Document:

Ex-10.5

 

May 9, 2005

Mr. Thomas Costabile

158 Brown Stone Court

Old Tappan, NJ 07675

Dear Tom:

     The purpose of this letter agreement is to confirm our mutual understanding of the terms of
your employment by Glenayre Electronics, Inc. (“Glenayre”) to serve as an executive officer of
Entertainment Distribution Company, LLC (the “Company”). As you know, Glenayre and the Company
have executed and delivered today definitive agreements for the acquisition by the Company and its
affiliates of substantially all of the assets of UMG Manufacturing & Logistics, Inc. and Universal
Music & Video Distribution Corp. and 100% of the stock of Universal Manufacturing and Logistics
GmbH (the “Acquisition”). The “Effective Date” of this letter agreement will be the date of
closing of the Acquisition without further action of any party hereto; provided, that
should the Acquisition fail to close on or before August 31, 2005 or such other date mutually
agreed in writing by you and Glenayre, this letter agreement will be terminated ab initio and be of
no force or effect.

     1. Duties.

     (a) You agree that, beginning on the Effective Date, you will serve as the Executive Vice
President and Chief Operating Officer of the Company, and you will perform those duties and
exercise those powers commensurate with your office as may be reasonably requested of you by the
Chief Executive Officer of the Company or the Board of Directors of the Company (the “Board”) or
vested in you by the Limited Liability Company Agreement of the Company which will be entered into
on the date of the closing of the Acquisition substantially in the form of Exhibit 10.2(e)(iii) to
the Asset Purchase Agreement referred to in Paragraph 3(k) below (the “LLC Agreement”). You will
also: (1) devote substantially all of your business time, attention and abilities to the Company’s
business and (2) faithfully serve the Company and use your best efforts to promote the interests of
the Company. Glenayre understands that you are currently serving as a member of the following
boards: (1) HBN, Inc., (2) University of Oregon Foundation and (3) The Because Group, LLC.
Glenayre agrees that you may continue to serve on those boards so long as there is no conflict of
interest between any of those organizations and the Company and your duties as a member of those
boards do not unreasonably interfere with your duties under this letter agreement. In the event
that you desire to serve as a member of boards or other governing bodies of additional
organizations or to serve in a more significant role for any of the above named organizations, you
agree to request approval for such service from the Board and the Board agrees to respond promptly
to any such request.

     (b) You are currently a member of the Board, and so long as you are employed by Glenayre to
provide services to the Company in the same or higher executive position, you will continue to be a
member of the Board. It is currently contemplated that the Board will consist of you, James
Caparro and all of the members of the Board of Directors of Glenayre (currently
eight). In addition, the Board will establish an Executive Committee composed of four members
of the Board, and so long as you are a member of the Board, you will be a member of the

 

 

Executive Committee. It is currently contemplated that the other three members of the Executive Committee
will be James Caparro, Clarke Bailey and Ray Ardizzone.

     2. Term and Termination.

     (a) The initial term of your employment under this letter agreement will be for a period of
four years, commencing as of the Effective Date. The term of your employment may be renewed for
successive renewal terms thereafter if Glenayre provides you with written notice of its intention
to renew this letter agreement not less than 180 days prior to its expiration. Renewal will then
be discussed with you and such renewal shall occur only upon terms mutually agreed upon by Glenayre
and you. The initial term and each renewal term are collectively referred to in this letter
agreement as the “Term.”

     (b) Notwithstanding the provisions of Paragraph 2(a) above, your employment under this letter
agreement may be terminated prior to the expiration of the Term as follows:

        (1) Glenayre may terminate your employment hereunder for “Cause;”

        (2) Glenayre may terminate your employment hereunder upon your “Disability”;

        (3) You may terminate your employment hereunder immediately for “Good Reason” or
without “Good Reason” on 30 days prior written notice;

        (4) Your employment hereunder shall terminate automatically upon your death;

        (5) Glenayre may terminate your employment hereunder at any time without “Cause” on 30
days’ prior written notice;

        (6) In addition to any other amounts expressly provided hereunder, you shall be paid
all amounts and benefits accrued and owed to you prior to and through the effective date of
any termination of your employment hereunder.

     3. Compensation and Benefits.

     (a) Glenayre will pay to you an initial salary of $400,000 per annum (which as increased from
time to time, is referred to as the “Base Salary”). The Base Salary will be payable in accordance
with Glenayre’s normal payroll practices. The Base Salary shall be reviewed annually during the
Term and may be increased (but not decreased) in the manner determined by Glenayre in consultation
with the Board or any Compensation Committee established by the Board.

     (b) You will be eligible to participate in the Executive Bonus Plan for the Company, pursuant
to which you may earn a bonus of up to 100% of your Base Salary at 100% of the target established
by the Board upon recommendations from management of the Company. The normal matrix used by
Glenayre for bonuses will be used to provide for bonuses at targets above

2

 

and below 100% of the target (that is, a bonus of 25% of Base Salary at 50% of the target and up to 200% of Base Salary
for results above 100% of the target).

     (c) On the Effective Date, Glenayre will pay you a signing bonus in the amount of $200,000,
and you will use all of the after-tax proceeds from such bonus to purchase “Class B Units” of the
Company (as defined and provided in the LLC Agreement) at the same price per Unit as Glenayre’s
“Class A Units” of the Company (as defined and provided in the LLC Agreement).

     (d) Glenayre shall provide you with an automobile allowance in the amount of $1,500 per month.

     (e) You may take four weeks of vacation in each calendar year during the Term at such times as
shall be mutually convenient to you and the Company. Your vacation will be prorated for each
partial calendar year during the Term.

     (f) You may participate in all bonus, compensation and other incentive plans and programs and
in all retirement plans, life, medical/dental insurance plans and disability insurance plans of
Glenayre, to the extent that you qualify under the eligibility requirements of each plan or
program. Glenayre intends to review certain of its plans and determine whether benefits thereunder
are at appropriate levels for its executives, including you. In undertaking such review, Glenayre
will take into account policies and practices that are customary in the music industry.

     (g) On the Effective Date, Glenayre will reimburse you for expenses in the amount of $15,000
incurred by you on behalf of Glenayre or the Company prior to the Effective Date. After the
Effective Date, Glenayre will reimburse you for all reasonable expenses incurred personally by you
on behalf of Glenayre or the Company, subject to the Company’s reimbursement policies in effect
from time to time. Those reimbursement policies for the Company will be recommended by the
President and the Chief Executive Officer of the Company and subject to approval by the Board, with
the Board to take in account policies and practices that are customary in the music industry. In
addition, Glenayre agrees that you will be reimbursed for your social club fees up to $10,000 for
each 12-month period during the Term.

     (h) You and James Caparro will be reimbursed for up to a total of $10,000 for your attorneys
fees incurred by both of you in connection with the LLC Agreement and your respective arrangements
with Glenayre and the Company.

     (i) On the Effective Date, in addition to the provisions of Paragraph 3(c) above, you will
invest $200,000 to purchase Class B Units of the Company at the same price per Unit as Glenayre’s
Class A Units.

     (j) On the Effective Date, you will receive Profits Interests, allocated among Tier One, Tier
Two and Tier Three, all as described in the LLC Agreement.1 On the Effective Date,

	1	 	Representing 16.67% of the Company’s
total Profits Interests as specified in the LLC Agreement (representing the
right to receive 5.0% of the distributions by the Company beyond certain
thresholds, all as described in the LLC Agreement).

3

 

you shall become vested with respect to one-third of each of your Tier One, Tier Two and Tier Three
Profits Interests. Provided that you are still employed by Glenayre under this letter agreement at
such time, you shall become vested with respect to an additional one-third of each of your Tier
One, Tier Two and Tier Three Profits Interests on the first anniversary of the Effective Date.
Provided that you are still employed by Glenayre under this letter agreement at such time, you
shall become vested with respect to the final one-third of each of your Tier One, Tier Two and Tier
Three Profits Interests on the second anniversary of the Effective Date. Notwithstanding the
foregoing, you shall be fully vested in all of such entire Profits Interests upon (1) a Change of
Control of the Company, (2) your death, (3) the termination of your employment hereunder because of
your Disability, (4) the termination of your employment hereunder by Glenayre without Cause or (5)
the termination of your employment hereunder by you for Good Reason. Upon the termination of your
employment under this letter agreement (other than after a Change of Control or on account of the
reasons specified in clauses (2) through (5) above), any portion of your Profits Interests that has
not previously vested shall be deemed cancelled and of no further force or effect.

     (k) Glenayre agrees that it and its affiliates will conduct “Seller Restricted Activities” (as
such term is defined in the Asset Purchase Agreement dated May 9, 2005 between the Company and UMG
Manufacturing & Logistics, Inc. and Universal Music & Video Distribution Corp.) only through the
Company and its subsidiaries or other entities in which you are granted Profits Interests
equivalent to the Profits Interest granted to you hereunder and under the LLC Agreement.

     (l) In the event that your employment is terminated by Glenayre without Cause or by you for
Good Reason, Glenayre will (1) pay you a total amount equal to twice the amount of (x) your Base
Salary at the time of termination, plus (y) the amount of your bonus under the Executive Bonus Plan
for the prior fiscal year of the Company (if either the prior fiscal year was not 12 full months,
then for this purpose such bonus will be annualized by multiplying such bonus by a fraction the
numerator of which is 365 and the denominator of which is the number of days in such prior fiscal
year or there was no prior fiscal year for which a bonus was determined, then the current fiscal
year’s bonus shall be used and annualized in the same manner), such total amount to be paid in 24
equal monthly installments over a period of two years after such termination and (2) provide
medical benefits to you (and your dependents) for a period of 12 months following such termination
of employment, at Glenayre’s full expense and at the same level of coverage as such benefits are
provided to active employees of Glenayre. Your right to continue medical coverage required under
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) shall begin at the expiration
of the 12–month period described in the preceding sentence of this Paragraph 3(l). Termination of
your employment for Disability shall not qualify you for benefits under this Paragraph 3(l).
Glenayre specifically waives any obligation or requirement on your part to seek other employment to
reduce or otherwise mitigate the severance benefits described in this Paragraph 3(l) and agrees
that in the event that you shall become employed or otherwise generate other earnings or compensation, such employment or other
earnings or compensation shall not reduce your benefits under this Paragraph 3(l). As used in this
letter agreement, the following terms shall have the following meanings:

“Cause” means the occurrence of any of the following:

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     (1) your resignation, except for Good Reason, from the offices of Executive Vice
President and Chief Operating Officer of the Company;

     (2) acts of dishonesty or fraud on your part which are intended to result in your
substantial personal enrichment at the expense of the Company;

     (3) your conviction of a felony involving moral turpitude or the entry of a plea of
nolo contendere for such a felony; or

     (4) a material violation of your responsibilities as set forth herein which is willful
and deliberate. However, prior to the determination by the Board that “Cause” has occurred,
the Board will provide to you in writing the reasons for such determination and provide you
a reasonable opportunity to remedy that breach.

