U.S. Distribution And Related Services Agreement

1.0  

Overview :

This U.S. Distribution and Related Services Agreement (“ Agreement ”) dated as of May 31, 2005 by and between UMG Recordings, Inc., on the one hand and Entertainment Distribution Company (USA) LLC (“ Supplier ”), on the other hand, referred to collectively as the parties (“ Parties ”), describes the terms, conditions, obligations, remedies, and other related matters concerning the purchase and supply of certain distribution related services and activities in the United States.

2.0  

Definitions : Definitions are set forth in Schedule 2.0 of this Agreement.

3.0  

Term :

3.1  

Subject to the termination provisions of this Agreement, this Agreement shall remain in force from the Effective Date through May 31, 2015 (the “ Term ”).

3.2  

At least 180 days prior to the expiration of the Term, senior management of the Parties shall meet to discuss a possible extension of the Term.

4.0  

Customer Purchase Obligation:

4.1  

In each year of the Term, subject only to the exclusions set forth in this Section 4.1, Customer shall purchase, and shall cause all members of the Universal Music Group to purchase, 100% of its and their respective Distribution Requirements from Supplier, excluding (i) any Distribution Requirements which Customer or such Universal Music Group member is permitted to purchase from a third party under Section 6.8 or 9.3 of this Agreement; (ii) Distribution Requirements for one million CDs, HDFDs or VRs; (iii) Distribution Requirements for any CDs, HDFDs, VRs or other Product as to which Customer or other members of the Universal Music Group are not required to use Supplier to manufacture; and (iv) Distribution Requirements that are contractually committed to third parties, other than Supplier, under valid written agreements existing as of the Effective Date.

4.2  

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4.3  

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4.4  

Subject to the provisions of Section 4.1, Customer agrees that it will not permit any of the Distribution Requirements of any member of the Universal Music Group to be transferred to another entity outside of the Universal Music Group, without also assigning, in whole or in part, this Agreement so that any transferred Distribution Requirements continue to be subject to this Agreement. Nothing contained in this Article 4.0 is intended to limit Vivendi Universal S.A. in any of its operations that are not part of or are acquired separately from the Universal Music Group or (subject to the limitations in this Section 4.4 and in Section 18) to limit the sale of the equity of, or of all or substantially all of the assets of a

*

A portion of this document is confidential and has been omitted in accordance with Rule 24b-2 under the Securities and Exchange Act of 1934. Such omitted confidential material is marked herein as follows: [*****].

Universal Music Group member, provided such operations or sale are subject to the assignment obligations described in this Section 4.4.

4.5  

Notwithstanding anything contained in this Agreement to the contrary, except as expressly provided in Sections 4.1 and 4.4, Customer shall have no obligation to conduct its business in a manner that maximizes the Distribution Orders/Activities to be requested from Supplier or minimizes the risks that such Distribution Orders/Activities shall not be required by Customer, including, without limitation, any obligation to extend or renew any agreements with third parties. Suppler acknowledges that there are no minimum requirements associated with this Agreement.

5.0  

Supplier Supply Obligations :

5.1  

Supplier and Customer will meet not less frequently than quarterly for planning purposes and to review, implement as necessary and approve matters as required under this Agreement (e.g., under Sections 5.2 and 7.4).

5.2  

Supplier will supply the Distribution Orders/Activities set forth on Schedule 10.1 for all Product as requested by Customer, in accordance with the requirements outlined in Article 6.0. These DOAs will at a minimum meet the quality specifications outlined in Article 8.0. In the event that Customer requests that Supplier supply any Distribution Orders/Activities which are not set forth on Schedule 10.1 the Parties shall use the procedure set forth in Section 10.5 to resolve the pricing for such requests.

5.3  

Supplier may not refuse (i) a Customer request to provide a Distribution Order/Activity for any Product, or (ii) any Distribution Order/Activity not set forth on Schedule 10.1 provided as to this clause (ii) (A) Customer and Supplier have followed the procedure described in Sections 10.5.1 through and including 10.5.5 and (B) the requested Distribution Service is normally and customarily provided by distributors in businesses substantially equivalent to Supplier’s business.

