Report of the Compensation Committee
The information contained in this report shall not be deemed to be "soliciting
material" or "filed" or incorporated by reference in future filings with the
SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act
of 1934, except to the extent that we specifically incorporate it by reference
into a document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The Compensation Committee is responsible for overseeing our compensation
programs. As part of that responsibility, the Compensation Committee determines
all compensation for the Chief Executive Officer and the Company's other
executive officers as defined by SEC rules.
The compensation for the Company's executive officers consists of base salary
and annual target bonuses. The executive officers do not receive any other
compensation or benefits other than standard benefits available to all U.S.
employees, which primarily consist of health plans, the opportunity to
participate in the company's 401(k) plan, basic life insurance and accidental
death insurance coverage. In addition, our executive officers receive long-term
incentives in the form of equity grants or the opportunity to purchase equity of
the Company.
In determining the compensation of the executive officers, the Compensation
Committee seeks to establish a level of compensation that is (a) appropriate for
the size and financial condition of the Company, (b) structured so as to attract
and retain qualified executives and (c) tied to annual financial performance and
long-term stockholder value creation.
The Company has entered into employment agreements with each of its executive
officers, which establish each executive's base salary and annual target bonus.
In addition, by evaluating their roles and responsibilities, each executive
officer was allowed to invest in equity of the Company or was awarded equity in
the form of stock options or restricted stock in connection with their
employment. The Compensation Committee believes these arrangements are
reasonable and competitive compared to other companies the Company competes with
for the attraction and retention of talent.
Executive Officer Base Salaries
Executive officers' salaries are determined pursuant to the terms of their
respective employment agreements. In cases where base salary increases are at
the discretion of the Compensation Committee pursuant to the terms of an
executive officer's employment agreement, the Compensation Committee annually
reviews base salaries and any increases are based on the Company's overall
performance and the executive's individual performance during the preceding
year.
Executive Officer Annual Bonuses
Executive officers were eligible for annual bonuses for 2006 based upon minimums
or targets set forth in their employment agreements. The Compensation Committee
based executive officer bonuses on the minimums or targets set forth in their
employment agreements and, in cases where bonus amounts are at the discretion of
the Compensation Committee, on comparisons with prior-year bonuses, the
Company's overall performance and subjective factors related to the executive's
individual performance during the preceding year. At its October 19,
2006, December 4, 2006 and December 6, 2006 meetings, the Compensation Committee
considered various data including specific factors regarding the performance of
the Company, including comparisons of fiscal 2006 revenue and operating income
before depreciation and amortization (or OIBDA), to the prior year and versus
budgets, subjective factors regarding the individual performance of the
Company's executive officers and external and internal comparable compensation
data to determine appropriate bonuses. The Compensation Committee determined
that based on the Company's financial results and review of other factors, the
executive officers were entitled to payments ranging from 100% to 286% of their
minimum or target bonuses. The
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Compensation Committee of the Board of Directors approved the award of bonuses
to the named executive officers listed below as follows:
• Edgar Bronfman, Jr., the Company's Chairman of the Board and CEO, was
awarded an annual cash bonus of $6,000,000;
• Lyor Cohen, the Company's Chairman and CEO of U.S. Recorded Music, was
awarded an annual cash bonus of $4,500,000;
• Michael Fleisher, the Company's Executive Vice President and CFO, was
awarded an annual cash bonus of $1,400,000;
• David H. Johnson, the Company's Executive Vice President, General Counsel
and Secretary, was awarded an annual cash bonus of $800,000; and
• Alex Zubillaga, the Company's Executive Vice President, Digital Strategy
and Business Development, was awarded an annual cash bonus of $1,000,000.
Equity Compensation Grants
The Compensation Committee is responsible for establishing and administering the
Company's equity compensation programs and for awarding equity compensation to
the executive officers. To date, the sole forms of equity compensation awarded
to or purchased by officers and employees have been restricted stock and stock
options. The Compensation Committee believes that restricted stock and stock
options are an important part of overall compensation because they align the
interests of officers and other employees with those of stockholders and create
incentives to maximize long-term stockholder value.
In determining the total amount of stock options or restricted stock to be
granted or offered to be sold annually to all recipients, the Compensation
Committee considers the amount of stock options and restricted stock already
held by employees and executive officers, dilution, future impact on operating
income and net income, the number of options outstanding, the number of shares
of common stock, including restricted stock, outstanding, the performance of the
Company during the immediately preceding year and equity granting practices at
peer companies and competitors. The grants in fiscal 2006 to all employees
totaled option grants covering 340,000 shares and restricted stock grants
covering 61,032 shares. Total option grants plus total restricted stock grants
in fiscal 2006 to all employees represented less than 1% of shares outstanding
as of September 30, 2006, in the aggregate.
The Compensation Committee determines the number of options or restricted stock
granted or sold to each executive officer based on the total amount of equity
awards available under outstanding plans and the responsibility and overall
compensation of each executive officer. In general, executive officers and other
employees have received an initial grant of equity in the form of restricted
stock (either purchased or awarded) or stock options, usually at the time of
their initial employment (or, for those employed at such time, in connection
with the acquisition of the Company from Time Warner in 2004). On occasion, the
Compensation Committee may grant additional equity awards to recognize increased
responsibilities or special contributions, to attract new hires to the Company,
to retain executives or to recognize other special circumstances. The Company
did not make any option or restricted stock grants to any of the persons named
in the Summary Compensation Table during the fiscal year ended September 30,
2006. The Company did grant 250,000 options to Patrick Vien in connection with
his hiring in February 2006 pursuant to an individual stock option agreement
described elsewhere in this Proxy Statement.
