Executive Compensation
Digital Music Group, Inc. was incorporated in April 2005 and has not conducted any operations other than raising capital
and those activities related to the acquisition of Digital Musicworks International, Inc. and certain assets of Rio Bravo Entertainment, LLC. To date Digital Music Group, Inc. has not paid any salaries. Following completion of this offering, the
annualized base salaries of our most highly compensated executive officers will be $150,000 for Mr. Mitchell Koulouris, our President and Chief Executive Officer, $130,000 for Mr. Cliff Haigler, our Chief Financial Officer, $130,000 for Mr. Anders
Brown, our Chief Operating Officer, $120,000 for Mr. Peter Koulouris, our Vice President of Business Development and $120,000 for Mr. Richard Rees, our Vice President of Business Development and Secretary. In addition, Messrs. Mitchell Koulouris,
Brown and Peter Koulouris are each entitled to a cash bonus under a bonus plan to be created and approved by the compensation committee of our board of directors. These bonuses are to be between 30% and 75% of each such individual’s annual
salary if the individual’s performance meets certain milestones to be determined by the compensation committee of our board of directors. Messrs. Mitchell Koulouris, Brown and Peter Koulouris will cease to be employees of, and will not receive
any compensation from, Digital Musicworks International, Inc. following the completion of this offering as Digital Musicworks International, Inc. will merge into us and will cease to exist as a separate entity. Mr. Rees will not receive any
compensation as an employee of Rio Bravo Entertainment LLC
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following the acquisition of certain assets by us from Rio Bravo Entertainment LLC upon completion of this offering. Mr. Rees may continue to receive
income from Rio Bravo Entertainment LLC in connection with his ownership interest therein.
As part of employment arrangements with us, Messrs. Mitchell Koulouris, Brown and Peter Koulouris each were sold and issued 200,000 shares of our common stock in August 2005 at a purchase price of $0.01 per share. As
part of Mr. Rees employment arrangement with us, he was sold and issued 75,000 shares of our common stock in August 2005 at a purchase price of $0.01 per share. See “—Employment Agreements and Change in Control Agreements” and
“Certain Relationship and Related Transactions—Our Formation and Organization.”
Employment Agreements and Change in Control Arrangements
In connection with this offering, we have entered into employment agreements with Messrs. Mitchell Koulouris, Haigler, Brown, Rees and Peter Koulouris,
which agreements will become effective upon the completion of this offering. Each agreement has a term of two years following the date this offering is completed, unless earlier terminated by us without cause upon 30 days written notice or upon
written notice for cause, subject to a 60-day notice period where such cause is curable by the employee. In addition, each officer may terminate the agreement upon written notice for good reason or no reason. All agreements provide that if the
officer’s employment is terminated for cause by us or voluntarily by the officer, such officer will be entitled to receive compensation and benefits through the date of termination in accordance with the terms of our benefit plans. In addition,
all agreements provide that if the agreement is terminated by us without cause or by the officer for good reason, the officer will be entitled to receive compensation and benefits for a period following the date of termination in accordance with the
terms of our benefit plans. For Messrs. Haigler and Rees this period is three months, for Messrs. Brown and Peter Koulouris, this period is six months and for Mr. Mitchell Koulouris it is 12 months. Each of these officers and each of our other
employees have entered into at-will employment, confidential information, invention assignment and arbitration agreements that become effective upon the completion of the offering and prohibit such individuals from disclosing our confidential
information and trade secrets, assigns all intellectual property developed by them in the course of employment to us and prohibit these individuals from soliciting our employees for a period of one year following termination of employment. Each
agreement provides for employment on an at-will basis that allows either party to terminate the employment relationship at any time without reason and without notice.
In connection with the acquisition of Digital Musicworks International, Inc. and certain assets of Rio Bravo Entertainment
LLC, we entered into non-competition and non-solicitation agreements with Messrs. Mitchell Koulouris, Brown, Peter Koulouris and Rees that will become effective upon the completion of the acquisitions and prohibit any of them from competing with us
anywhere in the United States or soliciting our employees for a period of three years following the completion of the acquisitions. There is an exception in Mr. Rees’ agreement that allows Rio Bravo Entertainment LLC to continue to provide
services to a third party pursuant to an existing agreement provided that it receives no economic benefit from such relationship and pays all monies received from such third party, after reasonable expenses, to us and Mr. Rees is obligated to
transfer such agreement to us as soon as reasonably practicable.
