat fee payments to the publishers of musical
works, unreimbursed costs and expenses incurred in the duplication and delivery
of copies of Videos to licensees, and all direct out-of-pocket costs (such as
for rights, artists (including Artist), producers and other personnel, travel
costs for persons other than Company employees, per-diems, facilities,
materials, services and use of equipment). If Company furnishes any of its own
facilities, materials, services or equipment for which Company has a standard
rate, the amount of such standard rate or if there is no standard rate, the
market value for the services or thing furnished shall be deemed Video
Production Costs. Notwithstanding the foregoing, mechanical royalties paid by
Company in respect of Videos shall not be included in Video Production Costs.
45
<PAGE>
(hh) "Wholesale Price" - The amount which Company or Distributor charges
Customers for each Record in the United States, whether or not affiliated with
Company.
The following terms are defined elsewhere in this agreement as follows:
(A) [INTENTIONALLY OMITTED]
(B) "Basic U.S. Rate"- subparagraph 9(a).
(D) "Consumer Compilation" - subparagraph 6(c)(iii)(A).
(B) "Contract Period" - paragraph 2.
(F) "Controlled Composition" - subparagraph 12(a)(i).
(G) "Cybersales"- subparagraph 9(f).
(H) [INTENTIONALLY OMITTED]
(I) "Escalated U.S. Album Rate" - subparagraph 9(a)(ii).
(J) "Foreign Rate"- subparagraph 9(b).
(K) "Four Over One"- subparagraph 21(c).
(L) "Group" - subparagraph 20(a)(i).
(M) "Materials"- subparagraph 15 (a)(iv).
(N) "New Technology Configurations"- subparagraph 9(e)(ii).
(0) "Option Period"- paragraph 2.
(P) "Recording Advances" - subparagraph 7(b).
(Q) "Recording Commitment" - paragraph 3.
(R) "Re-recording Restriction" - subparagraph 1 5(a)(viii).
(S) "Sampled Material" - subparagraph 4(b).
(T) "Sampling" - subparagraph 4(b).
(U) "Special Packaging Costs" - subparagraph 21(c)(iv).
(V) "Staff Producer" - subparagraph 8(b).
46
<PAGE>
(W) "Subject Masters" - subparagraph 13(d)(i).
(X) "Term" paragraph 2.
(Z) "U.S. Release Cure Period" - subparagraph 6(d).
(AA) "U. S. Release Deadline Period" - subparagraph 6(d).
25. MISCELLANEOUS
(a) This agreement sets forth the entire agreement between the parties
with respect to the subject matter hereof. No modification, amendment, waiver,
termination or discharge of this agreement shall be binding upon Company unless
confirmed by a written instrument signed by an authorized officer of Company, or
binding upon you unless confirmed by a written instrument signed by an
authorized officer of you. A waiver by either you or Company of any term or
condition of this agreement in any instance shall not be deemed or construed as
a waiver of such term or condition for the future, or of any subsequent breach
thereof. All rights, options and remedies in this agreement shall be cumulative
and none of them shall be in limitation of any other remedy, option or right
available to Company or to you. Should any provision of this agreement be
adjudicated by a court of competent jurisdiction as void, invalid or
inoperative, such decision shall not affect any other provision hereof, and the
remainder of this agreement shall be effective as though such void, invalid or
inoperative provision had not been contained herein. The headings of the
paragraphs hereof are for convenience only and shall not be deemed to limit or
in any way affect the scope, meaning or intent of this agreement or any portion
thereof. All accountings and royalties required herein, and all grants made
herein, shall survive and continue beyond the expiration or earlier termination
of this agreement. Neither party shall be entitled to recover damages or to
terminate the Term by reason of any breach by the other party of its material
obligations, unless the latter party has failed to remedy the breach within a
reasonable time following receipt of notice thereof. (The preceding sentence
shall not apply to any recovery to which Company may be entitled by reason of
your failure to fulfill the Recording Commitment hereunder.) If you claim that
additional monies are payable to you hereunder, Company shall not be deemed in
material breach of this agreement unless such claim is reduced to a final
judgment by a court of competent jurisdiction or is settled and Company fails to
pay you the amount thereof within thirty (30) days after Company receives notice
of the entry of such judgment or within thirty (30) days after such settlement,
as applicable. In entering into this agreement, and in providing services
pursuant hereto, you and Artist have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute you or the
Artist as Company's agents or employees, and nothing herein shall constitute a
partnership, joint venture or fiduciary relationship between you and Company.
(b) THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW
YORK AND ITS VALIDITY, CONSTRUCTION, PERFORMANCE AND BREACH SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE WHOLLY
PERFORMED THEREIN. YOU AGREE TO SUBMIT YOURSELF TO THE JURISDICTION OF THE
FEDERAL OR STATE COURTS LOCATED IN NEW YORK CITY IN ANY ACTION WHICH MAY ARISE
OUT OF THIS AGREEMENT AND SAID COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER ALL
47
<PAGE>
DISPUTES BETWEEN COMPANY AND YOU OR BLESSED UNION OF SOULS PERTAINING TO THIS
AGREEMENT AND ALL MATTERS RELATED THERETO. IN THIS REGARD, ANY PROCESS IN ANY
ACTION OR PROCEEDING COMMENCED IN THE COURTS OF THE STATE OF NEW YORK ARISING
OUT OF ANY CLAIM, DISPUTE OR DISAGREEMENT UNDER THIS AGREEMENT MAY, AMONG OTHER
METHODS, BE SERVED UPON YOU BY DELIVERING OR MAILING THE SAME, VIA REGISTERED OR
CERTIFIED MAIL, ADDRESSED TO YOU AT THE ADDRESS PROVIDED HEREIN FOR NOTICES TO
YOU; ANY SUCH DELIVERY OR MAIL SERVICE SHALL BE DEEMED TO HAVE THE SAME FORCE
AND EFFECT AS PERSONAL SERVICE WITHIN THE STATE OF NEW YORK. NOTHING CONTAINED
IN THIS SUBPARAGRAPH 25(b) SHALL PRECLUDE COMPANY FROM JOINING YOU OR BLESSED
UNION OF SOULS IN AN ACTION BROUGHT BY A THIRD PARTY AGAINST COMPANY IN ANY
JURISDICTION, ALTHOUGH COMPANY'S FAILURE TO JOIN YOU OR BLESSID UNION OF SOULS
IN ANY SUCH ACTION IN ONE INSTANCE SHALL NOT CONSTITUTE A WAIVER OF ANY OF
COMPANY'S RIGHTS WITH RESPECT THERETO, OR WITH RESPECT TO ANY SUBSEQUENT ACTION
BROUGHT BY A THIRD PARTY AGAINST COMPANY. NOTHING CONTAINED HEREIN SHALL
CONSTITUTE A WAIVER OF ANY OTHER REMEDIES AVAILABLE TO COMPANY.
(c) This agreement shall not become effective until executed by all
parties.
IN WITNESS WHEREOF, the parties hereto have executed this agreement on the day
and year first above written.