     “Change of Control” means any one of the following: (i) a merger, consolidation,
security exchange, issuance or sale of “Units”, or other reorganization of or involving the
Company pursuant to which either (a) the “Members,” determined immediately prior to such
transaction is effected, collectively have beneficial ownership of less than 51% of the
total outstanding “Units” (determined on a fully diluted basis) of the Company, or
comparable equity securities of the surviving entity if the Company is not the surviving
entity, immediately following such transaction or (b) the “Members” owning “Class A Units,”
determined immediately prior to such transaction is effected, collectively have beneficial
ownership of less than 51% of the total outstanding “Class A Units” (determined on a fully
diluted basis) of the Company, or comparable equity securities of the surviving entity if
the Company is not the surviving entity, immediately following such transaction, (ii) any
sale, lease, exchange or other transfer (in one transaction or a series of related
transactions), of all or substantially all of the assets of the Company, (iii) the
“Members’” or Board’s approval of any plan or proposal for the liquidation or dissolution of
the Company, or (iv) the Company’s submission or becoming subject to any bankruptcy
proceeding, the appointment of a trustee, custodian or conservator or any other similar
voluntary or involuntary creditors’ right proceeding; provided, however,
that notwithstanding the foregoing, in no event shall any of the following transactions be
deemed to have effected a Change of Control: (1) any transaction following which “Members”
comprising a “Voting Majority” immediately prior to any such transaction continue to have
right to select a majority of the members of the Board of Directors of the Company, or the
surviving entity if the Company is not the surviving entity, immediately following such
transaction, (2) any “Reorganization” which results in the Company merging, consolidating or
otherwise combining with Glenayre or Glenayre Technologies, Inc., and (3) any transaction
involving the public offering of equity securities of the Company or its successor or the
distribution of equity securities of the Company or its successor in a spin-off or similar transaction. All quoted terms
used herein have the meaning provided under the LLC Agreement.

     “Disability” shall be deemed to occur if you qualify for disability benefits under a
long-term disability plan sponsored by Glenayre or its affiliates.

     “Good Reason” means the occurrence of any of the following:

5

 

        (1) any failure of the Company to appoint or reappoint you to the offices of
Executive Vice President and Chief Operating Officer of the Company, except where
such failure is specifically approved by you (whether of a member of the Board or
individually);

        (2) any assignment to you of duties materially inconsistent with your position
with the Company or any material diminution by Glenayre or the Company of your
functions, authority, duties or responsibilities with the Company, provided
that you must first provide the Board with written notice specifying the failure of
Glenayre or the Company under this Paragraph and allow the Board 15 days from
receipt of notice to cure such failure;

        (3) any failure by Glenayre to pay to you the Base Salary or other compensation
and benefits or perform its material obligations provided for herein;
provided that you must first provide Glenayre with written notice and allow
Glenayre 15 days from receipt of notice to cure such failure; or

        (4) any relocation of your principal office to a location which is more than 50
miles outside of New York, New York.

     (m) In the event that Section 280G or Section 409A of the Internal Revenue Code shall be
applicable to any payments required by Glenayre to be made to you hereunder, the parties agree to
negotiate in good faith alternative arrangements to mitigate such applicability, with Glenayre to
have no obligation to increase the amount of any such payments.

     4. Confidential Information. You will not use or divulge to any person not employed by
the Company or its Affiliates or otherwise engaged to render services to the Company or its
Affiliates, any Confidential Information during or after your employment by Glenayre. For this
purpose, “Confidential Information” means: (1) the name, address or requirements of any customer of
the Company; or (2) any other secret or confidential information relating to any strategy,
acquisition, financial information, activity, invention, discovery or intellectual property of the
Company or its Affiliates or their customers not already in the public domain that you have or
shall have acquired during your employment by Glenayre hereunder. This provision will not preclude
you from disclosing such Confidential Information as may be required by any applicable law,
regulation or directive or any governmental agency, court or other authority having jurisdiction in
the matter, or in the proper course of conduct of the Company’s business in the prosecution of your
rights or entitlements or in defense of any claim against you. If any person seeks legally to
compel you to disclose, or you desire to disclose (in the prosecution of your rights or
entitlements or in the defense of any claim against you), Confidential Information, you will
promptly provide the Company with notice thereof. For purposes of this Paragraph 4, an “Affiliate”
of a Person means any Person that directly or indirectly, through one or more intermediaries or
otherwise, controls, is controlled by, or is under common control with such Person, where “control”
means the ability to direct management or policies through the ownership of voting securities, by
contract or otherwise, such Persons to include without limit Glenayre Technologies, Inc. and
Glenayre.

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     5. Non-Competition and Non-Solicitation.

     (a) You agree not to engage in any activities competitive with the Company or its Affiliates
at any time during the period of your employment hereunder (including any activities similar to
those described below), except in furtherance of the Company’s business. Furthermore, you agree
that, except as otherwise approved in writing by Glenayre, during the Restricted Period, you will
not, directly or indirectly: (1) engage in the Business in the Territory or market, sell or
provide Products and Services in the Territory; (2) solicit any Customer for purposes of marketing,
selling or providing Products and Services to such Customer; (3) accept as a customer any Customer
for purposes of marketing, selling or providing Products and Services to such Customer; (4) induce
or attempt to induce any employee of the Company or its Affiliates to terminate his or her
employment with the Company or its Affiliates; (5) interfere with the business relationship between
a Customer, Company employee or supplier and the Company or its Affiliates; or (6) be or become a
Representative of any Person who engages in any of the foregoing activities.