As a result of the acquisition of Digital Musicworks International, Inc., none of the options under the Digital Musicworks International, Inc. 2004 Stock Plan will be assumed or substituted and in accordance with the terms of the plan each
outstanding option will vest fully and become immediately exercisable. Any unexercised options will terminate upon the completion of this offering.
After a change in control, including the completion of the acquisition of Digital Musicworks International, Inc., pursuant to Mr. Mitchell Koulouris’
restricted stock purchase agreement with Digital Musicworks International, Inc., if, within 12 months, he is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in that agreement, the lesser of
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% of his total shares or the remaining of his unvested shares under such agreement shall be released from
our repurchase option. Pursuant to the terms of a restricted stock purchase agreement with us, if Mr. Koulouris is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in that agreement, the remaining
of his unvested shares under
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such agreement shall be released from our repurchase option. In addition, pursuant to an employment agreement with us, if Mr. Koulouris is terminated
involuntarily other than for cause or he quits for good reason, as such terms are defined in the restricted stock purchase agreement, he is entitled to payment of his then base salary and employee benefits, and bonus if applicable, for a period of
12 months following termination.
In connection with the
acquisition of Digital Musicworks International, Inc., options held by Mr. Brown to acquire common stock of Digital Musicworks International, Inc. will fully vest and be exercisable by Mr. Brown prior to the completion of the acquisition. Pursuant
to the terms of a restricted stock purchase agreement with us, if Mr. Brown is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in that agreement, the remaining of his unvested shares under such
agreement shall be released from our repurchase option. In addition, pursuant to an employment agreement with us, if Mr. Brown is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in the
restricted stock purchase agreement, he is entitled to payment of his then base salary and employee benefits, and bonus if applicable, for a period of six months following termination.
After a change in control, including the completion of the acquisition of Digital Musicworks International, Inc., pursuant
to Mr. Peter Koulouris’ restricted stock purchase agreement with Digital Musicworks International, Inc., if, within 12 months, he is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in that
agreement, the lesser of 16
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% of his total shares or the remaining of his unvested shares shall be released
from our repurchase option. Pursuant to the terms of a restricted stock purchase agreement with us, if Mr. Koulouris is terminated involuntarily other than for cause or he quits for good reason, as such terms are defined in that agreement, the
remaining of his unvested shares under such agreement shall be released from our repurchase option. In addition, pursuant to an employment agreement with us, if Mr. Koulouris is terminated involuntarily other than for cause or he quits for good
reason, as such terms are defined in the restricted stock purchase agreement, he is entitled to payment of his then base salary and employee benefits, and bonus if applicable, for a period of six months following termination.
Compensation Plans
Digital Musicworks International, Inc. 2004 Stock Plan
Digital Musicworks International, Inc.’s 2004 Stock Plan was adopted by
its board of directors and approved by its stockholders in 2004. The 2004 Stock Plan provides that in the event of a merger or sale of substantially all of the assets, the successor corporation will assume or substitute each option or stock purchase
right. If the outstanding options or stock purchase rights are not assumed or substituted, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to all of the shares
subject to the option or stock purchase right, including those which would not otherwise be exercisable, for a period of 15 days from the date of the notice. The option or stock purchase right will terminate if not exercised prior to the expiration
of the 15-day period. We do not intend to assume the 2004 Stock Plan in the acquisition of Digital Musicworks International, Inc. Optionees of Digital Musicworks International Inc. will be mailed notice of the board of director and shareholder
approval of the acquisition on or about October 7, 2005, together with instructions for conditionally exercising such options upon completion of the acquisition.
2005 Stock Plan
Our board of directors adopted and our stockholders approved our 2005 Stock Plan in 2005. Our 2005 Stock Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code, to our employees, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, performance units and performance shares to our employees,
directors and consultants.
Number of Shares of Common
Stock
. We have reserved 1,200,000 shares of our common stock for issuance pursuant to the 2005 Stock Plan. In addition, our 2005 Stock Plan provides for annual increases in the
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number of shares available for issuance thereunder on the first day of each fiscal year, beginning with our fiscal year 2007, equal to the lesser
of:
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5% of the outstanding shares of our common stock on the first day of the fiscal year;
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such other amount as our board of directors may determine.
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Administration of the 2005 Stock Plan
. Our board of directors or a committee of our board administers our 2005 Stock Plan.