PUSH RECORDS, INC.
By: /s/ [ILLEGIBLE]
-------------------------------------
- ------------------------------------- Legend Entertainment Corporation
Social Security Number:
By: /s/ [ILLEGIBLE]
-------------------------------------
- -------------------------------------
Social Security Number: Tax id #: 31-1470349
-------------------------------
- --------------------------------------
Social Security Number:
- --------------------------------------
Social Security Number:
p/k/a "_______________________"
48
<PAGE>
[ILLEGIBLE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROUP INSTRUMENTS AFofM VOCALIST LEAD PUBLISHING PERFORMANCE
MEMBER PLAYED MEMBER AFTRA MEMBER SINGER COMPANY RIGHTS SOCIETY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
yes yes yes ASCAP
- --------------------------------------------------------------------------------------------------------------
no no no BMI
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROUP INSTRUMENTS AFofM VOCALIST LEAD PUBLISHING PERFORMANCE
MEMBER PLAYED MEMBER AFTRA MEMBER SINGER COMPANY RIGHTS SOCIETY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
yes yes yes ASCAP
- --------------------------------------------------------------------------------------------------------------
no no no BMI
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROUP INSTRUMENTS AFofM VOCALIST LEAD PUBLISHING PERFORMANCE
MEMBER PLAYED MEMBER AFTRA MEMBER SINGER COMPANY RIGHTS SOCIETY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
yes yes yes ASCAP
- --------------------------------------------------------------------------------------------------------------
no no no BMI
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROUP INSTRUMENTS AFofM VOCALIST LEAD PUBLISHING PERFORMANCE
MEMBER PLAYED MEMBER AFTRA MEMBER SINGER COMPANY RIGHTS SOCIETY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
yes yes yes ASCAP
- --------------------------------------------------------------------------------------------------------------
no no no BMI
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Promissory Note of Paradise Music & Entertainment
PROMISSORY NOTE
23,960.25 Dated: August 7, 1998
SECTION 1. General.
1.1 PARADISE MUSIC & ENTERTAINMENT, INC., having an address at 53 West
23rd Street, New York, New York 10010 (referred to as the "Maker"), for value
received, hereby promises to pay on or before the first anniversary of this
Promissory Note (the "Maturity Date"), PAUL THOMAS COHEN, (hereinafter referred
to as the "Holder" or "Payee"), or order, the principal amount of the
outstanding balance of this Promissory Note together with interest on the unpaid
balance of the principal amount hereof from time to time outstanding at the rate
per annum of 10.00% on the Maturity Date. Such interest shall accrue from the
date hereof until the obligation of the Maker with respect to this Promissory
Note shall be fully discharged, and be paid quarterly, in arrears. Interest
hereon shall be computed on the basis of a 365-day year. All payments of
principal and interest on this Promissory Note shall be in such coin or currency
of the United States of America as at the time of payment shall be legal tender
for payment of public and private debts.
1.2 The Maker shall have the right at any time to prepay the whole (or at
any time and from time to time to prepay any part) of the unpaid principal
amount of this Promissory Note, without premium or penalty; provided, however,
that interest on the principal amount hereof to be so prepaid accrued to the
date of such prepayment shall be paid concurrently therewith.
SECTION 2. Conversion.
The holder of this Promissory Note may, at any time and from time to time,
upon written notice, convert the unpaid principal amount of this Promissory Note
together with all interest accrued thereon into shares of the Company's Common
Stock at the price per share of $2 7/8ths per share, which price represents the
fair market value of said restricted securities at the time that this Promissory
Note has been made, executed and delivered. If the Company shall at any time by
subdivision, combination or reclassification of securities or otherwise, change
any of the securities into which this Promissory Note is convertible into a
different number, the conversion price shall be adjusted accordingly. In the
event that the Company merges with or into another corporation, the conversion
price immediately prior to the merger shall remain unchanged and this Promissory
Note shall be convertible into shares of Common Stock of the surviving
corporation based upon the conversion price.
SECTION 3. Non-Negotiability of Promissory Note.
This Promissory Note shall not be transferred, assigned, conveyed or
negotiated by the holder. The Maker may deem and treat the holder of this
Promissory Note as the absolute owner of this Promissory Note for the purpose of
receiving payment hereon or on account hereof and for all other purposes, and
the Maker shall not be affected by any notice to the contrary.
SECTION 4. Events of Default and Remedies.
4.1 The entire principal amount of this Promissory Note together with all
accrued interest hereon, at the option of the holder hereof exercised by written
notice to the Maker at its address then in effect or as set forth herein, shall
forthwith become and be due and payable if any one or more of the following
events (herein called "Events of Default") shall have occurred (for any reason
whatsoever and
-1-
<PAGE>
Promissory Note of Paradise Music & Entertainment
whether such happening shall be voluntary or involuntary or come about or be
effected by operational law or pursuant to or in compliance with any judgment,
decree or order of any court or any order, rule or regulation of any
administration or governmental body) and be continuing at the time of such
notice, that is to say:
(a) if default shall be made in the due and punctual payment of the
principal or interest of this Promissory Note when and as the same shall become
due and payable (the "Default Amount"), whether on the Maturity Date, by
acceleration or otherwise, and such default shall have continued for a period of
fifteen (15) days. During any period in which the Maker is in default pursuant
to this subsection (a), additional interest shall accrue at the penalty rate of
one and one-half percent per (1 1/2%) month on such Default Amount;
(b) if the Maker shall: (i) admit in writing its inability to pay
its debts generally as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any insolvency act; (iii) make an assignment for
the benefit of creditors; (iv) consent to the appointment of a receiver of
itself or of the whole or any substantial part of its property; (v) have a
petition in bankruptcy filed against it, be adjudicated a bankrupt; or (vi) file
a petition or answer seeking reorganization or arrangement under the Federal
bankruptcy laws or any other applicable lay or statute of the Unites States of
America or any State, district or territory thereof;
(c) if a court of competent jurisdiction shall enter, except at the
direct or indirect request of the holder of this Promissory Note, an order,
judgment, or decree appointing, without the consent of the Maker, a receiver of
the Maker of the whole or any substantial part of its property, or approving a
petition filed against it seeking reorganization or arrangement of the Maker
under the Federal bankruptcy laws or any other applicable law or statute of the
United States of America or any State, district or territory thereof, and such
order, judgment or decree shall not vacated or set aside or stayed within
seventy-five (75) days from the date of entry thereof; or
(d) if, under the provisions of any other law for the relief or aid
of debtors, any court of competent jurisdiction shall assume custody or control
of the Maker's assets or of the whole or any substantial part of its property
and such custody or control shall not be terminated or stayed within
seventy-five (75) days from the date of assumption of such custody or control.
4.2 In the case any one or more of the Events of Default specified is
Section 5.1 hereof shall have occurred and be continuing, the holder of this
Promissory Note may proceed to protect and enforce its rights either by suit in
equity and/or by action at law, whether for the specific performance of any
covenant or agreement contained in this Promissory Note, or the holder of this
Promissory Note may proceed to enforce the payment of all sums due upon this
Promissory Note or to enforce any other legal or equitable right of the holder
of this Promissory Note.