Chief Executive Officer's Compensation
The Compensation Committee considered the following factors in determining the
compensation for fiscal 2006 for Edgar Bronfman, Jr., Chairman of the Board and
Chief Executive Officer: the terms of his employment agreement with the Company,
the Company's financial performance for 2006, Mr. Bronfman's performance and
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the total compensation paid to Mr. Bronfman. The base salary for Mr. Bronfman
pursuant to the terms of his employment contract is $1,000,000, subject to
discretionary increases from time to time by the Board of Directors or the
Compensation Committee. Mr. Bronfman is also eligible to receive an annual cash
bonus, with a target of 300% of his base salary and a maximum of up to 600% of
his base salary. Based on these factors, the Compensation Committee left
Mr. Bronfman's 2006 base salary at $1,000,000, which is unchanged from his 2004
and 2005 salary levels, and approved an annual bonus of $6,000,000.
Review of all Components of Executive Compensation
The Compensation Committee has reviewed all components of the executive
officers' compensation, including salary, bonus, equity compensation and
accumulated realized and unrealized stock option gains.
Internal Pay Equity
The Compensation Committee believes that the relative difference between CEO
compensation and the compensation of the Company's other executive officers is
consistent with such differences found at peer companies.
The Compensation Committee's Conclusion
Based on its review, the Compensation Committee finds the total compensation of
each of the executive officers to be reasonable and not excessive. The
Compensation Committee specifically considered that the Company maintains
employment contracts with such individuals.
Respectfully submitted by the Compensation Committee,
Scott M. Sperling, Chair
Len Blavatnik
Thomas H. Lee
Seth W. Lawry
Mark Nunnelly
Jonathan N. Nelson
Ian Loring
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Summary Compensation Table
The following table sets forth information with respect to the compensation
earned by our Chairman and Chief Executive Officer and the four other most
highly compensated executive officers (the "Named Executive Officers"). On
March 1, 2004, Warner Music Group Corp. was acquired from Time Warner Inc.,
therefore, the table sets forth compensation for fiscal 2006, 2005 and 2004,
subsequent to the acquisition.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------------------- ----------------------------------
Restricted Securities
Name and Principal Fiscal Other Annual Stock Underlying Options All Other
Position Year Salary(2) Bonus(3) Compensation(5) Awards(4) (# of shares) Compensation
-------------------------- ------ ----------- ----------- ----------------- ----------- ------------------ ------------
Edgar Bronfman, Jr. 2006 $ 1,000,000 $ 6,000,000 - - - -
Chairman and CEO 2005 $ 1,000,000 $ 6,250,000 - - - -
2004 (1) $ 596,154 $ 5,250,000 - - - -
Lyor Cohen 2006 $ 1,500,000 $ 4,500,000 - - - -
Chairman and CEO, 2005 $ 1,296,154 $ 4,500,000 - - - -
U.S. Recorded Music 2004 (1) $ 596,154 $ 5,238,839 - $ 2,098,954 - -
Michael Fleisher 2006 $ 800,000 $ 1,400,000 - - - -
Executive Vice President 2005 $ 600,000 $ 1,250,000 $ 4,878,424 $ 8,840,760 - -
and 2004 (1) $ - $ - - - - -
CFO
David H. Johnson 2006 $ 700,000 $ 800,000 - - - -
Executive Vice President 2005 $ 700,000 $ 1,037,500 $ 718,137 $ 1,432,242 - -
and 2004 (1) $ 605,769 $ 1,036,500 - - - -
General Counsel
Alex Zubillaga 2006 $ 600,000 $ 1,000,000 - - - -
Executive Vice President, 2005 $ 397,116 $ 485,000 $ 583,170 $ 551,419 - -
Digital Strategy and 2004 (1) $ 206,000 $ 206,000 - - - -
Business Development
|
(1) In connection with the acquisition of the Company from Time Warner in 2004,
the Company changed its fiscal year-end to September 30th from November 30th.
As such, fiscal 2004 was a ten-month transition period ended September 30,
2004. Salaries presented in the above table for fiscal 2004 represent actual
salary received during the ten-month fiscal period ended September 30, 2004
for each of the Named Executive Officers other than Mr. Fleisher, including
in some cases such shorter period during which they were employed by us.
Annual salaries for Messrs. Bronfman, Cohen, Johnson and Zubillaga as of
September 30, 2004 were $1,000,000, $1,296,154, $700,000 and $250,000,
respectively. Mr. Fleisher joined the Company on December 21, 2004.
(2) Mr. Cohen received actual salary of $1,296,153.89 in fiscal 2005, however,
his annual salary as of September 30, 2005 was $1,500,000. Mr. Fleisher was
appointed an executive officer on December 21, 2004, which was during the
2005 fiscal year. Mr. Fleisher was not employed by us in fiscal 2004 and,
therefore, did not serve as an executive officer during the 2004 fiscal year.