In the case of options intended to qualify as “performance based compensation” within the meaning of Section 162(m) of the Internal Revenue Code, the committee will consist of two or more “outside directors” within the
meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the awards, including the exercise price, the number of shares subject to each such award, the exercisability of the awards and the form of
consideration, if any, payable upon exercise.
Options
. The administrator determines the exercise price of options granted under our 2005 Stock Plan, which must at least be equal to the fair market value of our common stock on the date of grant. The term of
an incentive stock option may not exceed 10 years, except that, with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least
110% of the fair market value on the grant date. The administrator determines the term of all other options.
After termination, an employee, director or consultant, may exercise his or her option for a period of three months. However, an option generally may not
be exercised later than the expiration of its term.
Stock
Appreciation Rights
. Stock appreciation rights may be granted under our 2005 Stock Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the
exercise date and the date of grant. The administrator determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the increased appreciation in cash or with shares of our common stock, or a
combination thereof.
Restricted Stock
Awards
. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. Restricted stock awards may be granted under our 2005 Stock Plan. The
administrator will determine the number of shares of restricted stock granted to any employee, director or consultant, and the terms of vesting. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.
Performance Units and Performance
Shares
. Performance units and performance shares may be granted under our 2005 Stock Plan. Performance units and performance shares are awards that will result in a payment to a participant only if performance goals
established by the administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance goals in its discretion, which, depending on the extent to which they are met, will determine the
number and/or the value of performance units and performance shares to be paid out to participants. The administrator will also establish the initial dollar value of performance units prior to the grant date. Performance shares will have an initial
value equal to the fair market value of our common stock on the grant date.
Automatic Grants to Non-Employee Directors
. Our 2005 Stock Plan also provides for the automatic grant of options to our non-employee directors. Each non-employee director appointed to the
board after the completion of this offering will receive an initial option to purchase 24,000 shares upon such appointment except for those directors who become non-employee directors by ceasing to be employee directors. In addition, beginning
in 2006, non-employee directors who have been directors for at least six months will receive a subsequent option to purchase 6,000 shares immediately following each annual meeting of our stockholders. All options granted under the automatic
grant provisions have a term of 10 years and an exercise price equal to fair market value on the date of grant. Each initial option to purchase 24,000 shares becomes vested and exercisable
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as to one-twenty-fourth of the shares each month after the vesting commencement date, provided the non-employee director remains a director on such dates.
Each subsequent option grant to purchase 6,000 shares becomes vested and exercisable as to one-twelfth of the shares each month after the date of grant, provided the non-employee director remains a director on such date.
Restrictions on Transferability
. Our 2005 Stock
Plan does not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime.
Adjustments upon Change in Control.
Our 2005 Stock Plan provides that in the event of our change in control, the successor
corporation or its parent or subsidiary will assume or substitute an equivalent award for each outstanding award. If there is no assumption or substitution of outstanding awards, the administrator will provide notice to the recipient that he or she
has the right to exercise the option and stock appreciation right in full, all restrictions on any restricted stock will lapse, all performance goals or other vesting requirements for performance shares and units will be deemed achieved, and all
other terms and conditions met. The award will terminate upon the expiration of the period of time the administrator provides in the notice. In the event the service of an outside director is terminated on or following a change in control, other
than pursuant to a voluntary resignation, his or her options will fully vest and become immediately exercisable.
Amendment and Termination of our 2005 Stock Plan
. Our 2005 Stock Plan will automatically terminate in 2015, unless we
terminate it sooner. In addition, our board of directors has the authority to suspend or terminate the 2005 Stock Plan provided such action does not impair the rights of any participant.
Limitations on Directors’ Liability and Indemnification
Our certificate of incorporation and bylaws limit the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:
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any breach of their duty of loyalty to the corporation or its stockholders;
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acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
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payments of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law; or
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any transaction from which the director derived an improper personal benefit.
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Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our
certificate of incorporation and bylaws provide that we shall indemnify our directors, officers, employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties.
We have entered
into agreements to indemnify certain of our directors and executive officers, in addition to the indemnification provided for in our certificate of incorporation and bylaws. These agreements, among other things, provide for indemnification of our
directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by any such person in any action or proceeding arising out of such person’s services as a director or officer or at our request.
We believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers. There is no pending litigation or proceeding involving any of our directors, officers, employees or agents. We are not aware of any pending or threatened litigation or proceeding that
might result in a claim for indemnification by a director, officer, employee or agent.
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