4.3 No remedy herein conferred upon the holder is intended to be exclusive
of any other remedy and each and every such remedy shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or otherwise.
-2-
<PAGE>
Promissory Note of Paradise Music & Entertainment
4.4 No course of dealing between the Maker and the holder or any delay on
the part of the holder hereof in exercising any rights hereunder shall operate
as a waiver of any rights of the holder hereof.
SECTION 5. Section Headings.
The Section headings contained herein are for the purpose of convenience
of reference only and are not intended to define or limit the contents of any
such Section.
SECTION 6. Severability.
In the event that one or more of the provisions of this Promissory Note
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Promissory Note, but his Promissory Note shall
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
SECTION 7. Governing Law.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed entirely within such State. The Maker and Payee hereby consent to the
jurisdiction of the Federal and State Courts in and for the State of New York.
PARADISE MUSIC & ENTERTAINMENT, INC.
By /s/ John Loeffler
--------------------------------
John Loeffler, President & CEO
-3-
PROMISSORY NOTE
90,000.00 Dated as of July 1, 1998
SECTION 1. General.
1.1 PARADISE MUSIC & ENTERTAINMENT, INC., having an address at 53 West
23rd Street, New York, New York 10010 (referred to as the "Maker"), for value
received, hereby promises to pay on or before the first anniversary of this
Promissory Note (the "Maturity Date"), THOMAS EDELMAN, (hereinafter referred to
as the "Holder" or "Payee"), or order, the principal amount of the outstanding
balance of this Promissory Note together with interest on the unpaid balance of
the principal amount hereof from time to time outstanding at the rate of one
percent (1%) per month on the Maturity Date. Such interest shall accrue from the
date hereof until the obligation of the Maker with respect to this Promissory
Note shall be fully discharged, and be paid monthly commencing November 1, 1998,
in arrears. Interest hereon shall be computed on the basis of a 360-day year.
All payments of principal and interest on this Promissory Note shall be in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for payment of public and private debts.
1.2 The Maker shall have the right at any time, on ten (10) days' written
notice, to prepay the whole (or at any time and from time to time to prepay any
part) of the unpaid principal amount of this Promissory Note, without premium or
penalty; provided, however, that interest on the principal amount hereof to be
so prepaid accrued to the date of such prepayment shall be paid concurrently
therewith.
SECTION 2. Mandatory Prepayment; Conversion.
2.1 Mandatory Prepayment. At any time after the Maker has received at
least $600,000.00 in gross proceeds from a financing or financings (the "Initial
Financing"), Maker shall promptly pay to the Holder of this Promissory Note the
greater of (a) $45,000 in principal, or (b) the remaining principal balance
hereof, in either case, together with any accrued and unpaid interest thereon
through the date of such prepayment.
2.2 Conversion. At any time that the Maker undertakes a private offering
of its debt or equity securities (whether in one transaction or a series of
transactions which together comprise an integrated securities offering,
including the Initial Financing) (the "Private Placement"), the Holder of this
Promissory Note may, at any time and from time to time, upon written notice,
convert the unpaid principal amount of this Promissory Note together with all
interest accrued thereon, into securities having terms, rights, preferences and
priorities that are in all respects equivalent to those securities sold in the
Private Placement. If the Company shall at any time by subdivision, combination
or reclassification of securities or otherwise, change any of the securities
into which this Promissory Note is convertible into a different number, the
conversion price shall be adjusted accordingly. In the event that the Company
merges with or into another corporation, the conversion price immediately prior
to the merger shall remain unchanged and this Promissory Note shall be
convertible into the equivalent securities of the surviving corporation based
upon the conversion price.
The holder of this Promissory Note may, at any time and from time to time,
upon written notice, convert the unpaid principal amount of this Promissory Note
together with all interest accrued thereon into shares of the Company's Common
Stock at the price per share of $2 7/8ths per share. If the Company shall at any
time by subdivision, combination or reclassification of securities or otherwise,
change any of
-1-
<PAGE>
the securities into which this Promissory Note is convertible into a different
number, the conversion price shall be adjusted accordingly. In the event that
the Company merges with or into another corporation, the conversion price
immediately prior to the merger shall remain unchanged and this Promissory Note
shall be convertible into shares of Common Stock of the surviving corporation
based upon the conversion price.
SECTION 3. Non-Negotiability of Promissory Note.
This Promissory Note shall not be transferred, assigned, conveyed or
negotiated by the Holder without the consent of the Maker, such consent not to
be unreasonably withheld
SECTION 4. Events of Default and Remedies.
4.1 The entire principal amount of this Promissory Note together with all
accrued interest hereon, at the option of the Holder hereof exercised by written
notice to the Maker at its address then in effect or as set forth herein, shall
forthwith become and be due and payable if any one or more of the following
events (herein called "Events of Default") shall have occurred (for any reason
whatsoever and whether such happening shall be voluntary or involuntary or come
about or be effected by operational law or pursuant to or in compliance with any
judgment, decree or order of any court or any order, rule or regulation of any
administration or governmental body) and be continuing at the time of such
notice, that is to say:
(a) if default shall be made in the due and punctual payment of the
principal or interest of this Promissory Note when and as the same shall become
due and payable, whether on the Maturity Date, by acceleration or otherwise, and
such default shall have continued for a period of fifteen (15) days. During any
period in which the Maker is in default pursuant to this subsection (a),
additional interest shall accrue at the penalty rate of one and one-half percent
per (1 1/2%) month on the entire unpaid principal amount and accrued interest. A
default under this Note can only be cured by a (i) waiver on the part of the
Holder, or (ii) by paying the full unpaid principal amount, together with all
accrued unpaid interest (including penalty interest) on this Note;
(b) if the Maker shall: (i) admit in writing its inability to pay
its debts generally as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any insolvency act; (iii) make an assignment for
the benefit of creditors; (iv) consent to the appointment of a receiver of
itself or of the whole or any substantial part of its property; (v) have a
petition in bankruptcy filed against it, be adjudicated a bankrupt; or (vi) file
a petition or answer seeking reorganization or arrangement under the Federal
bankruptcy laws or any other applicable lay or statute of the Unites States of
America or any State, district or territory thereof;
(c) if a court of competent jurisdiction shall enter, except at the
direct or indirect request of the Holder of this Promissory Note, an order,
judgment, or decree appointing, without the consent of the Maker, a receiver of
the Maker of the whole or any substantial part of its property, or approving a
petition filed against it seeking reorganization or arrangement of the Maker
under the Federal bankruptcy laws or any other applicable law or statute of the
United States of America or any State, district or territory thereof, and such
order, judgment or decree shall not vacated or set aside or stayed within
seventy-five (75) days from the date of entry thereof; or
-2-
<PAGE>
(d) if, under the provisions of any other law for the relief or aid
of debtors, any court of competent jurisdiction shall assume custody or control
of the Maker's assets or of the whole or any substantial part of its property
and such custody or control shall not be terminated or stayed within
seventy-five (75) days from the date of assumption of such custody or control.
