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  

Intentionally deleted

4.3  

Intentionally deleted

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  

Intentionally deleted

6.3  

Intentionally deleted

6.4  

Intentionally deleted

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  

Intentionally deleted

6.10  

Intentionally deleted

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  

Intentionally deleted

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:

7.5  

Supplier agrees and understands that it has normal and customary custodial responsibilities for Customer-owned finished goods inventory in Supplier’s possession and Supplier specifically agrees to:

7.5.1  

Provide for the safe and secure storage of Customer-owned products and provide daily electronic information regarding inventory activity consistent with existing UML practices. In the event that Customer’s inventory is damaged or unaccounted for, as presented through inventory adjustments or physical inventory results, Supplier will reimburse Customer at the current manufacturing price for all units greater than a net impact of [*****] units annually.

7.5.2  

Provide cycle count services to maintain an Inventory Location Accuracy Level of [*****] or greater (or such other percentage as is consistent with Prevailing Practices). The cycle count program will review on a random basis a [*****] minimum of [*****] of all warehouse bulk locations in a manner such that each location is checked at least [*****] times per year. Supplier will provide Customer with monthly results of these cycle count services. If the Inventory Location Accuracy Level falls below [*****], Customer may conduct an audit of no less than [*****] locations. If the

Inventory Location Accuracy Level of those locations is under [*****]%, Customer may require Supplier to complete a full physical inventory within [*****] days of notification. Said physical inventory will be completed at Supplier’s expense which Customer may observe at its expense.

7.5.3  

Perform an annual physical inventory of the Returns work center and any Customer-owned inventory not included in the cycle counting process at no cost to Customer. The timing of this physical inventory will be mutually agreed upon. Supplier agrees to perform additional physical inventories at Customer’s request provided:

A)  

Requests for said inventories are made at least 30 days in advance.

B)  

Customer will compensate Supplier for all out-of-pocket costs associated with completing said inventory.

7.5.4  

Supplier will allow Customer agents or representatives from Distributed Label companies to observe the cycle count process and/or physical inventories provided:

A)  

Requests are made at least 30 calendar days in advance.

B)  

Customer or the Distributed Label representatives will observe at their own expense.

C)  

Customer and the Distributed Label representatives may not adversely impact the normal business activities of Supplier.

7.6  

Supplier will process receipts of Customer’s Inventory in a manner that provides electronic data regarding the receipt (e.g. item and quantity received against a specific Customer purchase order) to Customer’s legacy or similar computer system so that said inventory is available for shipment against Customer’s Orders, and has been updated in Customer’s inventory system, within [*****] hours of the product’s arrival at Supplier’s distribution location, or in such other manner as is consistent with Prevailing Practices. Supplier will provide expedited receiving for up to [*****] SKUs per day (or such other number as is consistent with Prevailing Practices) as requested by Customer, which SKUs will be processed within [*****] hours (or such other amount of time as is consistent with Prevailing Practices) if Customer identifies the carrier and trailer number in which the Product is being transported. In addition, Supplier will provide Customer with a daily report summarizing any discrepancy between what was received and what was indicated as shipped by the relevant manufacturer. Supplier will assist Customer in the resolution of any receiving discrepancy between Customer and its vendors. To the extent that any Customer changes to any Customer computer systems would cause Supplier to incur any costs in connection with adapting to, conforming to, custom programming for, or otherwise interfacing with such systems in order to facilitate the efficient performance of its obligations under this Agreement, including without limitation, Section 6.1 and this Section 7.6, Customer shall reimburse Supplier for all such costs.

7.7  

Supplier will assist Customer in identifying transportation savings opportunities. At a minimum, Supplier will identify when a shipment to a Customer’s customer would be less expensive using a truckload carrier instead of a Less Than Truckload ( “LTL ”) carrier that Customer originally designates.

7.8  

Other Logistics Services

Supplier will provide Customer with logistics advice and recommendations as requested, particularly with respect to matters that could affect Customer’s service to its clients or the cost of providing DOAs.

Examples of these areas of advice/recommendation include, but are not limited to:

•  

New Release Inventory Allocations

•  

Transportation Management

7.9  

Claims Administration . Customer’s customers may report freight damage or undelivered product to Customer. The following process will be used by Customer and Supplier to resolve these freight claims, and Supplier will act as described in 7.9.3 through 7.9.5.

7.9.1  

Customer will submit detailed claim reports to Supplier within six months of original date of shipments. Information provided will at a minimum meet current reporting practices as of July 1, 2004.

7.9.2  

Customer will not report claims for less than [*****] or [*****] units.

7.9.3  

Supplier will make normal and customary attempts to collect claims payments from carriers. However, Supplier will not be liable for any claim in part or in whole that is not approved by the carrier.

7.9.4  

All proceeds collected in settlement of Customer’s reported claims will be paid to Customer within [*****] days of receipt by Supplier.

7.9.5  

Supplier will provide Customer with documentation as to the cause regarding any claim that is denied or not paid in full.