5.4  

Supplier shall not have the right to subcontract the performance of the DOAs to third parties, except (a) for any DOAs which are subcontracted by UML as of the Effective Date, and (b) for any DOAs which Supplier does not have capacity to supply without such subcontracting. In the event that Supplier subcontracts the performance of any DOAs under this Agreement, as permitted above, Supplier shall subcontract such work to the third-party logistics providers listed on Schedule 5.4 hereto. Supplier may propose to Customer an amended Schedule 5.4 to add or delete subcontractors at any time, and from time to time, provided that such amendment shall not be effective unless and until Customer approves such amendment, which approval shall not be unreasonably withheld or delayed. Customer shall have the right to (i) add or delete previously approved subcontractors at any time and from time to time provided that, in the case of deletions (A) Customer’s deletion or change is not unreasonable; (B) Customer

5.4.1  

Any order subcontracted by Supplier shall remain subject to the terms of this Agreement. Supplier shall inform Customer of any order subcontracted within two Business Days of subcontracting any order.

5.4.2  

All Supplier’s agreements with subcontractors performing services for Customer will provide that Customer will have the right to inspect such subcontractor’s facilities upon reasonable advance written notice to Supplier, during normal subcontractor hours of operation, without interference to subcontractor’s operations, and subject to any reasonable access rules or confidentiality obligations imposed by the subcontractor.

5.4.3  

Notwithstanding any of the foregoing restrictions in this Section 5.4, Supplier may outsource [*****]% of hand packaging services, refurbishing and other non-automated services.

5.5 

Supplier shall maintain and employ facility security systems and procedures that are no less effective in preventing theft, pirating, unauthorized exhibition, copying or duplication of any of Customer’s proprietary programs or other material delivered by Customer to Supplier or its designated subcontractors than the security systems and procedures which Customer has disclosed to Supplier in writing in advance of the date hereof, to the extent such systems and procedures were prevailing at the existing UML manufacturing facilities as of the Effective Date.

5.6 

[*****]

5.7 

The Parties hereto acknowledge and agree that, notwithstanding any other provision of this Agreement, the standards to which Supplier will be held in connection with the Distribution Services to be provided by Supplier to Customer hereunder, including without limitation, quality, turnaround, shipment, security and reporting standards, shall as of the Effective Date be no greater than the standards which UML was consistently meeting in the twelve-month period prior to the Effective Date; provided, however, that, prior to adopting any standards pursuant to the above provisions of this Section 5.7 that vary from those set forth in this Agreement, Supplier shall first provide written notice to Customer of such intention with a detailed description of the standards Supplier intends to adopt and the basis for doing so; and provided further, the Parties acknowledge and agree that, notwithstanding the foregoing provisions of this Section 5.7, after [*****] of

5.8  

The Parties hereto acknowledge and agree that the standards applicable to the Distribution Services to be provided by Supplier to Customer hereunder, including without limitation, quality, the nature of services, security standards, IT systems and support, will change over the Term. If the standards applicable to similar distribution services provided by Supplier to any other customer are higher than those applicable to Customer, those higher standards shall also be applicable to the services provided by Supplier to Customer. In addition, Supplier shall, to the extent the industry standards referenced herein or which are generally required by buyers of services such as those provided by Supplier hereunder, increase or improve such standards from those in effect on the Effective Date, upgrade its operations and services to incorporate such increased or improved standards for the benefit of Customer. Notwithstanding the foregoing, Supplier shall not be required as a result of this Section 5.8 to be the first or an early adopter of new standards or technology, but is required to implement such new standards and technology as and when they become generally used and available.

5.9  

[*****]

5.10  

Prior to adopting any standards pursuant to the provisions of Sections 7.4, 7.5.2 or 7.6 that vary from the Specified Standards (as defined below), Supplier shall first provide written notice to Customer of such intention with a detailed description of the manner in which the applicable Specified Standards are inconsistent with Prevailing Practices and the standards Supplier intends to adopt that are consistent with Prevailing Practices.

5.11  

[*****]

6.0  

DOA Timelines:

6.1  

Customer shall place Distribution Orders/Activities as to Product with Supplier through Customer’s Legacy and/or WMS Systems, or Customer’s successor system(s). Any order for DOAs received prior to [*****] on a Working Day, local distribution center time, will be deemed placed on that Working Day for purposes of Section 6.5 hereof; all other orders (e.g., those placed after [*****] on a Working Day or any time on a non-Working Day) will be deemed received on the opening of business the next Working Day for purposes of Section 6.5.