4.2 In the case any one or more of the Events of Default specified is
Section 5.1 hereof shall have occurred and be continuing, the Holder of this
Promissory Note may proceed to protect and enforce its rights either by suit in
equity and/or by action at law, whether for the specific performance of any
covenant or agreement contained in this Promissory Note, or the Holder of this
Promissory Note may proceed to enforce the payment of all sums due upon this
Promissory Note or to enforce any other legal or equitable right of the Holder
of this Promissory Note.
4.3 No remedy herein conferred upon the Holder is intended to be exclusive
of any other remedy and each and every such remedy shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or otherwise.
4.4 No course of dealing between the Maker and the Holder or any delay on
the part of the Holder hereof in exercising any rights hereunder shall operate
as a waiver of any rights of the Holder hereof.
SECTION 5. Section Headings.
The Section headings contained herein are for the purpose of convenience
of reference only and are not intended to define or limit the contents of any
such Section.
SECTION 6. Severability.
In the event that one or more of the provisions of this Promissory Note
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Promissory Note, but his Promissory Note shall
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
SECTION 7. Governing Law.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed entirely within such State. The Maker and Payee hereby consent to the
jurisdiction of the Federal and State Courts in and for the State of New York.
PARADISE MUSIC & ENTERTAINMENT, INC.
By /s/ John Loeffler
--------------------------------
John Loeffler, President & CEO
-3-
Promissory Note of Paradise Music & Entertainment
PROMISSORY NOTE
23,960.25 Dated: August 7, 1998
SECTION 1. General.
1.1 PARADISE MUSIC & ENTERTAINMENT, INC., having an address at 53 West
23rd Street, New York, New York 10010 (referred to as the "Maker"), for value
received, hereby promises to pay on or before the first anniversary of this
Promissory Note (the "Maturity Date"), PAUL THOMAS COHEN, (hereinafter referred
to as the "Holder" or "Payee"), or order, the principal amount of the
outstanding balance of this Promissory Note together with interest on the unpaid
balance of the principal amount hereof from time to time outstanding at the rate
per annum of 10.00% on the Maturity Date. Such interest shall accrue from the
date hereof until the obligation of the Maker with respect to this Promissory
Note shall be fully discharged, and be paid quarterly, in arrears. Interest
hereon shall be computed on the basis of a 365-day year. All payments of
principal and interest on this Promissory Note shall be in such coin or currency
of the United States of America as at the time of payment shall be legal tender
for payment of public and private debts.
1.2 The Maker shall have the right at any time to prepay the whole (or at
any time and from time to time to prepay any part) of the unpaid principal
amount of this Promissory Note, without premium or penalty; provided, however,
that interest on the principal amount hereof to be so prepaid accrued to the
date of such prepayment shall be paid concurrently therewith.
SECTION 2. Conversion.
The holder of this Promissory Note may, at any time and from time to time,
upon written notice, convert the unpaid principal amount of this Promissory Note
together with all interest accrued thereon into shares of the Company's Common
Stock at the price per share of $27/8ths per share, which price represents the
fair market value of said restricted securities at the time that this Promissory
Note has been made, executed and delivered. If the Company shall at any time by
subdivision, combination or reclassification of securities or otherwise, change
any of the securities into which this Promissory Note is convertible into a
different number, the conversion price shall be adjusted accordingly. In the
event that the Company merges with or into another corporation, the conversion
price immediately prior to the merger shall remain unchanged and this Promissory
Note shall be convertible into shares of Common Stock of the surviving
corporation based upon the conversion price.
SECTION 3. Non-Negotiability of Promissory Note.
This Promissory Note shall not be transferred, assigned, conveyed or
negotiated by the holder. The Maker may deem and treat the holder of this
Promissory Note as the absolute owner of this Promissory Note for the purpose of
receiving payment hereon or on account hereof and for all other purposes, and
the Maker shall not be affected by any notice to the contrary.
SECTION 5. Events of Default and Remedies.
5.1 The entire principal amount of this Promissory Note together with all
accrued interest hereon, at the option of the holder hereof exercised by written
notice to the Maker at its address then in
-1-
<PAGE>
Promissory Note of Paradise Music & Entertainment
effect or as set forth herein, shall forthwith become and be due and payable if
any one or more of the following events (herein called "Events of Default")
shall have occurred (for any reason whatsoever and whether such happening shall
be voluntary or involuntary or come about or be effected by operational law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any administration or governmental body) and be
continuing at the time of such notice, that is to say:
(a) if default shall be made in the due and punctual payment of the
principal or interest of this Promissory Note when and as the same shall become
due and payable (the "Default Amount"), whether on the Maturity Date, by
acceleration or otherwise, and such default shall have continued for a period of
fifteen (15) days. During any period in which the Maker is in default pursuant
to this subsection (a), additional interest shall accrue at the penalty rate of
one and one-half percent per (1 1/2%) month on such Default Amount;
(b) if the Maker shall: (i) admit in writing its inability to pay
its debts generally as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any insolvency act; (iii) make an assignment for
the benefit of creditors; (iv) consent to the appointment of a receiver of
itself or of the whole or any substantial part of its property; (v) have a
petition in bankruptcy filed against it, be adjudicated a bankrupt; or (vi) file
a petition or answer seeking reorganization or arrangement under the Federal
bankruptcy laws or any other applicable lay or statute of the Unites States of
America or any State, district or territory thereof;
(c) if a court of competent jurisdiction shall enter, except at the
direct or indirect request of the holder of this Promissory Note, an order,
judgment, or decree appointing, without the consent of the Maker, a receiver of
the Maker of the whole or any substantial part of its property, or approving a
petition filed against it seeking reorganization or arrangement of the Maker
under the Federal bankruptcy laws or any other applicable law or statute of the
United States of America or any State, district or territory thereof, and such
order, judgment or decree shall not vacated or set aside or stayed within
seventy-five (75) days from the date of entry thereof; or
(d) if, under the provisions of any other law for the relief or aid
of debtors, any court of competent jurisdiction shall assume custody or control
of the Maker's assets or of the whole or any substantial part of its property
and such custody or control shall not be terminated or stayed within
seventy-five (75) days from the date of assumption of such custody or control.
5.2 In the case any one or more of the Events of Default specified is
Section 5.1 hereof shall have occurred and be continuing, the holder of this
Promissory Note may proceed to protect and enforce its rights either by suit in
equity and/or by action at law, whether for the specific performance of any
covenant or agreement contained in this Promissory Note, or the holder of this
Promissory Note may proceed to enforce the payment of all sums due upon this
Promissory Note or to enforce any other legal or equitable right of the holder
of this Promissory Note.
5.3 No remedy herein conferred upon the holder is intended to be exclusive
of any other remedy and each and every such remedy shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or otherwise.
-2-
<PAGE>
Promissory Note of Paradise Music & Entertainment
5.4 No course of dealing between the Maker and the holder or any delay on
the part of the holder hereof in exercising any rights hereunder shall operate
as a waiver of any rights of the holder hereof.