Actual salary received by Mr. Fleisher during the fiscal year ended
September 30, 2005 for such shorter period during which he was employed by
us, was $600,000, however, his annual salary as of September 30, 2005 was
$800,000. In fiscal 2005, Mr. Zubillaga received actual salary of $397,116,
however, his annual salary as of September 30, 2005 was $600,000.
(3) Bonuses for fiscal 2005 reflect two separate payments: (1) annual bonus and
(2) a one-time special bonus related to the Restructuring Plan
("Restructuring Plan Bonus"). The annual bonuses in fiscal 2005 of
$5,000,000, $3,500,000, $1,250,000, $825,000 and $485,000 paid to Messrs.
Bronfman, Cohen, Fleisher, Johnson and Zubillaga, respectively, were paid in
December 2005. The amounts in the table for fiscal 2005 also reflect 50% of
the Restructuring Plan Bonus paid in December 2005, or $1,250,000, $1,000,000
and $212,500 paid to Messrs. Bronfman, Cohen and Johnson, respectively.
Bonuses for fiscal 2004 reflect three separate payments: (1) annual bonuses,
(2) 50% of the Restructuring Plan Bonus and (3) for Mr. Cohen, a signing
bonus. The annual bonuses in fiscal 2004 of $4,000,000, $3,000,000, $824,000
and $206,000 paid to Messrs. Bronfman, Cohen, Johnson and Zubillaga,
respectively, represent bonuses for the twelve months ended November 30,
2004, which would have been our fiscal year-end prior to our change of our
fiscal year-end to September 30. The annual bonuses and 50% of the
Restructuring Plan Bonus were paid in January 2005. The amounts in the table
for fiscal 2004 reflect 50% of the Restructuring Plan Bonus paid in January
2005, or $1,250,000, $1,000,000 and $212,500 paid to Messrs. Bronfman, Cohen
and Johnson, respectively. In addition, Lyor Cohen's fiscal 2004 bonus
includes a $1,238,839 signing bonus paid at the time of his employment in
connection with his employment with us.
(4) In fiscal 2005, Messrs. Fleisher, Johnson and Zubillaga received 896,208,
119,494 and 119,494 shares of restricted stock. The shares of restricted
stock received by Messrs. Fleisher, Johnson and Zubillaga were determined to
have a fair market value at the time of grant of $9,768,678, $1,555,965 and
$675,141, respectively. In fiscal 2004, Mr. Cohen received 2,098,954 shares
of restricted stock with a determined fair market value of $2,098,954 at the
time of grant. Compensation for restricted stock awards represents the dollar
value (net of any consideration paid by the Named Executive Officer) of any
award calculated by multiplying the closing market price on the date of grant
or, where there was no available market price on the date of the award, the
determined or re-determined (if the fair market value was re-determined at
the time of our IPO) fair market value on the date of the grant by the number
of shares awarded. The agreements related to the restricted stock grants
generally provide that (i) one-third of the restricted shares generally vest
in four equal installments on the day prior to each of the first through
fourth anniversaries of the effective date of the restricted stock agreement,
subject to the employee's continued employment on each such vesting date and
(ii) the remainder generally vests based on the occurrence of both a service
condition (which is the same as the service condition described with respect
to the service-based portion of the restricted shares) and a performance
condition, which is described below under "LTIP and Individual Stock Option
Agreements." All of the performance-
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based requirements have been achieved for all of these grants, therefore, only
the service condition remains as a vesting requirement. Further, the
service-based portion of the restricted shares and the service condition
applicable to the performance-based portion will vest upon certain
terminations of employment following or in anticipation of a change in control
(as defined). Upon any termination of the employee's employment, the
restricted stock may be repurchased by the Company (or its subsidiary). Such
stock is subject to provisions regarding vesting, forfeiture and repurchase
contained in that agreement and is also subject to the stockholders agreement
described under "Certain Relationships and Related Party Transactions."
Holders of restricted stock are generally entitled to all of the rights of a
common stockholder of the Company, including the rights to dividends paid with
respect to the Company's common stock, provided that dividends paid with
respect to restricted shares which are not vested shall be withheld by the
Company and shall only be paid to the holder of such shares, without interest,
only when, and if, such restricted shares become vested.
(5) Other Annual Compensation consisted of one-time bonuses awarded to certain
employees to compensate them for certain tax implications of receiving stock
options or restricted stock awards at prices that were below market value at
the date of grant. The bonuses paid in fiscal 2005 were $2,566,043, $33,694
and $583,170 to Messrs. Fleisher, Johnson and Zubillaga, respectively. The
remaining amounts of $2,312,381 and $684,443 were paid to Messrs. Fleisher
and Johnson, respectively, in fiscal 2006. Such amounts equal the tax
liability incurred by the employees as of the date of purchase or an estimate
of the additional tax which would be incurred by the employee upon the
vesting of the shares based on any difference between the re-determined
purchase date fair market value and the amount originally paid by the
employees, plus an amount necessary to pay the taxes on the bonuses (i.e., a
gross-up).