     Glenayre agrees that your employment by a division or subsidiary that does not engage in the
Business in the Territory or market, sell or provide Products and Services in the Territory (the
“Non-Competing Division”) of a company with another division or subsidiary that does engage in the
Business in the Territory or does market, sell or provide Products and Services in the Territory
(the “Competing Division”) shall not be deemed a violation of this Paragraph 5(a), so long as (1)
the Non-Competing Division does not directly or indirectly engage in the Business in the Territory
or market, sell or provide Products and Services in the Territory, (2) the Non-Competing Division
does not directly or indirectly engage in any of the activities described in subparagraphs (1)
through (6) of the second sentence of Paragraph 5(a), (3) you do not directly or indirectly
participate or become involved in the activities or business of the Competing Division and (4) you
do not violate the provisions of Paragraph 4 above.

(b) The following terms have the meanings given to such terms below:

        For purposes of this Paragraph 5, an “Affiliate” of a Person means any Person (i) that,
directly or indirectly, through one or more intermediaries or otherwise, controls, is
controlled by, or is under common control with such Person, where “control” means the
ability to direct management or policies through the ownership of voting securities, by
contract or otherwise, such Persons to include without limit Glenayre Technologies, Inc. and
Glenayre, and (ii) on which Person’s behalf you have provided or rendered material executive
management services prior to the Termination.

        “Business” means the Company’s or its Affiliates’ CD and DVD manufacturing and physical
distribution businesses and any other business(es) in which the Company or its Affiliates
are or were engaged at the time of, or during the 12-month period prior to, the Termination.

        “Customer” means any Person who is or was a customer of the Company or its Affiliates
(i) at the time of, or during the 12-month period prior to, the Termination or (ii) at the
time of, or during the 12-month period prior to, the Termination and with whom you had
dealings in the course of your employment with the Company.

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        “Person” means any individual, corporation, limited liability company, partnership,
company, sole proprietorship, joint venture, trust, estate, association, organization, labor
union, governmental body or other entity.

        “Products and Services” means the products and/or services offered by the Company or
its Affiliates at the time of, or during the 12-month period prior to, the Termination.

        “Representative” of a Person means (i) a shareholder, director, officer, member,
manager, partner, joint venturer, owner, employee, agent, representative, independent
contractor, consultant, advisor, for, to or with such Person, (ii) an investor in such
Person or a lender to such Person or (iii) any Person acting for, on behalf of or together
with such Person.

        “Restricted Period” means the period commencing on the date of the Termination and
ending on the second anniversary of such date.

        “Termination” means the termination of your employment hereunder for any reason.

        “Territory” means: (i) any county or State in the United States, (ii) any State in
which the Company or its Affiliates does or did business at the time of, or during the 12-
month period prior to, the Termination, (iii) the United States of America, and (iv) any
country in the world where the Company or its Affiliates does or did business at the time
of, or during the 12-month period prior to, the Termination.

     (c) You agree that the covenants in this Paragraph 5 are reasonable given the real and
potential competition encountered (and reasonably expected to be encountered) by the Company and
its Affiliates and the substantial knowledge and goodwill you will acquire with respect to the
Business as a result of your services to the Company. If, however, any provision of this Paragraph
5 is determined by a court to be invalid or unenforceable, that court is authorized to limit the
terms of such provision to allow it to be enforced.

     (d) You acknowledge that the Company and its Affiliates will suffer irreparable harm if you
breach any of your obligations under this Paragraph 5 and that monetary damages will be inadequate
to compensate the Company and its Affiliates for that breach. Accordingly, you agree that, in such
event, the Company will be entitled to obtain from any court of competent jurisdiction preliminary
and permanent injunctive relief, and expedited discovery for the purpose
of seeking relief, in order to prevent or to restrain any such breach (and you agree to waive
any requirement for the securing or posting of any bond in connection with such remedies). The
Company will be entitled to recover its costs incurred in connection with enforcing this Paragraph
5, including reasonable attorneys’ fees and expenses.

     6. Ownership of Intellectual Property.

     (a) You will immediately and fully disclose in writing to the Company all inventions,
discoveries, ideas, technologies, trade secrets, know-how, formulae, designs, patterns, marks,
names, improvements, mask works, works of authorship and other intellectual property

8

 

conceived or developed in whole or in part by you, or in which you may have aided in its conception or
development, while employed by the Company (collectively, “Intellectual Property”).

     (b) You will from time to time immediately upon the conception or development of any
Intellectual Property assign, at the Company’s expense, to the Company all of your right, title and
interest in and to all such Intellectual Property (whether or not patentable, registrable,
recordable or protectable by copyright and regardless of whether the Company pursues any of the
foregoing). If any Intellectual Property falls within the definition of “work made for hire”, as
such term is defined in 17 U.S.C. § 101, such Intellectual Property will be considered “work made
for hire” and the copyright of such Intellectual Property will be owned solely and exclusively by
the Company. If any Intellectual Property does not fall within such definition of “work made for
hire”, then your right, title and interest in and to such Intellectual Property will be assigned to
the Company pursuant to the first sentence of this Paragraph 6(b). You will execute and deliver
any assignment instruments and do all other things reasonably requested by the Company (both during
and after the your employment with the Company) in order to more fully vest in the Company sole and
exclusive right, title and interest in and to all Intellectual Property. The Company agrees to
indemnify, defend and hold you harmless from and against any claim that may be made against you in
connection with the Company’s use of any Intellectual Property assigned by you to the Company or
any resulting damages sustained by you by reason of such claim.