SECTION 6. Section Headings.
The Section headings contained herein are for the purpose of convenience
of reference only and are not intended to define or limit the contents of any
such Section.
SECTION 7. Severability.
In the event that one or more of the provisions of this Promissory Note
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Promissory Note, but his Promissory Note shall
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
SECTION 8. Governing Law.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed entirely within such State. The Maker and Payee hereby consent to the
jurisdiction of the Federal and State Courts in and for the State of New York.
PARADISE MUSIC & ENTERTAINMENT, INC.
By /s/ John Loeffler
----------------------------------
John Loeffler, President & CEO
-3-
Letterhead of
Paradise Music & Entertainment, Inc.
September 28, 1998
Messrs. John Loeffler, Jon Small,
Brian Doyle and Richard Flynn
C/o Paradise Music & Entertainment, Inc.
53 West 23rd Street - 11th Floor
New York, NY 10010
Gentlemen:
This letter will memorialize our agreement with respect to the terms on which
amended and restated employment agreements (the "Agreements") for each of you
(the "Executives") will be prepared, negotiated and executed at the earliest
practicable opportunity.
1. Form of Agreement. Except as set forth below with respect to (i) the term of
the Agreements, (ii) certain provisions relating to compensation, and (iii)
certain provisions relating to non-competition, the form of Agreement will
reflect (without amendment, modification or supplementation) all of the
operative terms, benefits and conditions now contained in the employment
agreements covering the Executives as of the date hereof .
2. Term. The term of the Agreements (the "Term") will commence on the first
regularly scheduled pay period after the date on which such Agreements are
executed and expire on June 30, 2001. All parties agree to use their best
efforts to negotiate in good faith and to execute such Agreements as soon as
practicable after the date hereof.
3. Non-Compete.
A. Non-compete. The non-competition section of the existing
employment agreements will be amended in the new Agreements to provide
that if any Executive leaves the employ of the Company voluntarily (other
than for "Good Reason" as defined below), or is terminated for cause (but
only for cause), that such Executive will (i) surrender for cancellation
all securities of the Company owned by such Executive equal to the amount
of stock that such Executive received pursuant to that certain Exchange
Agreement dated as of October 9, 1996, (ii) forfeit all accrued, but
unpaid, compensation through the date of such Executive's departure, and
(iii) pay to the Company 25% of the gross client profit (defined as
revenues minus cost of goods sold) for any Clients or Artists (as defined
in the existing employment agreements) originated, or developed since
October 9, 1996 by the Executive or the subsidiary employing Executive
(the "Termination Payments"). Termination Payments will be paid to the
Company on all gross client profit earned by the Executive or the
subsidiary employing Executive for remainder of the Term. A list of
Clients and Artists affected by the 25% gross client profit allocation
will be provided to the Board and appended to each Employment Agreement.
The terms, conditions and payments described in subsections (i) through
(iii) above are hereafter referred to as the "Non-compete Consideration".
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
September 28, 1998
Page 2
The definition of cause contained in Section 7(b) of the existing
employment agreements shall be amended and restated in its entirety to
read as follows:
"(b) Commission of a willful or intentional act which has
materially injured the reputation, business or business
relationships of the Employer, including the violation of the terms
of Sections 10 and 11 hereof, which is not cured within 30 days
after Executive has received a written notice from the Company
stating in reasonable detail the willful or intentional act(s) at
issue and the nature of the injury or damage."
B. Good Reason. For purposes of this Agreement, "Good Reason" shall
mean (i) any breach of this Agreement by the Company, (ii) a material
diminution of an Executive's responsibilities, loss of title or position
with the Company or the subsidiary employing the Executive, or the failure
to reelect the Executive to the Board of Directors of the Company, (iii) a
material reduction in any Executive's base salary from that stated in this
Agreement or other benefits as in effect at the time in question, or (iv)
the failure by a successor to the Company to assume this Agreement.
4. Compensation.
A. Base Salaries. The base salaries ("Base Salaries") for Messrs.
Loeffler, Small, Doyle and Flynn will be $200,000 per annum, payable in
accordance with the Company's existing payroll practices. In recognition
of his performance for fiscal year 1998, Mr. Small's Base Salary will be
$320,000 per annum for fiscal year 1999 and for so long as Mr. Small earns
during any subsequent fiscal year of the Term an amount of Base Salary and
compensation from his Tier 3 Bonus (as described below) in an amount
greater than $320,000 per annum, Mr. Small shall be entitled to draw his
compensation at the rate of $320,000 per annum. In the event that Picture
Vision earns less than $320,000 (a "Picture Vision Shortfall")in Net
Profit (as hereafter defined) in any fiscal year, then Mr. Small's Base
Salary for the next fiscal year shall be reduced (but not below $200,000
per annum) by the amount of such Picture Vision Shortfall. The President
and CEO of the Company shall be entitled to receive a fee of $25,000 per
annum, payable in accordance with the Company's existing payroll practices
in addition to Base Salary or the compensation from any Bonus.
B. Tier 1, Tier 2 and Tier 3 Bonuses. For purposes hereof, the term
"Net Profit" shall mean pretax income as determined by the Company's
auditors in accordance with generally accepted accounting principles
consistently applied ("GAAP") (without any chargeback of corporate
overhead but after accounting for the payment of the Base Salary actually
received by such Executive in such year. A Tier 1 Net Profit threshold
will be established for each Executive as follows:
Name: Tier 1 Net Profit Threshold:
John Loeffler $200,000 in Net Profit from Rave.
Jon Small $0 from Picture Vision for any fiscal year that Mr.
Small's Base Salary is $320,000, otherwise up to
$200,000 in Net Profits from Picture Vision.
Brian Doyle An aggregate of $400,000 in Net Profits from the
and Richard Flynn operations of All Access Entertainment, Inc. ("All
Access") and PUSH Records, Inc. ("PUSH").
For purposes hereof, the losses of one subsidiary, if any, will not be
offset against the Net Profits generated by the other subsidiary other
than as set forth in subsection D below.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
September 28, 1998
Page 3
(i) An Executive will be entitled to receive (the "Tier 1
Bonus") 50% of each dollar of Net Profit earned by the operating
subsidiary that pays his Base Salary up to the Net Profit Threshold.
(ii) Messrs. Loeffler, Doyle and Flynn will be entitled to
receive (the "Tier 2 Bonus") equal to 15% of each dollar of Net
Profit earned by the operating subsidiary that pays his Base Salary
above the Net Profit Threshold. Mr. Small shall have no Tier 2 Bonus
for so long as his Base Salary is $320,000. In such event, the first
$200,000 in Net Profit shall be allocated 100% to the Company until
the Company has earned $200,000 and thereafter (the "Tier 3 Bonus"),
Net Profit from Picture Vision shall be allocated 75% to the Company
and 25% to Mr. Small. In the event that Mr. Small's Base Salary has
been reduced by any Picture Vision Shortfall, then the next $X in
Net Profit (where "X" equals the Picture Vision Shortfall for the
previous year) shall be allocated to Mr. Small (in lieu of a Tier 2
Bonus) such that Mr. Small shall have received compensation in such
year up to $320,000, then the next $200,000 in Net Profits shall be
allocated to the Company. Thereafter, Net Profits shall be allocated
75% to the Company and 25% to Mr. Small.