Options Granted In 2006 and Aggregate Option Exercises In Last Fiscal Year and
Fiscal Year-End Option Values
During fiscal 2006, options to purchase an aggregate of 340,000 shares of common
stock at fair market value on the date of grant were granted under our stock
option plans. We made no grants of stock options to persons named in the Summary
Compensation Table during the fiscal year ended September 30, 2006. Further,
none of the persons named in the Summary Compensation Table exercised any stock
options during the fiscal year ended September 30, 2006 or held any stock
options of the Company as of September 30, 2006.
The Company does not have any program, plan or practice to time stock option
grants to its executives in coordination with the release of material nonpublic
information. The Company does, from time to time, make grants to new hires with
a grant date set as of or shortly after their initial date of employment. The
Company previously set stock option exercise prices based on the average of the
high and low sales prices on the date prior to the grant date in accordance with
the terms of the 2005 Plan. Subsequent to approval of the Amended 2005 Plan, the
Company intends to set all stock option exercise prices as the closing price on
the date of grant in accordance with the terms of the Amended 2005 Plan.
Equity Compensation Plan Information
The following table provides information as of September 30, 2006 with respect
to shares of our common stock that may be issued under our existing equity
compensation plans. All of our equity compensation plans have been approved by
stockholders.
Number of Securities
Remaining for Future
Issuance Under Equity
Number of Securities Compensation Plans
to be Issued upon Weighted Exercise (excluding securities
Exercise of Price of Outstanding reflected in first
Plan Category Outstanding Options Options column)
Equity Compensation Plans
Approved by Stockholders
(1) 4,737,390 $ 9.41 1,729,638
(1) Consists of the 2005 Omnibus Stock Plan, as well as individual long-term
incentive plan (LTIP) and individual stock option agreements.
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LTIP and Individual Stock Option Agreements
In 2004, the Company's Board of Directors approved a form of LTIP stock option
agreement for grants of options to eligible individuals. Eligible individuals
include any employee, director or consultant of the Company or any of its
affiliates, or any other entity designated by the Board of Directors in which
the Company has an interest, who is selected by the Company's Compensation
Committee to receive an award. The Board of Directors authorized the granting of
options to purchase up to 1,355,066 shares of our common stock pursuant to the
LTIP program. The Company has granted options and may grant additional stock
options under the LTIP stock option agreements to certain members of our current
or future management. The Board of Directors also approved the granting of
options to purchase 3,701,850 shares of our common stock under stock option
agreements with certain members of our management. Both individual option
agreements and options granted under the LTIP program generally will have a
10-year term and the exercise price will equal at least 100% of the fair market
value on the date of the grant. With respect to each option granted pursuant to
individual option agreements or a LTIP stock option agreement, one-third of the
shares covered by the option generally vest and become exercisable in four equal
installments on the day prior to each of first through fourth anniversaries of
the effective date of the LTIP stock option agreement, subject to the employee's
continued employment. Two-thirds of the shares covered by the option generally
vest and become exercisable based on the occurrence of both a service condition
(which is the same as the service condition described with respect to the
service-based portion of the option) and a performance condition. The
performance condition is met if, following an initial public offering or certain
other events (including a change in control), a specified investment return is
achieved by the investors (one-half of such shares require one return level and
the other one-half of such shares require a different return level). The
performance-based portion of the option also vests, subject to the employee's
continued employment, on the day prior to the seventh anniversary of the
effective date of the individual or LTIP stock option agreement and the service
condition applicable to the performance-based option will be deemed to have been
attained upon certain terminations following or in anticipation of a change in
control. All of the performance-based requirements have been achieved for all of
these grants, therefore, only the service condition remains as a vesting
requirement.
2005 Omnibus Stock Plan
In May 2005, we adopted the 2005 Omnibus Stock Plan, or 2005 Plan, which
authorized the granting of stock based awards to purchase up to 3,416,133 shares
of our common stock. Under the 2005 Plan, our Board of Directors or the
Compensation Committee will administer the plan and has the power to make
awards, to determine when and to whom awards will be granted, the form of each
award, the amount of each award, and any other terms or conditions of each award
consistent with the terms of the 2005 Plan. Awards may be made to employees,
directors and others as set forth in the 2005 Plan. The types of awards that may
be granted include restricted and unrestricted stock, incentive and
non-statutory stock options, stock appreciation rights, performance units and
other stock-based awards. Each award agreement specifies the number and type of
award, together with any other terms and conditions as determined by the Board
of Directors or the Compensation Committee in their sole discretion. Eligible
participants include any employee, director, consultant or advisor to the
Company. The Company has granted options and restricted stock and may grant
additional awards under the 2005 Plan to certain members of our current or
future management and directors. Options granted generally have a 10-year term,
the exercise price will equal at least 100% of the fair market value on the date
of the grant and generally vest in four equal installments on the day prior to
each of first through fourth anniversaries of the effective date of the stock
option agreement, subject to the employee's continued employment. The 2005 Plan
and the Amended 2005 Plan are described further in Proposal No. 2 above.
Recent Management Changes
On December 13, 2006, the Company announced that Richard Blackstone would move
from his position as Chairman and CEO of Warner/Chappell Music, the Company's
music publishing unit, and take the new role of Senior Advisor to Edgar
Bronfman, Jr., Chairman and Chief Executive Officer of Warner Music Group Corp.,
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effective January 3, 2007. David H. Johnson, the Company's Executive Vice
President and General Counsel, has assumed the Warner/Chappell CEO position on
an interim basis while the Company conducts a search for Mr. Blackstone's
permanent successor. During the transition period, Paul M. Robinson, the
Company's Senior Vice President and Deputy General Counsel is serving as acting
General Counsel and Secretary for the Company.
