MARKETING AND SERVICES AGREEMENT

 

ARTICLE I

OBLIGATIONS OF THE PARTIES

 

1.01         During the Term, Madacy hereby grants the Partnership a non-exclusive (subject to the restrictions contained in Section 2.4 of the Partnership Agreement), royalty-free license to such portions of its entire music, consisting of the Madacy Songs and the Masters to the Madacy Songs, as the Partnership reasonably requests and requires for the full and proper exploitation of the Program in connection with the operation of the Websites and the Business of the Partnership.  The Parties hereto agree that such requests shall take into account the diversity and depth of Masters which have already been made available hereunder (and the avoidance of any redundancy) and, where applicable, the costs and efforts required to provide Masters as compared to their anticipated benefit or value to the Program, the whole subject to the following:

 

a.     The License shall only apply to Masters that Madacy has the right to license for downloading and is entitled to make available to the Partnership;

 

b.     The License shall permit the Partnership, and Traffix Music on behalf of the Partnership in rendering its services under this Agreement, to use the Masters for the following purposes:

 

i.  For the download by an end-user of Madacy Songs from the Websites for a fee; and

 

ii. For the download by an end-user of Madacy Songs from the Websites for free as a premium for further revenue generating activity.

 

For greater certainty, the License shall not permit the Partnership or Traffix Music in rendering its services under this Agreement to provide the download of all or any part of Madacy Songs for use as ring-tones, ring-backs or any other telephony use or any other use other than direct marketing via the Channels of Distribution.  The Partnership shall have no rights to assign or sub-license its rights hereunder;

 

c.     The License shall be subject to Madacy having obtained the appropriate mechanical licenses (“Mechanicals”) to permit the use of the Masters for downloading, which Madacy agrees to use reasonable commercial efforts to obtain;

 

d.     Madacy shall make those Masters which require the obtaining of Mechanicals available to the Partnership in batches as Mechanicals are obtained.  Madacy shall advise Traffix Music, on behalf of the Partnership, on a weekly basis, of those Masters, if any, for which Mechanicals have been obtained in such week and shall make such Masters available to the Partnership as soon as possible thereafter.  Madacy shall exercise its reasonable commercial efforts to obtain Mechanicals in a timely fashion;

 

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e.     The Masters which are the subject of this License are hereby listed on Schedule B hereto.  In addition, Schedule B shall be amended from time to time during the Term of this Agreement as Madacy makes further Masters available (ie. as Mechanicals are obtained for additional batches of Masters or as additional Masters are obtained by Madacy) or ceases to make Masters available (due to its loss of rights to the Track or inability to make the Track available for download).

 

f.      The present License granted hereunder shall expressly not include the artwork which Madacy uses for its CD products.  Madacy shall provide appropriate artwork to the Partnership to highlight/present each genre of music being offered.

 

g.     It is acknowledged that any limitations on use or term of use of Masters or artwork to which Madacy is subject shall equally apply to the license of Masters or artwork by Madacy to the Partnership.

 

h.     Other than as set forth in paragraph (i) below, Madacy will be solely responsible for all costs associated with acquiring the Madacy Songs (i.e. purchasing the Masters and securing the third party licenses).  However, with respect to Publishing and Royalties (a) the Partnership (and Traffix Music) will give Madacy direct access to the Websites’ reporting database for the purposes of permitting Madacy, as and when it desires in its sole discretion, to analyze the composition and volume of downloads of Madacy Songs and to generate a report of the name and number of the songs downloaded from the Websites (such songs and the corresponding Publishing and Royalty rates will be identified in the library of Madacy Songs provided to the Partnership) for such period as Madacy desires, and (b) Madacy will provide the Partnership, within five (5) days of the end of each month, with an invoice for the Publishing and Royalties due for the immediately preceding month, (c) the Partnership will pay to Madacy the amount determined in such monthly report within five (5) business days of receipt of the invoice and (d) Madacy will remit the Publishing and Royalties to the appropriate third party.  Notwithstanding the generality of the foregoing, each of Madacy and Traffix Music shall be directly responsible for the amount of any Shortfall resulting from a Proprietary Premium Program in accordance with Section 1.05(a) hereof.