C. Messrs. Doyle and Flynn shall prepare (prior to the execution of
the Agreements) a realistic projection of the anticipated results of
operations for PUSH for fiscal year 1998 (the "PUSH Budget"). The PUSH
Budget shall be reviewed and approved by the Board of Directors of the
Company. If PUSH amends the PUSH Budget to produce, license, market or
distribute records which are not reflected on the PUSH Budget as approved
(as was the case with the signing of Blessid Union of Souls in fiscal year
1998), such amendments must be approved by the Board of Directors and the
results of operations projected in such amended budget shall be deemed the
new PUSH Budget. Prior to June 1 of each fiscal year, PUSH shall prepare a
PUSH Budget for the next fiscal year which budget shall be submitted to
the Board for its approval. Once approved by the Board, such PUSH Budget
will establish the operating budget, subject to amendment as provided
above, for the ensuing fiscal year.
D. Net Profit for each operating subsidiary shall be computed on a
quarterly basis prior to the date on which the Company files its
consolidated results of operation with the SEC for the period covered. To
the extent that the results of operations for a subsidiary indicate that
they have earned Net Profit, then a Tier 1 Bonus (but not a Tier 2 or Tier
3 Bonus) shall be paid to the appropriate Executive on such Net Profit.
The maximum Tier 1 Bonus that will be paid for any quarter is 25% of the
maximum Tier 1 Bonus that an Executive could earn over the course of a
full year. If the results of operation for such quarter indicate that the
operating subsidiary has an operating loss, then such loss shall be
carried forward (as would any earned but unpaid Tier 1 Bonus amounts from
the previous quarter) and aggregated into the results for the next
succeeding quarter; provided, however, that any cumulative losses for any
fiscal year up to $200,000 shall not be carried forward into the next
succeeding fiscal year. Losses in excess of $200,000 for any operating
subsidiary (and, in the case of PUSH, $200,000 worse than the PUSH Budget,
as amended, for the year at issue) ("Excess Losses"), shall be carried
forward into the next fiscal year and these losses must be recouped before
any Tier 1, Tier 2 and Tier 3 Bonuses are paid to the Executive affiliated
with such operating subsidiary. In the case of PUSH and All Access
Entertainment Management Group, Inc. ("All Access"), Excess Losses for
either PUSH or All Access shall offset, on a dollar-for-dollar basis, Net
Profit from the other entity before any Bonus is paid to either Messrs.
Flynn and Doyle.
E. Tier 2 and Tier 3 Bonuses shall only be paid on Net Profit earned
above the Tier 1 Net Bonus Threshold on a subsidiary's operating results
for any fiscal year after such results have been (i) audited by the
Company's auditors and (ii) reported to the SEC on Form 10-K or any
successor form.
F. It is understood and agreed that Tier 1 and Tier 2 Bonuses earned
on the results of operations for PUSH and/or All Access can be allocated
to Messrs. Flynn and Doyle 50%/50% or in such other manner as mutually
determined in their sole discretion.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
September 28, 1998
Page 4
G. Tier 1, Tier 2 and Tier 3 Bonuses earned for any fiscal year can
be taken in cash or stock, at the option of the Executive, and paid
currently, or paid into the Company's deferred compensation plan to be
established prior to the Offering. If paid into the deferred compensation
plan in cash, the trustee of the plan will invest them in the same manner
as if they were pension funds contributions (e.g., in mutual funds, etc.).
If paid into the deferred compensation plan in the form of stock, the
Company will promptly issue to the plan for the benefit of the
contributing Executive an amount of stock equal to (i) the amount of the
deferred bonus contributed by the Executive, (ii) divided by the market
price of the Company's common stock (as determined under the plan). For
the first $30,000 contributed in stock, the Company shall contribute an
additional $30,000 in stock.
H. If a subsidiary earns over $500,000 in Net Profit in any year
(after deducting Tier 1, Tier 2 and Tier 3 Bonuses paid), the Executive
will earn one restricted share of stock for each $5.00 in Net Profit over
the $500,000 threshold up to an aggregate of 25,000 shares.
I. In addition to participation in all of the above-described plans,
after PUSH has recouped (i) all cumulative losses for such subsidiary (as
determined as of June 30th of each previous fiscal year , plus (ii) a
cumulative 20% annualized return on such investment, plus (iii) the cost
(as computed by the Company's auditors in accordance with GAAP) associated
with the distribution of the Bonus Shares (as defined), the Messrs. Doyle
and Flynn will be awarded 291,000 shares (the "Bonus Shares"). Such Bonus
Shares can be (i) earned on a pro rata basis as cumulative Net Profit is
earned by the label and (ii) allocated as determined by Messrs. Flynn and
Doyle. If the Bonus Shares are taken as deferred compensation, they will
not be matched by the Company.
5. Prior Advances; 144 Stock Sales. In exchange for the Non-compete
Consideration, any amounts deemed advances relating to the existing employment
agreements in place for fiscal year 1998 are forgiven. The proceeds from Mr.
Loeffler's Rule 144 stock sales will be applied towards repayment of $63,000 of
the currently outstanding $129,000 loan which has previously been advanced to
Mr. Loeffler by the Company. The proceeds from the sale of stock pursuant to SEC
Rule 144 for Messrs. Small, Flynn, and Doyle are to be converted into stock at
the rate of $2 7/8ths per share.
6. Client Accounts and Funds. "Client Funds", which shall be defined herein to
mean monies advanced by a third party to any subsidiary of the Company for use
by that subsidiary in connection with the production of a particular project,
shall not be available to or used by the Company for any other purpose
whatsoever including, without limitation, for capital expenditures unrelated to
such production or as collateral for any pledge or security interest granted by
the Company, it being understood that, at all times the subsidiary in receipt of
such Client Funds shall have the sole right to deposit and maintain such Client
Funds within a bank account or accounts maintained and managed by such
subsidiary and the Company shall have no right to access any such account(s).
Should the Company violate the terms and conditions of the preceding sentence
and attempt, in any way, to access or utilize such Client Funds for any purpose,
the parties hereto agree that such attempt shall subject the applicable
subsidiary to irreparable injury, for which money damages are insufficient as a
remedy, and, therefore, in addition to such legal remedies to which the
subsidiary and its principal(s) may be entitled, the subsidiary and its
principal(s) shall be entitled to enjoin the Company from accessing or utilizing
such Client Funds in any manner. Notwithstanding the foregoing, the Company
shall have the right to require each subsidiary to remit to the Company only
those amounts from available cash flow (after payment of production
expenditures, SG&A and a reasonable reserve) which constitute net profits of
such subsidiary not previously distributed. The Company agrees to cause its
Board of Directors to adopt a proper resolution approving the terms and
conditions of this provision and to take all other corporate action necessary to
ensure that this provision is enforceable, including without limitation, making
any required amendments to the Company's Certificate of Incorporation and
Bylaws. This provision is the essence of this Agreement and shall survive the
termination this Agreement for any reason.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
September 28, 1998
Page 5
7. Termination of This Agreement. In the event that the Company has not obtained
a firm commitment for a bridge financing in an amount equal to or greater than
$600,000 and closed on at least the first advance under such financing on or
before October 30, 1998 (and such date has not been extended in writing by all
of the parties hereto), then this letter agreement and the terms and conditions
set forth herein, including, without limitation, Section 3 hereof, shall
immediately terminate and be deemed of no force and effect.
8. Miscellaneous. This letter may be amended, modified, superseded, canceled,
renewed or extended, and the terms and conditions hereof may be waived, only by
a written instrument signed by each of the parties hereto, or in the case of a
waiver, signed by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power or privilege hereunder, nor any single or partial exercise of any right,
power or privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder. The rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies that any party may otherwise have at law or in equity. This letter
shall be governed by and construed in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of law. All of the
parties hereto, for themselves and their respective officers and directors
individually, jointly and severally, hereby consent to the jurisdiction of the
courts in and for the State of New York with respect to any disputes or other
matters arising over this letter and the transactions contemplated hereby. This
letter is not assignable except by operation of law or as specifically set forth
herein. All pronouns and any variations thereof refer to the masculine, feminine
or neuter, singular or plural, as the identity of the person or persons may
required. This letter may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
<PAGE>
Messrs. Loeffler, Small, Flynn and Doyle
Paradise Music & Entertainment, Inc.
September 28, 1998
Page 6
If the above is satisfactory to you and adequately reflects our understanding,
please acknowledge by executing in the space below provided.
PARADISE MUSIC & ENTERTAINMENT, INC.
By: /s/ John Loeffler
--------------------------
John Loeffler, Chairman
/s/ John Loeffler /s/ Jon Small
- ----------------------------- -----------------------------
John Loeffler, an Executive Jon Small, an Executive
/s/ Brian Doyle /s/ Richard Flynn
- ----------------------------- -----------------------------
Brian Doyle, an Executive Richard Flynn, an Executive
ACKNOWLEDGED AND ACCEPTED BY:
/s/ Thomas Edelman /s/ P. Thomas Cohen
- ----------------------------- -----------------------------
Thomas Edelman, Director P. Thomas Cohen, Director
[Letterhead of CCF Capital Group, Inc.]
September 24, 1998
Mr. John Loeffler
President and CEO
Paradise Music and Entertainment, Inc.
53 West 23rd Street
New York, New York 10010
Dear John:
This Letter of Agreement will confirm the understanding between Paradise Music
and Entertainment, Inc. and its other subsidiaries ("Client") and CCF Capital
Group, Inc. ("CCFC") or its assignee pursuant to which CCFC is hereby retained
as financial advisor, on the terms and conditions set forth herein, for the
purposes of: 1) providing financial advice and strategic planning with respect
to the operations of the Client; 2) assisting in identifying a potential partner
for merger or acquisition and the negotiation and structure of said merger or
acquisition; 3) assisting in a best effort to raise equity capital or debt or
credit facilities of up to $3,000,000 for the Client.
1. RETENTION/TERM:
Client hereby retains CCFC as its non-exclusive financial advisor in connection
with the Project for a period of 36 months from the date hereof, renewable
thereafter with the consent of both parties (the "Term"). The Term may be
cancelled by either party after the ninth month anniversary of the date hereof;
provided, however, that the cancelling party provides written notice of such
cancellation at least 90-days prior to the effective date of such termination.
2. OFFERING MATERIAL:
To the extent required and as requested by CCFC, Client will furnish CCFC with
sufficient information in order to prepare an appropriate offering memorandum
with respect to Client's business and/or future project offerings, and/or
financing as may be undertaken by Client pursuant to this engagement from time
to time (collectively, "Offering Materials"). Client represents that all
Offering Materials will not contain any untrue or misleading
1
<PAGE>
statements of material fact or omit to state any material fact reasonably
required to be stated therein, Client further agrees to advise CCFC immediately
upon the occurrence of any event or other change which results in the Offering
Materials containing any untrue or misleading statement of a material fact or
emitting to state any material fact required to be stated therein.
3. CCFC'S UNDERTAKINGS:
CCFC will undertake to:
(i) To assist Client in the preparation of the Offering Materials, the
contents of which are the responsibility of the Client;
(ii) To advise the Client on costs, rates and amount at which the Client's
business/assets will be marketed;
(iii) To promote the Client and the Client's business, as applicable, to
potential investors;
(iv) To make representatives of CCFC available to meet with potential investors
and the Client as may be reasonably required.
(v) To assist in the preparation of Reg. D with S-3 filing up to 20% of
outstanding shares issued with terms to be agreed by both parties.
4. INITIAL RETAINER
Client agrees to pay CCFC an initial retainer of $75,000.00 payable as follows:
(a) $18,750 shall be due and payable on the Closing Date as such term is
defined in that certain letter agreement dated as of even date hereof
between the Client and Pines International Resorts, Inc. (the "Pines
Agreement");
(b) $18,750 shall be due and payable on the date that the remainder of monies
due to the Client under the Pine Agreement is funded; and
(c) $18,750 shall be due and payable on the 45th date following the payment
referred to in (b) above and $18,750 shall be due and payable on the 9Oth
day following the payment referred to in (b) above. In addition to the
fees described above, CCFC shall be entitled to a monthly retainer equal
to $6,500 per month beginning with the first calendar month following the
Closing Date, and 100,000 shares of the Client's Common Stock which shares
are to be issued on (and included for registration with) the date that the
Client files its S-3 registration statement in fulfillment of its
obligation under the Pines Agreement.
Financing Fees:
2
<PAGE>
Client agrees to retain CCFC as its non-exclusive financial advisor in
connection with any Project financing to be undertaken by Client during the Term
subject to the successful completion of the Project, and pay CCFC success fees
at the completion of such financing based on the gross proceeds of such
financing from investors directly introduced by CCFC, as follows:
(i) 1.5% on senior debt;
(ii) 4% on a subordinated debt and preferred stock
(iii) On closing of a Common Stock offering (other than the Pines transaction),
CCFC will receive 10% of the common stock issuable to investors in such
transaction with registration rights and a 10% cash fee for all monies
raised.
5. COMPENSATION:
Monthly compensation will begin 30 days following the closing of any transaction
listed above shall be $6,500.00. All pre-approved out of pocket expenses to be
reimbursed by Client within (14) fourteen days of submitted invoice.
6. CONFIDENTIALITY:
CCFC agrees to keep any non-public information about the Client confidential so
long as it remains non-public, unless disclosure is required by law by any
governmental or regulatory agency or body and CCFC will not make any use
thereof, except in connection with the services thereunder for the Client. Any
advice rendered to Client by CCFC pursuant to this letter may not be disclosed
publicly in any manner without CCFCs written consent and will be treated by
Client as confidential.