Employment Agreements and Severance Arrangements
Employment Agreement with Edgar Bronfman, Jr.
Mr. Bronfman is party to an employment agreement with our wholly owned
subsidiary, WMG Acquisition Corp., which took effect on March 1, 2004, pursuant
to which he serves as our Chairman of the Board and CEO. The employment
agreement expires on March 1, 2008 but is automatically extended for successive
one-year terms unless either party gives written notice. The employment
agreement provides that Mr. Bronfman is paid an annual base salary of at least
$1,000,000, subject to discretionary increases from time to time by the Board of
Directors or Compensation Committee. Mr. Bronfman is also eligible to receive an
annual cash bonus, with a target of 300% of his base salary and a maximum of up
to 600% of his base salary.
In the event WMG Acquisition Corp. terminates his employment agreement for any
reason other than for cause or if Mr. Bronfman terminates his employment for
good reason, as defined in the agreement, Mr. Bronfman will be entitled to
severance benefits equal to: one year of his then-current base salary and target
bonus; a pro-rated annual bonus; and continued participation in WMG Acquisition
Corp.'s group health and life insurance plans for up to one year after
termination.
The employment agreement also contains standard covenants relating to
confidentiality and assignment of intellectual property rights and one year
post-employment non-solicitation and non-competition covenants.
Mr. Bronfman purchased 3,283,944 shares of the Company's common stock through
his restricted stock agreement. The restricted stock agreement provides that
(i) one-third of the restricted shares generally vest in four equal installments
on the day prior to each of the first through fourth anniversaries of the
effective date of the restricted stock agreement (March 1, 2004), subject to
Mr. Bronfman's continued employment on each such vesting date and (ii) the
remainder generally vests based on the occurrence of both a service condition
(which is the same as the service condition described with respect to the
service-based portion of the restricted shares) and a performance condition,
which is met if, following an initial public offering or certain other events
(including a change in control), a specified investment return is achieved by
the investors (one-half of such shares requires one return level and the other
one-half requires a higher return level). The performance-based portion also
vests (x) subject to Mr. Bronfman's continued employment, on the day prior to
the seventh anniversary of the effective date of the restricted stock agreement
and (y) on its Initial Call Date (as defined) following certain terminations of
employment upon which certain performance targets are achieved. All of the
performance-based requirements have been achieved for all of these grants,
therefore, only the service condition remains as a vesting requirement. Further,
the service-based portion of the restricted shares and the service condition
applicable to the performance-based portion will vest upon certain terminations
of employment following or in anticipation of a change in control (as defined).
Upon any termination of Mr. Bronfman's employment, the restricted stock may be
purchased by the Company (or its subsidiary). Such stock is subject to
provisions regarding vesting, forfeiture and repurchase contained in that
agreement and is also subject to the stockholders agreement described under
"Certain Relationships and Related Party Transactions." One-half of the shares
of restricted stock were vested as of September 30, 2006.
APPAC, a minority shareholder group of Vivendi Universal, initiated an inquiry,
which under French law is both civil and criminal, into various issues relating
to Vivendi, including Vivendi's financial disclosures and the appropriateness of
compensation received by the former CEO, Jean-Marie Messier. The inquiry has
also been
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extended to cover compensation received by Mr. Bronfman. While the scope and
targets of this inquiry are not public, the president of APPAC has publicly
announced that he is seeking to have Mr. Bronfman repay to Vivendi compensation
he received while affiliated with Vivendi. The outcome of such inquiry or of any
subsequent proceeding with respect to Mr. Bronfman is uncertain at this time.
Mr. Bronfman believes that all compensation paid to him by Vivendi was properly
received and that the claims raised by APPAC are without merit.
Employment Agreement with Lyor Cohen
WMG Acquisition Corp. entered into an employment agreement with Lyor Cohen on
January 25, 2004 under which Mr. Cohen serves as Chairman and CEO of U.S.
Recorded Music. The employment agreement provides for a four-year term beginning
on March 1, 2004, but the term is automatically extended for successive one-year
terms unless either party gives written notice to the contrary at least 90 days
prior to the expiration of the current term. Under the terms of the employment
agreement, Mr. Cohen is paid a salary equal to $1,000,000 for the first year of
his employment, and thereafter, will be paid an annual base salary of at least
$1,500,000, subject to discretionary increases from time to time by the Board of
Directors or Compensation Committee. Mr. Cohen is also eligible to receive an
annual cash bonus, with a target of $2,500,000 and a maximum of $5,000,000. In
the event of a change of control of the Company or certain other events and
subject to certain conditions, Mr. Cohen will receive a one-time cash bonus of
up to $10,000,000 depending on the amount of cash consideration received by the
members of the Investor Group that financed the acquisition of the Company from
Time Warner in 2004. In the event WMG Acquisition Corp. terminates the
employment agreement for any reason other than cause or if Mr. Cohen terminates
his employment for good reason, as defined in the agreement, Mr. Cohen will be
entitled to severance benefits equal to: one year of his then-current base
salary and target bonus; a pro-rated annual bonus; and continued participation
in Warner Music Group's group health and life insurance plans for up to one year
after termination.
The employment agreement also contains standard covenants relating to
confidentiality, assignment of intellectual property rights and six-month post
employment non-solicitation covenants.
WMG Acquisition Corp. also agreed to pay Mr. Cohen a starting bonus equal to the
greater of $1,000,000 or 59% of the fair market value, as of March 1, 2004, of
the shares of common stock of the Company granted to him at that time. The
Company granted to Mr. Cohen 2,390,102 shares of its common stock. The
restricted stock agreement provides that (i) one-third of the restricted shares
generally vest in four equal installments on the day prior to each of the first
through fourth anniversaries of the effective date of the restricted stock
agreement (March 1, 2004), subject to Mr. Cohen's continued employment on each
such vesting date and (ii) the remainder generally vests based on the occurrence
of both a service condition (which is the same as the service condition
described with respect to the service-based portion of the restricted shares)
and a performance condition, which is met if, following an initial public
offering or certain other events (including a change in control), a specified
investment return is achieved by the investors (one-half of such shares requires
one return level and the other one-half requires a different return level). All
of the performance-based requirements have been achieved for all of these
grants, therefore, only the service condition remains as a vesting requirement.
In addition, all unvested restricted stock vests, subject to Mr. Cohen's
continued employment, on the day prior to the seventh anniversary of the
effective date of the restricted stock agreement or upon termination of
Mr. Cohen's employment for specified reasons. Further, the service-based portion
of the restricted shares and the service condition applicable to the
performance-based portion will vest upon a change in control (as defined). The
vested restricted stock may also be purchased by the Company (or its subsidiary)
upon any termination of employment. Such stock is also subject to the
stockholders agreement described under "Certain Relationships and Related Party
Transactions." One-half of the shares of restricted stock were vested as of
September 30, 2006.
Employment Agreement with Richard Blackstone
Mr. Blackstone's employment pursuant to his employment agreement described below
terminated as of January 3, 2007.
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Warner/Chappell Music, Inc. (WCM) entered into an employment agreement with
Richard Blackstone on March 15, 2005 under which Mr. Blackstone served as
Chairman and CEO of WCM until January 3, 2007. The employment agreement provided
for a four-year term beginning on May 31, 2005, the date on which Mr. Blackstone
commenced employment at WCM. Under the terms of the employment agreement,
Mr. Blackstone was paid an annual salary equal to $650,000. Mr. Blackstone was
also eligible to receive an annual cash bonus, with a target of $650,000 pro
rated to reflect his actual service to WCM in 2005. In addition, WCM paid
Mr. Blackstone a special payment in the amount of $100,000, less any annual
bonus amounts paid to Mr. Blackstone by WCM or his prior employer with respect
to 2005. In connection with the termination of his employment agreement,
Mr. Blackstone will receive severance benefits equal to $1,500,000, plus a
pro-rated annual bonus, and continued participation in WCM's group health and
life insurance plans through December 31, 2007. The employment agreement also
contains standard covenants relating to confidentiality and assignment of
intellectual property rights and one-year post employment non-solicitation
covenants.
Mr. Blackstone was also awarded 238,989 shares of the Company's common stock.
The restricted stock agreement provided that (i) one-third of the restricted
shares generally vest in four equal installments on the day prior to each of the
first through fourth anniversaries of the effective date of the restricted stock
agreement, subject to Mr. Blackstone's continued employment on each such vesting
date and (ii) the remainder generally vests based on the occurrence of both a
service condition (which is the same as the service condition described with
respect to the service-based portion of the restricted shares) and a
performance-based condition, which is met if, following an initial public
offering or certain other events (including a change in control), a specified
investment return is achieved by the investors (one-half of such shares requires
one return level and the other one-half requires a higher return level). All of
the performance-based requirements had been achieved for all of these grants,
therefore, only the service condition remained as a vesting requirement. In
addition, all unvested restricted stock would have vested, subject to
Mr. Blackstone's continued employment, on the day prior to the seventh
anniversary of the effective date of the restricted stock agreement or upon
termination of Mr. Blackstone's employment for specified reasons. Further, the
service-based portion of the restricted shares and the service condition
applicable to the performance-based portion vested upon a change in control (as
defined). The vested restricted stock may also be purchased by the Company (or
its subsidiary) upon any termination of employment. Such stock is also subject
to the stockholders agreement described under "Certain Relationships and Related
Party Transactions." One-quarter of the shares of restricted stock had vested as
of September 30, 2006. Mr. Blackstone's employment pursuant to his restricted
stock agreement terminated as of January 3, 2007, and the 179,242 shares that
were unvested at such time were forfeited.
Employment Agreement with Michael D. Fleisher
Warner Music Inc. entered into an employment agreement with Michael D. Fleisher
on December 21, 2004 under which Mr. Fleisher serves as Executive Vice President
and Chief Financial Officer. The employment agreement provides for a four-year
term beginning on January 1, 2005. Under the terms of the employment agreement,
Mr. Fleisher is paid a salary equal to $800,000. Mr. Fleisher is also eligible
to receive an annual cash bonus, with a target of $800,000; provided that
Mr. Fleisher's bonus with respect to 2005 shall not be less than $800,000. In
the event Warner Music Inc. terminates the employment agreement for any reason
other than cause or if Mr. Fleisher terminates his employment for good reason,
as defined in the agreement, Mr. Fleisher will be entitled to severance benefits
equal to: one year of his then-current base salary and target bonus; a pro-rated
annual bonus; and continued participation in WMG Acquisition Corp.'s group
health and life insurance plans for up to one year after termination. The
employment agreement also contains standard covenants relating to
confidentiality, assignment of intellectual property rights and six-month
post-employment non-solicitation covenants.
Mr. Fleisher purchased 896,208 shares of the Company's common stock through his
restricted stock agreement. The restricted stock agreement provides that
(i) one-third of the restricted shares generally vest in four equal installments
on the day prior to each of the first through fourth anniversaries of the
vesting commencement date set forth in the restricted stock agreement (December
21, 2004), subject to Mr. Fleisher's
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continued employment on each such vesting date and (ii) the remainder generally
vests based on the occurrence of both a service condition (which is the same as
the service condition described with respect to the service-based portion of the
restricted shares) and a performance condition, which is met if, following an
initial public offering or certain other events (including a change in control),
a specified investment return is achieved by the investors (one-half of such
shares requires one return level and the other one-half requires a higher return
level). The performance-based portion also vests, subject to Mr. Fleisher's
continued employment, on the day prior to the seventh anniversary of the
effective date of the restricted stock agreement. All of the performance-based
requirements have been achieved for all of these grants, therefore, only the
service condition remains as a vesting requirement. Further, the service-based
portion of the restricted shares and the service condition applicable to the
performance-based portion will vest upon certain terminations of employment
following or in anticipation of a change in control (as defined). The restricted
stock may be purchased by the Company (or its subsidiary) upon any termination
of employment. Such stock is also subject to the stockholders agreement
described under "Certain Relationships and Related Party Transactions."
One-quarter of the shares of restricted stock were vested as of September 30,
2006. An additional one-quarter of the shares vested on December 21, 2006.
Employment Agreement with David H. Johnson
Warner Music Inc. entered into an employment agreement with David H. Johnson
under which Mr. Johnson serves as Executive Vice President and General Counsel.
On March 1, 2004, WMG Acquisition Corp. assumed Mr. Johnson's employment
agreement.
The employment agreement terminates on June 29, 2007. Under the terms of the
employment agreement, Mr. Johnson is paid an annual base salary of $700,000.
Mr. Johnson is also eligible to receive an annual cash bonus equal to the
greater of his annual target bonus, as defined in the agreement, or the average
of his bonuses for 2002 and 2003.
In the event Warner Music Inc. terminates the employment agreement for any
reason other than for cause or if Mr. Johnson terminates his employment for good
reason, as defined in the agreement, Mr. Johnson will be entitled to severance
benefits equal to a lump sum payment of two times his annual base salary and a
minimum bonus as defined in the agreement.
The employment agreement also contains standard covenants relating to
confidentiality.
Mr. Johnson purchased 119,494 shares of the Company's common stock through his
restricted stock agreement. The restricted stock agreement provides that
(i) one-third of the restricted shares generally vest in four equal installments
on the day prior to each of the first through fourth anniversaries of the
vesting commencement date set forth in the restricted stock agreement (October
1, 2004), subject to Mr. Johnson's continued employment on each such vesting
date and (ii) the remainder generally vests based on the occurrence of both a
service condition (which is the same as the service condition described with
respect to the service-based portion of the restricted shares) and a performance
condition, which is met if, following an initial public offering or certain
other events (including a change in control), a specified investment return is
achieved by the investors (one-half of such shares requires one return level and
the other one-half requires a higher return level). The performance-based
portion also vests, subject to Mr. Johnson's continued employment, on the day
prior to the seventh anniversary of the effective date of the restricted stock
agreement (January 28, 2005). All of the performance-based requirements have
been achieved for all of these grants, therefore, only the service condition
remains as a vesting requirement. Further, the service-based portion of the
restricted shares and the service condition applicable to the performance-based
portion will vest upon certain terminations of employment following or in
anticipation of a change in control (as defined). The restricted stock may be
purchased by the Company (or its subsidiary) upon any termination of employment.
Such stock is also subject to the stockholders agreement described under
"Certain Relationships and Related Party Transactions." One-quarter of the
shares of restricted stock were vested as of September 30, 2006. An additional
one-quarter of the shares vested on October 1, 2006.
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Employment Agreement with Alex Zubillaga
On November 4, 2005, Warner Music Inc., entered into a new employment agreement,
effective as of August 8, 2005, with Alejandro (Alex) Zubillaga under which
Mr. Zubillaga serves as Executive Vice President, Digital Strategy and Business
Development. Under the terms of the three-year agreement, Mr. Zubillaga is paid
an annual salary equal to $600,000. Mr. Zubillaga is also eligible to receive an
annual cash bonus, with a target of $350,000, effective with respect to his
fiscal 2005 bonus and thereafter. In the event that Warner Music Inc. terminates
the employment agreement for any reason other than cause or if Mr. Zubillaga
terminates his employment for good reason, as defined in the agreement,
Mr. Zubillaga will be entitled to severance benefits equal to one year of salary
and bonus target plus a pro rata portion of his target bonus with respect to the
year in which such termination occurs. The employment agreement also contains
standard covenants relating to confidentiality and assignment of intellectual
property rights.
