Executives at Cash-Starved ArtistDirect Agree to Defer Pay

By CONOR DOUGHERTY
Staff Reporter

In another sign of its deteriorating cash position, ArtistDirect Inc.'s three top executives, including its billionaire Chairman Frederick "Ted" Field, have agreed to salary reductions until the company can find at least $20 million in financing, is merged or sold, according to filings with the Securities and Exchange Commission.

L.A.-based ArtistDirect, which had $16.3 million in cash and short-term investments as of Sept. 30, 2002, has commitments to spend $21 million on a joint venture agreement over the next three years and has said in filings it is seeking financing to end its cash pinch.

Field, founder of Interscope Records, agreed to forgo his $500,000 salary and his $1 million-a-year salary from ArtistDirect Records, a joint venture between him and ArtistDirect, according to filings.

Marc Geiger, vice chairman and president of artist services, and Keith Yokomoto, president and chief operating officer, agreed to work for half their $500,000 annual salaries until new financing is arranged, according to letters attached to SEC filings.

None of the three executives returned calls.

In an e-mail, James Carroll, ArtistDirect's chief financial officer, said, "We have no comment and will not be available to answer your questions."

According to the agreements, Field, Geiger and Yokomoto will receive deferred payments of the salary not taken in a lump sum when the company receives $20 million in financing, is merged or sold, whichever is soonest. The money would be credited to an account for each of the three and carried as a liability.

Further obligations

Since the arrival of Field in 2001, ArtistDirect has gone from a three-tiered Internet, talent agency and record label business to one focused exclusively on the recording business.

The company agreed to fund ArtistDirect Records formed as a 50/50 joint venture between the company and Field with $50 million over five years. But according to regulatory filings, its cash reserves have diminished to the point where it is in danger of defaulting on that agreement.

SEC filings show ArtistDirect spent $24 million on the record label as of Sept. 30, 2002. By the end of 2002, its total investment in the label was expected to be $30.25 million, leaving $10 million in cash and short-term investments, the company said in filings.

ArtistDirect is committed to give the label $2.75 million in 2003 and $12 million in 2004.

"In the event that we fail to provide funding to ArtistDirect Records as required under the terms of the operating agreement ArtistDirect Records then has the right to secure substitute financing," the company said in a filing. If that happens, the filing said, its distribution partner, BMG, could be brought in.

"Our commitment to fund ArtistDirect Records is subject to a guaranty for the benefit of BMG," the company wrote in its third quarter report to shareholders. "Should we fail to meet our commitment, BMG may choose to enforce the guaranty or provide substitute financing that could result in dilution of our interest in ArtistDirect Records."

BMG Distribution bought a 5 percent stake from ArtistDirect in 2001 for $5 million, reducing the company's ownership interest to 45 percent.

In its most recent quarterly report for the period ended Sept. 30, 2002, the company said it was seeking financing to end the cash crunch, but did not say if it had made any progress.

Tied to arrival

ArtistDirect's obligations to the label were struck when Field was hired to run the company. For its 50 percent stake, ArtistDirect agreed to fund the label and incur all losses; Field agreed to run the label for $1 million a year, in addition to holding the top job at ArtistDirect, for his stake.

The initial deal called for ArtistDirect to fund no more than $15 million a year, or $33 million in any three-year period.

In August, the board approved a plan to accelerate funding. In exchange for an additional $10 million contribution, the company would pick up another 20 percent interest in the label, boosting its total to 65 percent. Field's interest would decline by 20 percent, to 30 percent.

"I am satisfied with the actions that the company is taking," said Stephen Krupa, a member of the company's board and a managing director of Psilos Group, a New York-based venture capital firm that owns 2.3 percent of ArtistDirect stock. He declined further comment.

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