7. INDEMNIFICATION:
Client agrees to indemnify and hold CCFC and its affiliates, control persons,
officers, employees and agents (each an "Indemnified Person") harmless from and
against all losses, claims, damages, liabilities, costs or expenses, joint or
several, resulting from any threatened or pending investigation, action,
proceeding or dispute (collectively, "Claims"), resulting from CCFC's entering
into or performing services under this Agreement or arising out of any matter
referred to in this Agreement. This indemnity shall also include CCFC's and/or
any such other Indemnified Person's reasonable attorneys' and accountants' fees
and out-of-pocket expenses incurred, provided, however, that the indemnity in
this paragraph shall not apply where a court of competent jurisdiction has made
a final determination that CCFC acted in a grossly negligent manner or engaged
in willful
3
<PAGE>
misconduct in the performance of its services hereunder which gave rise to loss,
claim, damage, liability, cost or expense sought to be recovered thereunder.
CCFC agrees to indemnify and hold Client, and its affiliates, control persons,
officers, employees and agents harmless from and against all losses, claims
damages, liabilities, cost and expenses, joint and several resulting from
threatened or pending investigation action proceeding or dispute arising from
CCFC's gross negligence or willful misconduct. The provisions of this section
shall Survive the termination and expiration of this Agreement.
8. RIGHT OF FIRST REFUSAL
CCFC will have the right of first refusal for providing investment banking
services on any and all future endeavors in which the Client may be involved,
which right may be exercised by CCFC in writing directed to the Client not more
than 30 days after receiving any third-party financing proposal presented to
CCFC in writing by the Client provided, however, that the terms on which CCFC
agrees to provide such financing is at least as favorable on the terms of the
third-party financing.
9. NOTICES
Notice given such pursuant to any of the provisions of this Agreement shall be
in writing and shall be mailed or delivered to Client: at 53 West 23rd Street,
New York, New York 10010, Attention: Mr. John Loeffler, and to CCF Capital
Group, Inc. at 950 Third Avenue, Suite 2500, New York, NY 10022 Attention: Mr.
James Young, Executive Vice President.
10. NON-CIRCUMVENTION
Client agrees not to circumvent CCFC in its fund raising/acquisition/merger
efforts on behalf of Client, and furthermore agrees not to negotiate with any
other source (s) regarding the fund raising effort without notice to CCFC.
11. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts, each
of which shall be deemed an original, but all of which shall constitute one and
the same instrument.
12. THIRD PARTY BENEFICIARIES
4
<PAGE>
This Agreement has been and is made solely for the benefit of Client and the
respective entities thereof (as the case may be), CCFC and assignees thereof and
the indemnified Persons and their respective successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement.
13. CONSTRUCTION
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York.
14. HEADINGS
The section headings in this Agreement have been inserted as a matter of
convenience and are not a part of this Agreement.
Please sign at closing and return two copies of this letter together with a
check for $6,500.00 payable to CCF Capital Group, Inc. to indicate your
acceptance of the terms set forth herein, whereupon this letter and your
acceptance shall constitute a binding agreement between Client and CCFC. The
additional copy is for your records.
Sincerely,
/s/ James Young
- -----------------------
CCF Capital Group, Inc.
James Young
Executive Vice resident
Agreed & Accepted this day of September, 1998
The undersigned represents that he has the authority to execute this agreement
on behalf of the Company.
/s/ John Loeffler
- -----------------------
Paradise Music and Entertainment, Inc.
John Loeffler
President and CEO
5
[Letterhead of Pines International Resorts, Inc.]
October 6, 1998
VIA FACSIMILE: (212) 590-2121
Paradise Music and Entertainment, Inc.
53rd West 23rd Street
New York, New York 10010
John Loeffler -- President and CEO
Dear Mr. Loeffler:
This letter confirms Paradise Music and Entertainment, Inc., NASDAQ symbol
PDSE ("Company") is offering for sale 500,000 Common Shares ("Shares") to Pines
International Resorts, Inc. ("Pines") for $775,000. Following execution of this
agreement, the Company and Pines will use their respective best efforts to
expedite the completion of the documentation. The parties to this agreement
agree as follows:
1. The Company will issue to Pines 500,000 shares of Common Stock, in
reliance on the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended ("the Act").
2. Pines will pay Company $775,000 as follows:
a. $345,000 within five business days after delivery of the
certificate(s) evidencing 500,000 shares of Common Stock
of the Company, into an account in the name Pines
International Resorts, Inc.; and
b. $430,000 within one week of the date the Company files
the S-3 registration statement.
3. The Company must, at its sole expense, file a registration statement
within (30) days of the Closing Date (as defined below) on Form S-3
covering the 500,000 shares issued hereunder together with (i) the
350,00 shares underlying the Options (as defined below) and (ii) the
100,000 shares issued pursuant to the CCF Agreement. The Company
represents that it is eligible to register the resale of the Shares
on Form S-3. If the registration statement is not declared effective
by the SEC within 90 days of the Closing Date, as liquidated damages
the Company agrees to, at the option of Pines, (1) issue 100,000
shares of registered shares to Pines International Resorts, Inc. or
(2) pay to Pines International Resorts, Inc. $50,000 cash for each
month, thereafter that the registration is not effective. The
registration statement will be kept effective until such time as the
Shares can be freely sold without registration.
4. The "Closing Date" shall mean the date upon which the first monies
are tendered by Pines.
5. The Company agrees that should a Secondary Offering be issued before
the registration of the Pines' stock is completed then Pines will be
given "piggy-back" rights in said offering.
6. The Company agrees that should the registration not be completed by
the end of the Rule 144 holding period then the Company will not
withhold issuing it's 144 option.
7. The parties acknowledge that a placement fee of $75,000 will be paid
to CCF Capital Group, Inc. pursuant to that certain letter agreement
dated as of September 24, 1998.
8. The Company further agrees to issue to Pines options to purchase
shares of the company's common stock in accordance with the
following schedule (the "Options"):
<PAGE>
Number of Shares: Price Per Share: Option Period:
- ----------------- ---------------- --------------
100,000 $1.55 Date hereof through 90 days after the S-3
effective date.
150,000 $1.55 Date hereof through 12/31/99.
50,000 $2.00 Date hereof through 12/31/99.
50,000 $2.50 Date hereof through 12/31/99.
The shares underlying these options shall be registered on Form S-3 together
with the other shares issued to Pines in connection with Section 2 above.
Please confirm your agreement of the terms by executing a copy of this letter
where indicated below and returning via facsimile.
Sincerely yours,
/s/ Waylon E. McMullen
Waylon E. McMullen
President
Agreed & Accepted this _____ day of October, 1998.
The undersigned that he has the authority to execute this agreement on behalf of
the Company.
Paradise Music and Entertainment, Inc.
By: /s/ John Loeffler, President
-------------------------------------
Acknowledged:
Donald & Co. Securities, Inc.
By: /s/ [ILLEGIBLE]
-------------------------------------
An Authorized Officer
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
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0
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