     7. Indemnity. You are entitled to indemnification from the Company to the same extent as
other directors of the Company, as described in Section 11.8 of the LLC Agreement.

     8. Notices. All notices and other communications required or permitted hereunder must be
in writing and shall be deemed to have been duly given when personally delivered or on the third
business day after being placed in the United States mail by certified mail, return receipt
requested, postage prepaid, addressed to the parties hereto as follows (provided that notice of
change of address shall be deemed given only when actually received):

	 	 	 	 	 
	

	 	As to Glenayre or
the Company:
	 	Glenayre Electronics, Inc. or

Entertainment Distribution Company, LLC

360 Madison Avenue, Suite 500

New York, New York 10017

Attention: Chairman of the Board
	 
	 	 	 	 
	

	 	As to You:
	 	Mr. Thomas Costabile

158 Brown Stone Court

Old Tappan, NJ 07675

The address of any party may be changed from time to time by such party serving notice on the other
party.

     9. Miscellaneous. You may not assign this letter agreement or any of your rights,
benefits, obligations or duties hereunder to any other Person. Glenayre may assign its rights,
obligations and duties hereunder (with no continuing obligation to you hereunder) to any

9

 

company that acquires all or substantially all of the Company’s assets or equity interests and expressly
assumes such obligations and duties hereunder. Glenayre may also assign its rights, obligations,
and duties hereunder (with no continuing obligation to you hereunder) if Glenayre and its
affiliates collectively shall cease to have beneficial ownership of a majority of the total
outstanding Class A Units (determined on a fully diluted basis) of the Company. This letter
agreement is made with the intention that the construction and validity shall be determined in
accordance with and governed by the laws of the State of New York. This letter agreement shall be
binding upon and inure to the benefit of the Company, its successors and assigns, and of you and
your heirs and personal representatives. This letter agreement constitutes the entire agreement
among Glenayre, the Company and you with respect to the subject matter hereof and supersedes and
cancels all prior or contemporaneous oral or written agreements and understandings between us with
respect to the subject matter hereof. This letter agreement may not be changed or modified orally
but only by a writing signed by the Company and you, which writing states that it is an amendment
to this letter agreement. If any provision of this letter agreement be held invalid or
unenforceable, that shall not affect or impair any other provision of this letter agreement and
shall not have any effect on or impair the obligation of the Company or you.

* * *

     If the foregoing reflected your understanding of the terms of your employment by Glenayre,
please sign where provided below.

	 	 	 	 	 
	 	 	GLENAYRE ELECTRONICS, INC.
	 
	 	 	 	 
	

	 	By:
	 	/s/ Clarke H. Bailey
	

	 	 	 	 
	

	 	Name:

Title:
	 	Clarke H. Bailey

Chairman of the Board

	 	 	 
	AGREED:
	 	 
	 
	 	 
	/s/ Thomas Costabile
	 	 
	Thomas Costabile
	 	 
	 
	 	 

	 	 	 	 	 
	AGREED:	 	 
	 
	 	 	 	 
	ENTERTAINMENT DISTRIBUTION COMPANY, LLC	 
	 
	 	 	 	 
	By:

	 	/s/ Clarke H. Bailey
	 	 
	Name:

Title:

	 	Clarke H. Bailey

Chairman	 	 

10Ex-10.6

 

May 31, 2005

Mr. James Caparro

11 Elden Drive

Saddle River, NJ 07458

Thomas Costabile

158 Brown Stone Court

Old Tappan, NJ 07675

Dear Jim and Tom:

     On the date hereof, Glenayre Electronics, Inc. (“GEI”), James Caparro (“Caparro”) and Thomas
Costabile (“Costabile”) are executing the Limited Liability Company Agreement (the “LLC Agreement”)
of Entertainment Distribution Company, LLC (“EDC”) as Members. Capitalized terms used but not
defined herein have the meanings ascribed thereto in the LLC Agreement. Under the terms of the LLC
Agreement, (1) GEI is making an initial capital contribution as described in the LLC Agreement (the
“GEI Initial Capital Contribution”), (2) each of Caparro and Costabile (together with GEI, the
“Initial Members”) are making the initial capital contributions as described in the LLC Agreement
(together with the GEI Initial Capital Contribution, the “Initial Capital Contributions”), and (3)
each of Caparro and Costabile have been granted certain Profits Interests in EDC (the “Profits
Interests”).

     The Initial Members are entering into this letter agreement to grant to Caparro and Costabile
the anti-dilution rights with respect to the Profits Interests described in the following sentence
(the “Anti-Dilution Rights”). If GEI or any of its Affiliates makes any capital contributions
above the GEI Initial Capital Contribution (including deemed capital contributions pursuant to
Section 2.7 of the LLC Agreement) (“Additional Capital Contributions”), the Initial Members or
their Affiliates will grant additional Profits Interests to Caparro and Costabile such that their
total Profit Interests will equal what their respective Profits Interest would have been had such
Additional Capital Contributions been made by GEI and included within the GEI Initial Capital
Contribution.

     Annexes 1 and 2 attached hereto illustrate how the Anti-Dilution Rights would operate assuming that
$200 million is available to distribute to all Members. Annex 1 provides an example of the
Distributions that would be available to be made to the Initial Members and the Profits Members
based on the expected Initial Capital Contributions and a third party having made additional
capital contributions that together with the Initial Capital Contributions equal $60 million, the
purpose of which is to demonstrate the impact of dilution which impact is intended to be avoided
hereby. Annex 2 provides an example of the Distributions that would be

 

 

Mr. James Caparro

Mr. Thomas Costabile

May 31, 2005

Page 2

available to be made to the Initial Members and the Profits Members based on total Initial Capital
Contributions of $60 million, the purpose of which is to demonstrate the results to be achieved by
application of the Anti-Dilution Rights.

     It is understood and agreed that the Anti-Dilution Rights shall not alter:

	 	(i)  	the IRR Hurdle Condition which, in accordance with Section 3.1(b)(v) of the LLC
Agreement, shall, including the effect of any Additional Capital Contributions, in all
events be required to be satisfied before any Level Three Distributions or Level Four
Distributions are required to be made with respect to the Profits Interests; or
	 
	 	(ii)  	any distributions received prior to any Additional Capital Contributions by GEI or its
Affiliates, Caparro or Costabile.

     It is also understood and agreed that the Anti-Dilution Rights will only apply to Additional
Capital Contributions that would cause GEI’s and its Affiliates total Capital Contributions to
equal up to $60 million and will not apply to capital contributions made by GEI or its Affiliates
in excess of such amount.

	 	 	 	 	 
	 	Sincerely,

GLENAYRE ELECTRONICS, INC.

 	 
	 	By:  	/s/ Clarke H. Bailey
 	 
	 	 	Name:  	Clarke H. Bailey 	 
	 	 	Title:  	Chairman of the Board 	 
	 

AGREED:

/s/ James Caparro          

James Caparro

/s/ Thomas Costabile          

Thomas Costabile

 

 

Annex 1

EDC

Profit Distribution Waterfall

Example with a $35 Million Capital Contribution from GEI

and $25 Million from a Third Party

	 	 	 	 	 	 	 	 	 
	 	 	Capital Contribution	 	 	% Ownership	 
	 	 	 
	Total Initial GEI and Class B Capital Contribution
	 	$	35,000,000.00	 	 	 	58.3	%
	Total New Capital Contribution
	 	 	25,000,000.00	 	 	 	41.7	%
	 	 	 
	Total Capital Contribution
	 	$	60,000,000.00	 	 	 	100.0	%
	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level One	 	 	Level Two	 	 	Level Three	 	 	Level Four	 
	 	 	Gross %	 	 	Pro Rata %	 	 	Pro Rata %	 	 	Pro Rata %	 	 	Pro Rata %	 
	 	 	 
	Class A & B Members (“Class AB”)
	 	 	70.0	%	 	 	100.00	%	 	 	82.35	%	 	 	75.68	%	 	 	70.00	%
	Tier 1
	 	 	15.0	%	 	 	—	 	 	 	17.65	%	 	 	16.22	%	 	 	15.00	%
	Tier 2
	 	 	7.5	%	 	 	—	 	 	 	—	 	 	 	8.11	%	 	 	7.50	%
	Tier 3
	 	 	7.5	%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7.50	%
	 	 	 
	Total
	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%
	 	 	 

Calculation of Distribution Strike Prices

	 	 	 	 	 
	 	 	Tier 1:	 
	Total Capital Contribution
	 	$	35,000,000.00	 
	divided by Class AB
	 	 	82.35	%
	 
	 	 	 
	Level Two Pro Rata %
	 	$	42,500,000.00	 
	minus Total Capital Contribution
	 	 	(35,000,000.00	)
	 
	 	 	 
	 
	 	$	7,500,000.00	 
	multipled by Factor
	 	 	1.00x	 
	 
	 	 	 
	equals Tier 1 Distribution Strike
	 	$	7,500,000.00	 
	 
	 	 	 

	 	 	 	 	 	 	 	 	 
	 	 	Tier 2:	 	 	Tier 3:	 
	 	 	 
	Tier 1 Distribution Strike
	 	$	7,500,000.00	 	 	$	7,500,000.00	 
	Multiplied by 50%
	 	 	50.0	%	 	 	50.0	%
	Multiplied by Factor
	 	 	1.50x	 	 	 	2.00x	 
	 	 	 
	Distribution Strike
	 	$	5,625,000.00	 	 	$	7,500,000.00	 
	 	 	 

Calculation of Threshold Amount

	 	 	 	 	 
	Level One:	 	 	 	 
	Tier 1 Distribution Strike
	 	$	7,500,000.00	 
	divided by Tier 1 Level Two Pro Rata %
	 	 	17.65	%
	 
	 	 	 
	Sub total
	 	$	42,500,000.00	 
	minus Tier 1 Distribution Strike
	 	 	(7,500,000.00	)
	 
	 	 	 
	Level One Threshold Amount
	 	$	35,000,000.00	 
	 
	 	 	 

	 	 	 	 	 
	Level Two:	 	 	 	 
	Tier 2 Distribution Strike
	 	$	5,625,000.00	 
	divided by Tier 2 Level Three Pro Rata %
	 	 	8.11	%
	 
	 	 	 
	Sub total
	 	$	69,375,000.00	 
	minus Tier 1 Distribution Strike
	 	 	(7,500,000.00	)
	minus Tier 2 Distribution Strike
	 	 	(5,625,000.00	)
	 
	 	 	 
	Level Two Threshold Amount
	 	$	56,250,000.00	 
	 
	 	 	 

	 	 	 	 	 
	Level Three	 	 	 	 
	Tier 3 Distribution Strike
	 	$	7,500,000.00	 
	divided by Tier 3 Level Four Pro Rata %
	 	 	7.50	%
	 
	 	 	 
	Sub total
	 	$	100,000,000.00	 
	minus Tier 1 Distribution Strike
	 	 	(7,500,000.00	)
	minus Tier 2 Distribution Strike
	 	 	(5,625,000.00	)
	minus Tier 3 Distribution Strike
	 	 	(7,500,000.00	)
	 
	 	 	 
	Level Three Threshold Amount
	 	$	79,375,000.00	 
	 
	 	 	 
	 
	 	 	 
	Level Four	 	 	 	 
	All amounts above Level Three

	 	 

 

 

Annex 1

	 	 	 	 	 
	Total Entertainment Distribution Company LLC Distribution
	 	$	200,000,000.00	 
	Total Intitial GEI and Class B Ownership
	 	 	58.3	%
	 
	 	 	 
	Value of Distribution to AB Members and Profits Interest
Holders
	 	$	116,666,666.67	 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Distribution Waterfall Allocation:
	 	 	 	 	 	 	Level One Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	—	 	 	$	35,000,000.00	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	100.00	%	 	$	35,000,000.00	 
	Level 1	 	Tier 1 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	35,000,000.00	 
	 	 	 	 	 	 	 

	 	 	 	       	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level Two Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	35,000,000.01	 	 	$	56,250,000.00	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	82.35	%	 	$	17,499,999.99	 
	Level 2	 	Tier 1 Profits Holders
	 	 	17.65	%	 	 	3,750,000.00	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	21,249,999.99	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level Three Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	56,250,000.01	 	 	$	79,375,000.00	 
	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	75.68	%	 	$	17,499,999.99	 
	Level 3	 	Tier 1 Profits Holders
	 	 	16.22	%	 	 	3,750,000.00	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	8.11	%	 	 	1,875,000.00	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	23,124,999.99	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	  	 	 	 
	 	 	 	 	 	 	Level Four Distributions	 
	 	 	 	 	 	 	Above	 	 	$79,375,000.00	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	70.00	%	 	$	26,104,166.68	 
	Level 4	 	Tier 1 Profits Holders
	 	 	15.00	%	 	 	5,593,750.00	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	7.50	%	 	 	2,796,875.00	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	7.50	%	 	 	2,796,875.00	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	37,291,666.69	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Total $	 	 	%	 
	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	$	96,104,166.66	 	 	 	82.37	%
	Total	 	Tier 1 Profits Holders
	 	 	13,093,750.00	 	 	 	11.22	%
	 	 	 	 	Tier 2 Profits Holders
	 	 	4,671,875.00	 	 	 	4.00	%
	 	 	 	 	Tier 3 Profits Holders
	 	 	2,796,875.00	 	 	 	2.40	%
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	$	116,666,666.67	 	 	 	100.00	%
	 	 	 	 	 	 	 

IF IRR hurdles are not met for Tier 2 and Tier 3 above, then all amounts above the Level One threshold
will be allocated as per the Level Two percentages until the IRR hurdle is met. Thereafter, all amounts
will be allocated as per the appropriate Distribution Level.

 

 

Annex 2

EDC

Profit Distribution Waterfall

Example with a $60 Million Capital Contribution from GEI

	 	 	 	 	 
	Total Initial GEI and Class B Capital Contribution
	 	$	60,000,000.00	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level One	 	 	Level Two	 	 	Level Three	 	 	Level Four	 
	 	 	Gross %	 	 	Pro Rata %	 	 	Pro Rata %	 	 	Pro Rata %	 	 	Pro Rata %	 
	 	 	 
	Class A & B Members (“Class AB”)
	 	 	70.0	%	 	 	100.00	%	 	 	82.35	%	 	 	75.68	%	 	 	70.00	%
	Tier 1
	 	 	15.0	%	 	 	—	 	 	 	17.65	%	 	 	16.22	%	 	 	15.00	%
	Tier 2
	 	 	7.5	%	 	 	—	 	 	 	—	 	 	 	8.11	%	 	 	7.50	%
	Tier 3
	 	 	7.5	%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7.50	%
	 	 	 
	Total
	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%	 	 	100.00	%
	 	 	 

Calculation of Distribution Strike Prices

	 	 	 	 	 
	 	 	Tier 1:	 
	Total Capital Contribution
	 	$	60,000,000.00	 
	divided by Class AB
	 	 	82.35	%
	 
	 	 	 
	Level Two Pro Rata %
	 	$	72,857,142.86	 
	minus Total Capital Contribution
	 	 	(60,000,000.00	)
	 
	 	 	 
	 
	 	$	12,857,142.86	 
	multipled by Factor
	 	 	1.00x	 
	 
	 	 	 
	equals Tier 1 Distribution Strike
	 	$	12,857,142.86	 
	 
	 	 	 

	 	 	 	 	 	 	 	 	 
	 	 	Tier 2:	 	 	Tier 3:	 
	 	 	 
	Tier 1 Distribution Strike
	 	$	12,857,142.86	 	 	$	12,857,142.86	 
	Multiplied by 50%
	 	 	50.0	%	 	 	50.0	%
	Multiplied by Factor
	 	 	1.50x	 	 	 	2.00x	 
	 	 	 
	Distribution Strike
	 	$	9,642,857.14	 	 	$	12,857,142.86	 
	 	 	 

Calculation of Threshold Amount

	 	 	 	 	 
	Level One:	 	 	 	 
	Tier 1 Distribution Strike
	 	$	12,857,142.86	 
	divided by Tier 1 Level Two Pro Rata %
	 	 	17.65	%
	 
	 	 	 
	Sub total
	 	$	72,857,142.86	 
	minus Tier 1 Distribution Strike
	 	 	(12,857,142.86	)
	 
	 	 	 
	Level One Threshold Amount
	 	$	60,000,000.00	 
	 
	 	 	 

	 	 	 	 	 
	Level Two:	 	 	 	 
	Tier 2 Distribution Strike
	 	$	9,642,857.14	 
	divided by Tier 2 Level Three Pro Rata %
	 	 	8.11	%
	 
	 	 	 
	Sub total
	 	$	118,928,571.43	 
	minus Tier 1 Distribution Strike
	 	 	(12,857,142.86	)
	minus Tier 2 Distribution Strike
	 	 	(9,642,857.14	)
	 
	 	 	 
	Level Two Threshold Amount
	 	$	96,428,571.43	 
	 
	 	 	 

	 	 	 	 	 
	Level Three	 	 	 	 
	Tier 3 Distribution Strike
	 	$	12,857,142.86	 
	divided by Tier 3 Level Four Pro Rata %
	 	 	7.50	%
	 
	 	 	 
	Sub total
	 	$	171,428,571.43	 
	minus Tier 1 Distribution Strike
	 	 	(12,857,142.86	)
	minus Tier 2 Distribution Strike
	 	 	(9,642,857.14	)
	minus Tier 3 Distribution Strike
	 	 	(12,857,142.86	)
	 
	 	 	 
	Level Three Threshold Amount
	 	$	136,071,428.57	 
	 
	 	 	 
	 
	 	 	 
	Level
Four	 	 	 	 
	All amounts above Level Three

	 	 

 

 

Annex 2

	 	 	 	 	 
	Total Entertainment Distribution Company LLC Distribution
	 	$	200,000,000.00	 
	Total GEI and Class B Ownership
	 	 	100.0	%
	 
	 	 	 
	Value of Distribution
	 	$	200,000,000.00	 

	 	 	 	 	 	 	 	 	 	    	 	 	 
	Distribution Waterfall Allocation:
	 	 	 	 	 	 	Level One Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	—	 	 	$	60,000,000.00	 
	 	 	 	 	 	 	 
	 	 	 	 	Level 1
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	100.00	%	 	$	60,000,000.00	 
	Level 1	 	Tier 1 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	60,000,000.00	 
	 	 	 	 	 	 	 

	 	 	 	   	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level Two Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	60,000,000.01	 	 	$	96,428,571.43	 
	 	 	 	 	 	 	 
	 	 	 	 	Level 2
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	82.35	%	 	$	29,999,999.99	 
	Level 2	 	Tier 1 Profits Holders
	 	 	17.65	%	 	 	6,428,571.43	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	36,428,571.42	 
	 	 	 	 	 	 	 

	 	  	  	    	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Level Three Distributions	 
	 	 	 	 	 	 	From	 	 	To	 
	 	 	 	 	 	 	 
	 	 	 	 	 
	 	$	96,428,571.44	 	 	$	136,071,428.57	 
	 	 	 	 	Level 3
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	75.68	%	 	$	29,999,999.99	 
	Level 3	 	Tier 1 Profits Holders
	 	 	16.22	%	 	 	6,428,571.43	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	8.11	%	 	 	3,214,285.71	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	39,642,857.13	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	    	 	 	 
	 	 	 	 	 	 	Level Four Distributions	 
	 	 	 	 	 	 	Above	 	 	$136,071,428.57	 
	 	 	 	 	 	 	 
	 	 	 	 	Level 4
	 	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	 	70.00	%	 	$	44,750,000.01	 
	Level 4	 	Tier 1 Profits Holders
	 	 	15.00	%	 	 	9,589,285.72	 
	 	 	 	 	Tier 2 Profits Holders
	 	 	7.50	%	 	 	4,794,642.86	 
	 	 	 	 	Tier 3 Profits Holders
	 	 	7.50	%	 	 	4,794,642.86	 
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	100.00	%	 	$	63,928,571.45	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 	    	 	 	 
	 	 	 	 	Total	 	Total $	 	 	%	 
	 	 	 	 	 	 	 
	 	 	 	 	AB Members
	 	$	164,750,000.00	 	 	 	82.37	%
	Total	 	Tier 1 Profits Holders
	 	 	22,446,428.57	 	 	 	11.22	%
	 	 	 	 	Tier 2 Profits Holders
	 	 	8,008,928.57	 	 	 	4.00	%
	 	 	 	 	Tier 3 Profits Holders
	 	 	4,794,642.86	 	 	 	2.40	%
	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	$	200,000,000.00	 	 	 	100.00	%
	 	 	 	 	 	 	 

IF IRR hurdles are not met for Tier 2 and Tier 3 above, then all amounts above the Level One threshold
will be allocated as per the Level Two percentages until the IRR hurdle is met. Thereafter, all amounts
will be allocated as per the appropriate Distribution Level.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00085-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00085-of-00352.parquet"}]]