7.10  

Transportation Administration

7.10.1  

Supplier will, upon Customer’s request and following Customer’s instructions, coordinate and route shipments from Supplier’s manufacturing facilities to locations designated by Customer. In addition, Supplier will, at Customer’s request and following Customer’s

instructions, coordinate and route shipments from Customer’s manufacturing vendors (other than Supplier) to the extent that Customer has at least a six-month contract with said manufacturing vendors. The actual charges incurred by Supplier from freight vendors for such shipments (without markup of any kind) will be payable by Customer to Supplier within [*****] Working Days of receipt by Customer of normal and customary supporting documentation.

7.10.2  

Supplier will, upon Customer’s request and following Customer’s instructions, coordinate and route shipments from all of Customer’s other manufacturing vendors. The actual charges incurred by Supplier from freight vendors for such shipments (without markup of any kind) will be payable by Customer to Supplier within [*****] Working Days of receipt by Customer of normal and customary supporting documentation. Additionally, some shipments referred to in Section 7.10.1 may require expedited service requiring non-standard communication with Supplier’s carriers. The administration of the first [*****] such shipments in each [*****] month period of the Term (measured by each anniversary of the Effective Date) will be coordinated and routed by Supplier at no additional charge to Customer. With respect to any additional such shipments during a particular twelve month period, Supplier may charge Customer, and upon such charge Customer will pay Supplier, [*****] per shipment coordinated and routed.

7.11  

Data Interfaces. Customer shall provide Supplier with the data and reports reasonably necessary for Supplier to perform the Distribution Services hereunder in a reasonable format agreed by the Parties. During the term of the Information Technology Transition Services Agreement, Customer shall provide such data and reports to Supplier pursuant to Supplier’s access to Customer’s systems as provided in such IT TSA. In consideration of the foregoing, Customer shall be entitled, on the first Working Day of each month during the Term (or as soon thereafter as Customer shall elect), to debit the amount of [*****] against all then-outstanding invoices of Supplier to Customer.

8.0  

Shipping Quality :

8.1  

Supplier will prepare and label product for shipping in a manner consistent with Prevailing Practices to minimize damage during transport, and enable a carrier to correctly identify a shipment.

8.2  

Supplier will perform random quality inspections of outbound shipments and maintain an Order Line Accuracy level equal to the actual results obtained by employing the procedures described in Schedule 8.2 during the first 90 days of the Term (such results, the “Order Line Accuracy Standard”). Supplier will provide Customer with monthly results of these inspections. If Order Line Accuracy falls below the Order Line Accuracy Standard, Customer at its sole reasonable

discretion may require Supplier to increase the quantity of shipments and lines inspected.

9.0  

Key Failures .

9.1  

A “ Key Failure ” is an occurrence of any of the events identified as a “KPI Repeated Failure Event” on Schedule 9.1 of this Agreement. As soon as it becomes aware of a Key Failure, Customer or Supplier shall notify the other of the Key Failure, specifying the nature of the Key Failure and the data sources used to identify such Key Failure (each such notice is a “ Failure Notice ”).

9.2  

Any Key Failure which is not cured in accordance with this Section 9.2 is an “ Uncured Key Failure ,” provided that Customer has provided Supplier (or Supplier has provided Customer) with an associated Failure Notice within [*****] days of the Key Failure. A Key Failure which is cured under this Section 9.2 shall not relieve Supplier of any other remedies to which Customer may be entitled under Sections 6.11, 6.14, or 8.2 of this Agreement. In order to cure a Key Failure, Supplier must do each of the following:

9.2.1  

Within seven calendar days of receipt of a Failure Notice identifying such Key Failure from Customer, or delivery of a Failure Notice by Supplier, after consultation with Customer, provide to Customer a detailed, written correction action plan (“ CAP ”), with defined and traceable milestones, metrics and timelines which address the causes of the Key Failure and describes how Supplier will monitor and manage the relevant business practices/processes to ensure that the causes of the Key Failure are successfully addressed;

9.2.2  

During the six-week period following the date of Supplier’s receipt or sending of the Failure Notice (the “ Cure Period ”), on each Tuesday, provide Customer with a written report describing the progress on the CAP and any Key Failures during the preceding Work Week (ending on the immediately preceding Saturday); and

9.2.3  

By the end of the Cure Period, successfully address the causes of the Key Failure, and provide Customer with a written report of the relevant business practices/process implemented.

9.3  

The effects of Key Failures and Uncured Key Failures shall be as follows:

9.3.1  

On the first Uncured Key Failure with respect to which Supplier has received or delivered a Failure Notice during any [*****]-year period, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****]% of its DOAs and/or at the option of the Customer up to [*****]% of the manufacturing services for the SKUs whose DOAs are outsourced (such combination of DOA and manufacturing services as elected by Customer, the “ Elected Services ”) with any other entity or entities for a period of

[*****] months, or (b) receive from Supplier liquidated damages in the amount of [*****], payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.2  

On the second Uncured Key Failure with respect to which Supplier has received or delivered a Failure Notice during any [*****]-year period, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****]% of its Elected Services with any other entity or entities for a period of [*****] months, or for an additional [*****]-month period in the event that Customer is then-currently exercising a prior sourcing right under any sub-section of Section 9.3, or (b) receive from Supplier liquidated damages in the amount of [*****] payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.3  

Notwithstanding Section 9.3.2, if two Key Failures under “Hits/Catalog Shipping” or “New Release On Time Delivery” on Schedule 9.1 with respect to which Supplier has received or delivered a Failure Notice occur between August 15th and November 30th of the same calendar year, whether cured or not, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****]% of the Elected Services with any other entity or entities for a period of [*****] months, or for an additional [*****]-month period in the event that Customer is then-currently exercising a prior sourcing right under any sub-section of this Section 9.3, or (b) receive from Supplier liquidated damages in the amount of [*****] payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.4  

If three Key Failures of the same category (e.g., Hits/Catalog Shipping) with respect to which Supplier has received or delivered a Failure Notice occur during any rolling [*****]-year period, whether cured or not, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****] of the Elected Services with any other entity or entities for [*****] of the Term, (b) terminate this Agreement; or (c) receive from Supplier liquidated damages in the amount of [*****] payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.5  

On the fourth Key Failure with respect to which Supplier has received or delivered a Failure Notice during any rolling [*****]-year period, whether cured or not, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****] of the Elected Services with any other entity or entities for a

period of [*****] months, or for an additional [*****]-month period in the event that Customer is then-currently exercising a prior sourcing right under any sub-section of this Section 9.3, or (b) receive from Supplier liquidated damages in the amount of ,[*****] payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.6  

On the fifth key failure with respect to which Supplier has received or delivered a Failure Notice during any rolling [*****]-year period, whether cured or not, Customer shall have the right, as its sole liability and as Customer’s sole remedy for such Key Failure(s), to either (a) source up to [*****] of the Elected Services with any other entity or entities for [*****] of the Term, (b) terminate this Agreement, or (c) receive from Supplier liquidated damages in the amount of [*****] payable in the form of a monthly credit towards Customer’s accounts payable to Supplier in the amount of [*****] per month for [*****] months.

9.3.7  

For purposes of clarity, the parties agree that (a) Customer shall never have a right to source any more than [*****] under the provisions of Sections 9.3.1, 9.3.2, 9.3.3 and 9.3.5, and (b) where the provisions of more than one sub-section of Section 9.3 would provide Customer with a remedy with respect to any new Key Failure event, Customer may elect only one of such remedies. In addition, to the extent that an event that would constitute a Key Failure under “Picking Accuracy” on Schedule 9.1 is uncured and continuing during the applicable Cure Period, such event may not constitute another Key Failure until the end of the applicable Cure Period in accordance with Section 9.2.

9.3.8  

Customer’s right to invoke any remedy available to Customer with respect to a particular event under the provisions of any sub-section of Section 9.3 shall be exercised, if at all, in writing and within [*****] days after the date upon which such right first accrues to Customer (e.g., at the end of the cure period or on the occurrence of a Key Failure and receipt of a Failure Notice, as applicable), and any period of loss of exclusive volume and DOAs under any sub-section of Section 9.3 shall commence upon such date, except in the case where a period of loss of exclusive volume and DOAs under any sub-section of this Section 9.3 is currently running, in which case the new period shall commence upon the expiration of the current period.

9.3.9  

In the event that Customer exercises any right to source any volumes with third parties under any sub-section of this Section 9.3, Customer shall provide Supplier with timely notice of such third-party sourcing, and Supplier’s capacity commitments under this Agreement shall be reduced by the amount of such third-party sourcing. Upon the conclusion of any period in which Customer has elected to outsource exclusive volume

pursuant to Sections 9.3.1 through 9.3.6, such exclusive volume shall automatically revert to Supplier.

9.4  

Notwithstanding any other provision of this Agreement, any failure of Supplier to perform any of its obligations under this Agreement shall not be considered a default, breach, Key Failure or Uncured Key Failure to the extent that such failure is caused by (a) any Customer breach of, or noncompliance with this Agreement or any other agreement between Customer and Supplier; (b) the failure of Customer to timely provide any consents, approvals, instructions or assistance required hereunder; or (c) any Customer breach of, or noncompliance with, the Transition Services Agreement, the U.S. CD Manufacturing Agreement, the U.S. HDFD Manufacturing Agreement, or the Asset Purchase Agreement.

10.0  

Pricing:

10.1  

Base Pricing

10.1.1  

Schedule 10.1 contains (i) the prices for DOAs, excluding prices for Transportation Services which are described in 10.2, and prices associated with the items described in Section 10.6 in each case existing as of the Effective Date and (ii) a list of all no-charge DOAs. These prices are fixed through the term of the Agreement, with the exception(s) described in this Agreement, including, without limitation, pursuant to Sections 10.5, 10.6 and 22.0. The Parties agree that Supplier will not charge, and Customer will