 

The Partnership hereby acknowledges and agrees that the payment of Publishing is required by applicable federal law and Royalties are contractual obligations of Madacy.  Accordingly, the payment to Madacy of Publishing and Royalties will be made by the Partnership on a priority basis to all other payments, reimbursements or disbursements of the Partnership.

 

i.      The Parties acknowledge that Madacy has licensed the San Juan Songs from SJMG and has obtained, in such license, the right to sub-license substantially all of the San Juan Songs to the Partnership.  The Parties further acknowledge that Madacy is responsible to pay to SJMG the San Juan Royalty and the San Juan Guarantee.  The Partnership hereby agrees that it shall pay to Madacy with respect to each fiscal year of the Partnership a royalty equal to the greater of (a) the San

 

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Juan Royalty with respect to such year and (b) the San Juan Guarantee with respect to such year, so as to permit Madacy to satisfy its obligations to SJMG under its license with SJMG.  Notwithstanding the generality of the foregoing and the five (5) year initial term of Madacy’s license with SJMG of the San Juan Songs and the guarantees thereunder, in the event Madacy ceases, at any time, to license the Madacy Songs to the Partnership, the Partnership’s obligations to Madacy under this paragraph shall be limited to the amount which is otherwise payable for the full fiscal year in which Madacy ceases to license the Madacy Songs (being the greater of the San Juan Royalty and the San Juan Guarantee with respect to such year) and all San Juan Guarantees for subsequent years shall be the sole responsibility of Madacy.

 

1.02         Traffix Music shall be responsible for the creation, maintenance and hosting of the Websites (the ownership of which shall vest exclusively in the Partnership), any developments and modifications to the technology associated with the Program, the origination and publication of all advertising on the Websites.  Traffix Music shall be solely responsible, for its own account, for all Traffix Music Contributed Expenses.  Traffix Music shall also be responsible for administering for the account of the Partnership the payment of all Partnership Out-of-Pocket Expenses, Marketing Expenses, New Revenue Source Commissions and Accounting Expenses incurred by Traffix Music for the account of the Partnership in carrying out its obligations hereunder.  In addition, each of Traffix Music and Madacy may further incur certain Direct Out-of-Pocket Expenses for the account of the Partnership.  Subject to the priority payment of all Publishing and Royalties in accordance with Section 1.01(h) above, Traffix Music and Madacy shall be reimbursed out of Gross Revenues for all such expenses, other than Traffix Music Contributed Expenses, the whole subject to Section 1.03 below.

 

1.03         During the Term, Traffix Music hereby grants the Partnership, a non-exclusive (subject to the restrictions contained in Section 2.4 of the Partnership Agreement), royalty-free license to the use of the Program in connection with the operation of the Website and the conduct of the Business of the Partnership, except that such license shall be exclusive to the Partnership with respect to the conduct of a business identical or materially similar to the Business of the Partnership, and Traffix Music also grants Madacy a non-exclusive, royalty-free license to the use of the Program for the purposes set forth in Section 1.06 of this Agreement (the license of the Program described in this Section may be referred to as the “Program License”).

 

1.04         Traffix Music will be responsible for marketing the Program to all Channels of Distribution, other than the Madacy Channels (defined below).  Madacy will be responsible for marketing the Program to brick-and-mortar businesses as well as to any current or future customers of Madacy’s hard-copy entertainment products (the “Madacy Channels”).  Traffix Music will be solely responsible for media buying necessary to generate traffic and sales.  Traffix Music may not commit to, or incur, aggregate marketing and/or advertising expenses on behalf of the Partnership in

 

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excess of the greater of (a) $10,000 per month, and (b) the amount set out in the marketing/advertising budgets established from time to time by Madacy.

 

In the event Traffix Music uses any of its proprietary media for marketing the Program, it shall be entitled to reimbursement for the value of such media, which value shall be the lowest rate such media is made generally available to Traffix Music’s customers; however, Traffix Music shall not use more than $5,000.00 of such media in the aggregate in any calendar month (and $30,000 in any calendar year) without the written consent of the Partnership.

 

Each of Traffix Music and Madacy, in their capacity as independent contractors hereunder, shall use its reasonable commercial efforts to assist the Partnership in the promotion, marketing, distribution, sales and Upsales of the Madacy Songs via the Websites and the services promoted thereby and to assist the Partnership in the generation of Gross Revenues therefrom, including, without limitation, through the promotion of Website Sales, Websites’ Database Sales and New Revenue Source Sales; provided, however, that neither Contractor shall have any obligation or other liability whatsoever for any acts or failures to act of the other (or such other’s Affiliates).  Such efforts shall be performed in accordance with all applicable industry standards and federal, provincial, state and local government rules, regulations or requirements now in effect or which may hereafter be in effect in the conduct of its activities.  To the extent that Madacy or Traffix Music wishes, in providing such assistance to the Partnership or otherwise, to construct a marketing arrangement that is out of the ordinary course (i.e., involves extra web development, or requires a non-compete), then such deal shall be subject to the prior approval of the Partnership and Madacy.

 

1.05         During the Term and subject to the terms and conditions of this Agreement, neither Contractor shall enter, directly or indirectly, into another relationship or business enterprise which, materially similar to, and directly competitive with the relationship set out herein and/or the Business.  For greater certainty, Madacy hereby agrees that it shall not make its Masters available in bulk in any transaction or relationship for zero or nominal cash consideration.

 

Notwithstanding the foregoing, the Parties hereby agree that during the term of the Agreement between the Parties:

 

i.      Madacy and its Affiliates shall be entitled, at all times, to make their recorded music available for download, on a non-exclusive basis, to any entity which is providing the services of an on-line music store on a fair market value pay-per-download basis;

 

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ii.     Madacy and its Affiliates shall be entitled, at all times, to make their recorded music available for download, on a pay-for-use basis, to any of its present or future Madacy Channel customers or Affiliates customers and Madacy and its Affiliates shall further be entitled to offer exclusively for download to such customers any packages (pre-set selection of recorded music) which they have made or make exclusively available to such customer for sale via its Madacy Channel (the individual songs of such package being still available individually to the Websites); and

 

iii.    Madacy and its Affiliates shall be entitled, at all times, to enter into, participate in, or carry out such promotional, marketing or licensing activities with their brick-and-mortar customers in support of their CD and DVD sales (or any replacement configuration thereof) as they deem appropriate or necessary, in their sole discretion acting reasonably, to create, maintain or enhance their business or relationship with such customer (e.g. provide free downloads of a limited number of songs/tracks as a promotion or give-away to retail customers in support of brick-and-mortar sales).

 

Other than as set forth above, neither Contractor may create, supply, support, operate, or otherwise be involved with, either directly or indirectly, a website that is materially similar to the Websites and directly competitive with the Business of the Partnership.  It is further acknowledged and agreed that a number of Madacy Songs may be controlled by Madacy on a non-exclusive basis.  As such, other parties may retain rights to such Madacy Songs for use via download or otherwise.  Such use shall not be deemed a breach of this Agreement.

 

The Parties hereby agree that Madacy shall be the exclusive provider of music-for-download content to the Partnership (ie. any music that the Partnership licenses/obtains/uses in the exploitation of its Business will emanate from/flow through Madacy).  Any other product (ie. other than music) may be sourced directly by the Partnership and Traffix Music in rendering its services to the Partnership under this Agreement.

 

1.06         Each of the Contractors may use the Program as a premium or give-away (“Premium”) to generate sales for its own (non-3^rd party) products/services (“Proprietary Premium Program”) and any revenue generated from the sales of such Party’s products/services shall belong solely to such Contractor; however, any revenue generated on the Websites from the consumers who receive such premiums will be included as Website Sales (e.g., if the consumer redeems his free songs and purchases more music, or if the consumer clicks on an advertising banner, then such additional revenue is included).  In addition, Premium programs may be carried out solely for the benefit of the Business (ie. they are not being carried out in support of the business of either of the Contractors) (“Partnership Premium Program”).  Notwithstanding the generality of the foregoing, the following shall apply to any Premium:

 

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a.     With respect to Proprietary Premium Programs, the Contractor carrying out the premium deal shall be directly and personally liable to the Partnership for Publishing and Royalties with respect thereto.  In the event that the revenues generated from a Proprietary Premium Program are insufficient and give rise to a Shortfall (ie. the revenues from the program are less than the Publishing and Royalties with respect thereto), the Contractor carrying out the Proprietary Premium Program shall be directly responsible for the payment of such Shortfall.

 

b.     With respect to Partnership Premium Programs, in the event that one or more Partnership Premium Programs are carried out in any fiscal quarter of the Partnership and an aggregate Shortfall is realized from these Premium programs and there are insufficient Gross Revenues in such fiscal quarter from all of the revenue sources of the Websites to fully cover off the Shortfall (any remaining Shortfall after the application of other Gross Revenues hereinafter referred to as a “Net Partnership Shortfall”) the amount, if any, of the Net Partnership Shortfall shall be borne and funded equally by the Contractors.

 

c.     It is expressly understood and agreed that no Party shall carry out any Premium program unless such program has a registration, survey or other revenue generating benefit (save and except for the effecting of Proprietary Premium Programs by Madacy for its customers which sell entertainment product in CD or DVD (or any “hard” replacements thereof format)).

 

d.     No Party shall, without the express prior written approval of Madacy, carry out any Premium program which permits the download or access by any one participant of more than twenty-five (25) tracks (songs) of which no more than ten (10) tracks (songs) may be subject to Publishing or Royalties.

 

Notwithstanding the foregoing, in the event that any Premium program has a pre-determined associated revenue stream at least equal to the maximum potential Publishing and Royalty cost of such Premium, the foregoing limitation shall not apply (e.g. a Premium which has a fixed $1.50 revenue from the party providing the premium shall be entitled to have such number of tracks (songs) as have an aggregate Publishing and Royalty cost of up to $1.50).  The Parties further agree to review the foregoing limitation from time to time to determine its reasonableness and appropriateness

 

1.07         The Database will be owned by the Partnership.  Each Contractor shall be permitted to use the Database, but at its own cost and expense, for the marketing and promotion of any Exempt Sales.  If a Contractor elects to promote its own products/services in the media of the Websites (e.g., banners, exit traffic) on a cost per acquisition basis or otherwise, then such Contractor shall pay for such media at the lowest rate it offers to third parties for similar media buys (provided such rates are consistent with market norms), and such fees shall be deemed Website Sales.  In the event of a License Extension, Madacy shall continue to have free access to the Database during such extended term.

 

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ARTICLE 2

ADMINISTRATION, BILLINGS AND COLLECTIONS

 

2.01         Traffix Music shall provide all of the administration services required the Partnership.  In particular, Traffix Music shall be responsible for the fulfillment, billing, collection and customer service relating to any sales that occur on the Websites and shall maintain, on a current basis, all of the books and records of the Partnership (accounting, legal and otherwise).  Each Contractor shall be responsible for the fulfillment, billing, collection and customer service relating to any other sales of the Program.

 

2.02         Each Contractor shall submit to the Partnership, on a monthly basis commencing on the one month anniversary of the Effective Date, all records, information and reports prepared by that Contractor relating to (i) any sales or other distributions made in the prior month that resulted in any Gross Revenues, and (ii) any Partnership Expenses (copies of such invoices) incurred in the prior month, as well as (iii) such other information as is reasonably required to determine compliance with the terms of this Agreement.  Traffix Music will be responsible (at its cost) for the reconciliation of all such records, and will deliver to the Partnership (with a copy to Madacy) an accounting in the form of monthly (unaudited) statements.  All revenue generated from the Program will be delivered to Traffix Music, and Traffix Music will deposit all such amounts in a separately identified bank account in the name of the Partnership.

 

2.03         The Partnership shall have the right, but not more than twice in any twelve month period, during normal business hours and upon reasonable advance notice, to cause (at its expense) the books and records of the Contractors to be inspected and audited by an independent third-party accountant or firm of accountants; provided, that, in all instances such inspection/audit does not unreasonably interfere with that Party’s business activities.  In the event that as a result of such inspection and audit, it is determined that a Party underreported sales or other distributions or over reported expenses by an amount that exceeds five percent (5%) of the amount so reported, the Party responsible for the underreporting/overreporting shall pay the entire cost of the examination and audit, together with interest at the rate of eight percent (8%) per annum on the amount of the underreported/overreported amount from the date such reporting was made until the date the proper amount is reported and properly recorded.

 

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ARTICLE 3

RELATIONSHIP BETWEEN PARTIES

 

The Parties acknowledge and agree that at all times each Contractor shall be an independent contractor with respect to the other, and both Contractors shall be independent contractors with respect to the Partnership.  Each Contractor shall be the employer of its own personnel engaged in the performance of this Agreement.  Neither Contractor shall be considered an agent or employee of the other or of the Partnership.  Neither Contractor shall knowingly do anything that would cause any third party to consider the Contractors as anything other than independent contractors.  The parties further acknowledge that the activities contemplated herein (ie. the business of generating revenues from the use of the Program, the Websites and the Database) and all of the benefits thereto and obligations therefrom (including, but not limited, the goodwill being generated therefrom) are for the benefit of the Partnership.

 

ARTICLE 4

TAXES

 

Each Party shall be solely responsible for payment of any and all federal, state and local sales, use, value added and excise taxes, and any other taxes or duties of any nature whatsoever assessed upon or with respect to the services provided by it hereunder or otherwise arising from this Agreement and the transactions contemplated hereby.

 

ARTICLE 5

DURATION

 

5.01         The License shall commence on the Effective Date and shall be in effect for an initial fixed term expiring on December 31, 2005 as it may be extended in accordance with the provisions of this Agreement (the “Term”).  Thereafter, but subject to Sections 5.04 and 5.04 hereof, the License shall be automatically extended for up to four (4) successive terms of two (2) years provided that each such extension shall be subject to the Partnership (i) generating more than two million ($2,000,000) of net profits (as set out in its audited financial statements) in the immediately preceding term (such amount shall be $1.0 million with respect to the initial license term terminating on December 31, 2005) and (ii) distributing in cash to its partners a minimum of seventy-five percent (75%) of such net profits in such term failing which the License shall expire without further extension (both of the foregoing financial criteria are hereinafter collectively referred to as the “Minimum Financial Objectives”).  Notwithstanding the foregoing, in the event that the distribution to Madacy sp Inc. with respect to any term is inadequate to satisfy the foregoing minimum distribution requirement for the automatic renewal of the License (ie. less than $990,000, or $495,000 with respect to the initial term), Traffix Music or any of its Affiliates shall be entitled, but not obligated, to pay to Madacy sp Inc. the amount of the shortfall in which case the Minimum Financial Objectives shall be deemed to have been

 

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achieved.  In the event that either or both of the Minimum Financial Objectives have not been satisfied, Madacy shall have the right (but not the obligation) to renew the License on a year-by-year basis.  The term of the present Agreement with regard to all other matters shall be equal to the Term.

 

5.02         Any Party may terminate this Agreement at any time for a material breach of the terms hereof or of the terms of the Partnership Agreement by another Party or its Affiliates by giving prior written notice of such termination.  Such notice shall specify in reasonable detail the breach upon which the termination is based.  After receipt of such notice, the recipient shall have thirty (30) days to correct or cure such alleged breach.  If such breach is cured timely, then the notice shall be null and void and the Agreement shall not terminate.  Otherwise, the Agreement shall be deemed terminated.

 

5.03         In the event of a breach of Section 1.03 of this Agreement due to a Party making a sale to the other Party’s client in violation of the terms of such Section, then in addition to all other remedies available under this Agreement, at law or in equity, all revenue generated from such sale by the violating Party shall be deemed Website Sales and subject to the Net Profit sharing provisions of this Agreement.

 

5.04         Notwithstanding the provisions of Section 5.01 hereof, in the event that Madacy or Madacy sp Inc. shall cease, at any time, to have an interest in the Business or in the Partnership pursuant to either a sale by the Partnership of the Business or of all or substantially all of its assets or a Traffix Sale (as such term is defined in the Limited Partnership Agreement of the Partnership), Madacy hereby agrees that notwithstanding the remaining term of the License at the time of such transaction, the License shall be extended for a period of five (5) years from the date of the transaction (“License Extension”), the whole subject to the following:

 

a.   the Partnership’s or the Partnership’s transferee, as the case may be, permitted use of the Masters (and restrictions thereon) shall be the same as contemplated in this Agreement;

 

b.   the License shall relate to those Masters which are the subject of the License at the date of the License Extension; and

 

c.   During the term of the License Extension, Madacy shall be entitled to a royalty, payable in cash, from the Partnership or the Partnership’s transferee, as the case may be, determined as follows:

 

(i)            The royalty rate (“Extension Royalty Rate”) shall be the percentage represented by dividing one-sixth (1/6) of the Partnership EBITDA for the 12 months preceding the transaction by the gross revenues of the Partnership for such period (“Base Year Gross Revenue”);

 

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(ii)           Madacy shall be entitled to an annual royalty, payable within thirty (30) days of each anniversary of the commencement of the License Extension, equal to the amount, if any, by which annual gross revenue of the Partnership or the Partnership’s transferee, as the case may be, for such year of the License Extension exceeds Base Year Gross Revenue, the whole multiplied by the Extension Royalty Rate.

 

5.05         Notwithstanding the provisions of Section 5.01 hereof, in the event of a sale of Madacy, the License shall be automatically extended for an initial term of three (3) years commencing on the date of such sale.  Thereafter, the License may be extended for up to three (3) successive periods of two (2) years and thereafter, for a final extension of one (1) year provided that each such extension shall be subject to the Partnership achieving the Minimum Financial Objectives set out in Section 5.01 hereof failing which the License shall expire without further extension.  Notwithstanding the foregoing, in the event that the distribution to Madacy sp Inc. with respect to any two year period is inadequate to satisfy the Minimum Financial Objectives for such period in order to cause the renewal of the License, Traffix Music or any of its Affiliates shall be entitled, but not obligated, to pay to Madacy sp Inc. the amount of the shortfall in which case the Minimum Financial Objectives shall be deemed to have been achieved.  In the event that either or both of the Minimum Financial Objectives have not been satisfied, Madacy shall have the right (but not the obligation) to renew the License on a year-by-year basis.  The term of the present Agreement with regard to all other matters shall be equal to the Term.

 

5.06         Notwithstanding the provisions of Section 1.03 of this Agreement, in the event that Traffix or its Affiliates shall cease, at any time, to have an interest in the Business or in the Partnership pursuant to either a sale by the Partnership of the Business or of all or substantially all of its assets, Traffix Music hereby agrees that notwithstanding the remaining term of the License at the time of such transaction, the Program License shall be extended for a period of five (5) years from the date of the transaction (“Program License Extension”), the whole subject to the following:

 

a.     the Partnership’s transferee’s permitted use of the Program (and restrictions thereon) shall be the same as contemplated in this Agreement;

 

b.     the Program License shall relate to the Program as it exists at the date of the License Extension; and

 

c.     During the term of the License Extension, Traffix Music shall be entitled to a royalty, payable in cash, from the Partnership’s transferee determined as follows:

 

(i)            The royalty rate (“Extension Royalty Rate”) shall be the percentage represented by dividing one-sixth (1/6) of the Partnership EBITDA for the 12 months preceding the transaction by the gross revenues of the Partnership for such period (“Base Year Gross Revenue”); and

 

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(ii)           Traffix Music shall be entitled to an annual royalty, payable within thirty (30) days of each anniversary of the commencement of the License Extension, equal to the amount, if any, by which annual gross revenue of the Partnership’s transferee for such year of the License Extension exceeds Base Year Gross Revenue, the whole multiplied by the Extension Royalty Rate.

 

5.07         Notwithstanding the provisions of Section 5.01 hereof, in the event of a sale of Traffix Music or its Affiliates other than in connection with a Traffix Sale, the Program License shall be automatically extended for an initial term of three (3) years commencing on the date of such sale.  Thereafter, the Program License may be extended for up to three (3) successive periods of two (2) years and thereafter, for a final extension of one (1) year provided that each such extension shall be subject to the extension of the License pursuant to the other provisions of this Article 5.

 

ARTICLE 6

PROPERTY RIGHTS AND PROTECTIONS

 

6.01         The Parties agree to keep strictly confidential the terms and conditions of this Agreement including the amounts of compensation payable hereunder, except where the same may be required to be disclosed in accordance with applicable federal, state or local laws, statutes, rules or regulations, including, without limitation, the securities laws of Canada and the provinces thereof and of the United States and the states and protectorates thereof.

 

6.02         The parties acknowledge and agree that certain information regarding the Websites,  Madacy Songs, San Juan Songs, vendors, marketing t