6.2  

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6.3  

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6.4  

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6.5  

Supplier will Ship, tender or process units which are the subject of DOAs within the deadlines shown in 6.5.1 – 6.5.6 below. Supplier will make commercially reasonable efforts to handle emergency Customer requests to Ship or process DOAs in lesser time than described in 6.5.1 – 6.5.6.

6.5.1  

DOAs for Hits items received before [*****] (local distribution center time) will Ship as follows:

All non-Direct-To-Store DOAs for Hits items received after [*****] (local distribution center time) will Ship not later than the end of the next Working Day.

6.5.2  

All DOAs for Catalog items received prior to [*****] (local distribution center time) EST will Ship as follows:

All non-Direct-To-Store DOAs for Catalog items received after [*****] (local distribution center time) will Ship not later than [*****] Working Day following the Working Day of receipt.

6.5.3  

Notwithstanding the foregoing provisions of this Section 6.5, in the event Customer has approved certain classes of DOAs (by way of example for purposes of clarity but not limited to Best Buy direct to store DOAs and west coast LTL direct to store orders) to ship on a standard schedule, Supplier is exempted from the performance metrics in 6.5.1 and 6.5.2 for said classes of DOAs, and shall comply only with the agreed applicable standard schedule.

6.5.4  

[*****] or greater of DOAs for products identified in Customer system as New Releases will be tendered to carrier by Supplier on the specified tender date. This metric will be evaluated and monitored by Customer randomly selecting [*****] such New Release DOAs per [*****] and determining the actual date tendered to the designated carrier date vs. Customer’s specified tender date.

6.5.5  

Returned products will be processed in a manner such that an electronic file is made available to Customer on average within [*****] Working Days of receipt during a month. Said electronic file shall contain at a minimum the information provided by the current [*****] system, including but not limited to: customer number, customer’s reference number, selection number returned and quantity returned per selection number. Returned products will be reworked and available to return to shippable inventory within a [*****] Working Days after receipt or less.

6.5.6  

Supplier will maintain at least one “DJ promo area” in one Distribution Center to be used to process DJ promo Product. DJ promo units will Ship within [*****] of receipt of an order for DOAs for such units unless product is not available in the DJ promo area or Distribution Center, in which case orders will Ship within [*****] of the product’s arrival in the DJ promo area. If DJ promo product is in a Distribution Center, but not in the DJ promo area, such units must Ship within [*****] of receipt of an order for DOAs for such units.

6.6  

Customer shall be responsible for ensuring that Supplier has sufficient Universal Product and/or Universal Materials to fulfill all orders. To assist Customer with this obligation, Supplier shall notify Customer as soon as it becomes aware that any significant shortfall in required Universal Product and/or Universal Materials may occur. Supplier shall also notify Customer of any circumstances which might reasonably lead to late deliveries as soon as it becomes aware of such circumstances and shall act in accordance with Customer’s reasonable instructions in such situations.

6.7  

Intentionally deleted

6.8  

Without limitation of Customer’s other remedies hereunder, if Supplier is unable or otherwise fails to fulfill any DOA in accordance with this Agreement within [*****] of the date required under this Agreement, then Customer may secure the services of a third party or parties to fulfill such DOA(s).

6.9  

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6.10  

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6.11  

Required Supplier Actions Concerning Late DOAs

6.11.1  

Subject to the limitations in this Section 6.11, individual shipping order(s) described in Sections 6.5.1, 6.5.2, 6.5.3 and 6.5.4 not Shipped or tendered by or before the deadlines described in Sections 6.5.1, 6.5.2, 6.5.3 and 6.5.4 will be known as “ Late Order(s) ”. In the event that at the end of [*****] Working Days there are [*****] Late Order(s) not Shipped or tendered, Supplier must at its own expense schedule all qualified employees to work the maximum amount of overtime (either extended hours in a Working Day or on non-Working Days) permitted under

federal/state law or union agreement(s) until there have been no Late Orders for [*****] Working Days. Supplier will not charge Customer any amount over and above the Standard Order Shipping Prices shown on Schedule 10.1 for the above.