Mr. Zubillaga purchased 119,494 shares of the Company's common stock through his
restricted stock agreement. The restricted stock agreement provides that
(i) one-third of the restricted shares generally vest in four equal installments
on the day prior to each of the first through fourth anniversaries of the
vesting commencement date set forth in the restricted stock agreement (October
1, 2004), subject to Mr. Zubillaga's continued employment on each such vesting
date and (ii) the remainder generally vests based on the occurrence of both a
service condition (which is the same as the service condition described with
respect to the service-based portion of the restricted shares) and a performance
condition, which is met if, following an initial public offering or certain
other events (including a change in control), a specified investment return is
achieved by the investors (one-half of such shares requires one return level and
the other one-half requires a higher return level). The performance-based
portion also vests, subject to Mr. Zubillaga's continued employment, on the day
prior to the seventh anniversary of the effective date of the restricted stock
agreement (October 1, 2004). All of the performance-based requirements have been
achieved for all of these grants, therefore, only the service condition remains
as a vesting requirement. Further, the service-based portion of the restricted
shares and the service condition applicable to the performance-based portion
will vest upon certain terminations of employment following or in anticipation
of a change in control (as defined). The restricted stock may be purchased by
the Company (or its subsidiary) upon any termination of employment. Such stock
is also subject to the stockholders agreement described under "Certain
Relationships and Related Party Transactions." One-quarter of the shares of
restricted stock were vested as of September 30, 2006. An additional one-quarter
of the shares vested on October 1, 2006.
Employment Agreement with Caroline Stockdale
In August, 2005 Warner Music Inc. entered into an employment agreement with
Ms. Stockdale under which Ms. Stockdale serves as Executive Vice President,
Global Human Resources. The employment agreement provides for a term beginning
on August 8, 2005 and ending on December 31, 2008. Under the terms of the
employment agreement, Ms. Stockdale is paid an annual salary equal to $375,000.
Ms. Stockdale is also eligible to receive an annual cash bonus, with a target of
$350,000. In the event that Warner Music Inc. terminates the employment
agreement for any reason other than cause or if Ms. Stockdale terminates her
employment for good reason, as defined in the agreement, Ms. Stockdale will be
entitled to severance benefits equal to one year of salary and bonus target. The
employment agreement also contains standard covenants relating to
confidentiality and assignment of intellectual property rights.
Ms. Stockdale also has entered into a stock option agreement with the Company
pursuant to which she was granted an option to purchase 50,000 shares of the
Company's common stock at a price of $16.56 per share, subject to adjustments.
The option granted to Ms. Stockdale generally has a 10-year term. The shares
covered by the option generally vest and become exercisable in four equal
installments on the day prior to each of first through fourth anniversaries of
the effective date of stock option agreement, subject to the employee's
continued employment. One-quarter of the options have vested as of September 30,
2006.
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Employment Agreement with Patrick Vien
In February 2006, Warner Music Inc. entered into an employment agreement with
Mr. Vien under which Mr. Vien serves as Chairman and CEO of Warner Music
International (WMI). The employment agreement provides for a term beginning on
February 13, 2006 and ending on February 28, 2009. Under the terms of the
employment agreement, Mr. Vien is paid an annual salary equal to $750,000.
Mr. Vien is also eligible to receive an annual cash bonus, with a target of
$750,000. In addition, Warner Music Inc. paid Mr. Vien a commencement bonus in
the amount of $150,000. In the event that Warner Music Inc. terminates the
employment agreement for any reason other than cause or if Mr. Vien terminates
his employment for good reason, as defined in the agreement, Mr. Vien will be
entitled to severance benefits equal to $1,500,000 and continued participation
in Warner Music Inc.'s group health and life insurance plans for up to one year
after termination. Mr. Vien's employment agreement also provides that, if Warner
Music Inc. does not renew his agreement at the end of the term, he will receive
a payment of $400,000 upon expiration of this agreement and will be considered
for a pro rata discretionary bonus for the partial year for the year in which
his agreement expires. The employment agreement also contains standard covenants
relating to confidentiality and assignment of intellectual property rights and a
one-year post employment non-solicitation covenant.
Mr. Vien also has entered into a stock option agreement with the Company
pursuant to which he was granted an option to purchase 250,000 shares of common
stock at a price of $20.57 per share, subject to adjustments. The option granted
to Mr. Vien generally has a 10-year term. The shares covered by the option
generally vest and become exercisable in four equal installments on the day
prior to each of first through fourth anniversaries of the effective date of
stock option agreement, which is February 17, 2006, subject to the employee's
continued employment.
Prior Employment Agreement with Paul-René Albertini
Mr. Vien replaced Paul-René Albertini as Chairman and CEO of WMI. Mr. Albertini
had served as President and later Chairman and CEO of WMI since 2002. On
February 13, 2006, the Company announced that Mr. Albertini would be leaving WMI
to pursue other opportunities. Prior to such time, Mr. Albertini was an
executive officer of the Company. As a result of his departure, Mr. Albertini
was entitled to receive payments as set forth in his employment agreement. In
addition, the provisions of his restricted stock and option agreements with
respect to the effect of the termination of employment without cause applied.
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