6.11.2  

In the event that at the end of each [*****] Working Days there are [*****] Late Orders not Shipped or tendered, Supplier will Ship [*****] of all Late Orders in its possession via [*****] until such time as there are no Late Orders. Supplier will not charge Customer, i.e., Supplier will absorb and pay the difference in cost between [*****] costs for the above and any overtime or other expenses associated therewith.

6.11.3  

In addition to the requirements set forth in Sections 6.11.1 and 6.11.2, if as a result of any Late Order Customer (i) incurs any incremental difference in shipping costs as a result (e.g. late fee penalties imposed by its customers and paid by Customer), or (ii) is required to make air (as opposed to ground) shipments, Supplier shall promptly reimburse Customer for such incremental difference in costs and the differential in shipping costs.

6.11.4  

Customer hereby represents to Supplier that UML’s prevailing practice during its 2003 and 2004 fiscal years with respect to overtime premium costs [*****]. Customer may audit Supplier’s books and records under Section 23.0 in connection with any compensation request hereunder and either party make invoke the arbitration procedures set forth in Section 14.0 in the event of a disagreement as to the amount, if any, of compensation owed by Customer to Supplier for any given year.

6.11.5  

The remedies set forth in this Section 6.11 shall be Supplier’s sole liability and Customer’s sole remedy for any Late Orders, except as otherwise set forth in Section 9.3.

6.12  

No additional or conflicting terms and conditions on any purchase orders or other documentation provided by Customer or any other Universal Music Group member incident to any Orders hereunder shall form any part of any agreement between the parties, including this Agreement, except for purchase order quantities and descriptions.

6.13  

Customer requests to scrap Product will be completed within [*****] Working Days.

6.14  

Supplier will maintain an Overpacked Carton Percentage of [*****] or greater across all facilities servicing Customer as tracked by the current UML Overpack Report (a form of which is attached as Schedule 6.14). If in any month Supplier fails to meet the Overpacked Carton Percentage of at least ,[*****] Customer may charge and Supplier will pay Customer if charged, a [*****] fee for each carton below the [*****]% Overpacked Carton Percentage level. The [*****] fee

shall be Customer’s sole remedy, and Supplier’s sole liability, for Supplier’s failure to maintain an Overpack Carton Percentage of at least [*****]% in any month.

6.15  

Supplier will provide (and may subcontract) at a minimum, the value-added services referred to as stickering, long boxing, assortment creations, product cutting and display building. Supplier will ensure the following minimum daily output levels for each of these services within [*****] Working Days from receipt of request:

6.16  

[*****]

6.17  

Limitations on Customer Order Transmissions

6.17.1  

New Release Orders

°

Customer will consult with Supplier before transmitting orders for New Release DOAs. Unless previously approved by Supplier, Customer will limit the transmission of New Release orders to [*****] a week, unless Customer requires an off cycle New Release shipment of less than [*****] SKUs. The first transmission of orders for a specific release date will occur in a manner that provides Supplier with at least [*****] days to process the orders prior to its required tender date to the designated carrier. The [*****] transmission of orders will not exceed [*****] units of non-case lot items without prior approval by Supplier. [*****] transmission orders are not required to be tendered to the designated carrier by the normal tender date.

°

On the Monday prior to the street date for New Release products, Customer may transmit orders for quantities of [*****] units or greater on items that have a total quantity across all orders of [*****] units or greater. Orders will be transmitted such that multiple items going to the same destination are combined with one another.

7.0  

Specific Related Services :

Supplier will provide the services to support the Distribution Orders/Activities that are set forth in this Article 7.0 (the “ Specific Related Services ”). There shall be no additional

cost to Customer for any of the specific Related Services, including those listed in this Section 7.0, except as expressly provided to the contrary. Specific Related Services shall be substantially similar to the existing UML practices as of the Effective Date, and shall include:

7.1  

Intentionally deleted

7.2  

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7.3  

Intentionally deleted

7.4  

Supplier will provide and maintain certain reports and electronic data feeds to the extent (a) available to Customer under Prevailing Practices, and (b) applicable to Customer, including but not limited to: