EXHIBIT 10.26
HEADS OF AGREEMENT
for Manufacturing and Distribution
between
WARNER-ELEKTRA-ATLANTIC CORPORATION ("WEA")
and
NU TECH DIGITAL, INC. ("Company")
Capitalized terms not defined where they appear in the text are
defined in
Paragraph 15.
1.
Appointment as Exclusive Distributor.
(a) Exclusive Rights. Company, on behalf of the Company
Entities,
hereby appoints WEA as Company's exclusive distributor of Products
through
Normal Distribution Channels during the Term in the Territory in
accordance with
the terms hereof. Company possesses (and hereby grants WEA) the
right to sell
Products with the name (legal or assumed), photograph, likeness and
biographical
material, as supplied by Company, of the artists whose performances
are
contained therein. With respect to such names, photographs,
likenesses and
biographical materials, WEA shall abide by any contractual
requirements or
restrictions imposed upon Company of which WEA is given reasonably
sufficient
prior written notice.
(b) Download/Ringtone Sales. From time to time during the Term,
and
subject to Company's rights in each case, Company shall determine
those Products
Company wishes to make available for sale via download or as
"ringtones" (or the
like) in the Territory and shall provide WEA with all rights,
materials and
information necessary for WEA to copy, store, prepare, deliver and
otherwise
make such Products available for sale via download, as "ringtones"
(or the
like). Company shall cooperate with WEA to ensure that all such
materials and
information are provided to WEA in the form, format(s) and manner
WEA reasonably
requires from time to time in order to make Products so available.
Company
understands that for the purposes of sales of Products via
download, as
"ringtones" or the like, the term "Products" shall be deemed to
include units
sold as full albums in addition to units sold as one or more
individual
recordings otherwise embodied in Records furnished to WEA
hereunder. Solely with
respect to units of Products sold by WEA in the form of downloads,
ringtones and
the like, "WEA Net Sales" shall mean (i) the number of units of
Products sold
via download, as "ringtones" (or the like) multiplied by (ii) the
price (after
all rebates, adjustments, settlements, allowances, credits and
discounts (other
than cash discounts) approved by Company) charged by WEA to WEA's
customers for
all such sales of Products.
(c) WEA's Undertakings.
(i) WEA shall render Distribution Services and shall
distribute and sell Products on Company's behalf through Normal
Distribution
Channels during the Term in the Territory and shall solicit and
fulfill orders
for Products in the same outlets as WEA generally does for the WMG
Labels.
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(ii) WEA shall prepare for Company the same sales, returns,
credits and inventory reports as are prepared by WEA for the WMG
Labels and
shall supply Company with such reports with the same frequency as
such reports
are supplied by WEA to the WMG Labels. Monthly sales and return
reports shall
include the following information: selection number, artist name,
selection
title, product configuration, gross units shipped, units actually
returned, net
units, discounted units, free goods, gross dollars charged, actual
gross
returned dollar amounts and net returned dollar amounts.
(d) Distribution Fee. WEA shall be entitled to retain a
distribution
fee equal to 22% of WEA Net Sales of Products (the "Distribution
Fee").
(e) Advance. Promptly following the complete execution of this
Agreement, WEA shall pay to Company a non-refundable,
fully-recoupable advance
in the amount of $200,000.00 (the "Advance"). The Advance shall
be
fully-recoupable from all Net Receipts otherwise payable to Company
hereunder.
2. Title.
Title to units of Products manufactured for distribution and
sale hereunder shall remain in Company. Units of Products shall be
consigned by
Company to WEA, subject to the provisions of this Agreement. WEA,
as consignee,
shall be empowered to pass title to units of Products directly to
its customers.
WEA shall have the right, as Company's consignee, to accept any and
all returns
of units of Products from its customers. Upon receipt of units of
Products so
returned to WEA from its customers, title therein shall revert to
Company.
3.
Manufacturing and Packaging Services.
(a) Use of Services. Company shall have the option, exercisable
by
written notice to WEA, to utilize Manufacturing and Packaging
Services provided
by WEA through WEA's manufacturing and packaging designees (the
"Manufacturing
and Packaging Entities") for the manufacture and packaging of units
of Products
hereunder, including, without limitation, components therefor and
all
separations and merchandising materials relating thereto.
Manufacturing and
Packaging Services shall be furnished on the same terms and at the
same prices
provided to the WMG Labels by the Manufacturing and Packaging
Entities for the
WMG Labels' own comparable products.
(b) Delivery of Source Materials. To the extent that Company
elects
to utilize the Manufacturing and Packaging Services, Company shall,
at Company's
sole expense, deliver to WEA (or to such suppliers as WEA may
designate) all
Source Materials. Source Materials shall be of a quality suitable
to comply with
WEA's technical standards. Company shall retain title to all Source
Materials
supplied to WEA or its designees.
(c) Trade Advertisements, Tip Sheets and Chart Listings.
Company
shall cause all trade advertisements, tip sheets and chart listings
for any
Product to identify WEA as the distributor of such Product in the
Territory. In
the event of any failure to accord WEA such credit, such failure
shall not be
deemed a breach of this Agreement if, following Company's receipt
of written
notice thereof from WEA, Company shall cause such failure to be
rectified
prospectively.
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(d) Notices on Packaging; Security and Identification Strip.
Packaging for Products manufactured following the execution of this
Agreement
shall have printed thereon "Distributed by Warner-Elektra-Atlantic
Corporation"
(or such other identification of manufacturer or distributor as WEA
may
reasonably designate from time to time) together with such logo as
WEA may
designate. Packaging for Products manufactured following the
execution of this
Agreement shall also include, among other things, a security and
identification
strip (i.e., "title strip" or "dog bone" etc.), as well as internal
electronic
article surveillance tags, all in a form similar to that affixed to
the WMG
Labels' own product.
(e) Parental Advisory Warnings. Company shall have the right to
affix a parental advisory warning sticker (or similar
industry-standard warning
label) on Products manufactured for distribution and sale in the
Territory in a
format used customarily by WEA or as may be required by applicable
law. If
Company does not so designate, but WEA believes in WEA's reasonable
business
judgment that such a warning is appropriate on a particular
Product, WEA may
affix such a warning on such Product at Company's sole cost and
expense.
(f) Bar Code on Packaging: All packaging shall have printed
thereon
a scannable "UPC Bar Code" conforming to recording industry
standards which
specifically identifies the selection and configuration of the
Product sold.
(g) Ordering.
(i) The initial orders for finished units of Products shall be
specified by Company after consultation with WEA.
(ii) Reorders of finished units of Products shall be specified
by Company after consultation with WEA. For this purpose, verbal
approval given
by Company's most senior executive directly in charge of production
shall be
sufficient. It is contemplated that the parties will agree upon
guidelines for
reordering so that WEA will not require a specific approval by
Company in each
instance.
(iii) The minimum order quantities for units of Products and
for all other items ordered hereunder shall be the same as the
minimums
applicable from time to time for the WMG Labels' comparable
products (currently,
300 units for CDs and cassettes).
(iv) Orders hereunder shall be deemed fulfilled by the
manufacture of any quantity between 90% and 110% of the quantity
ordered.
4. Release
Schedules. Company, in consultation with WEA, shall select a
reasonable release date for each specific Product from the release
dates offered
by WEA (which shall be the same release dates as are generally
offered by WEA to
the WMG Labels). WEA shall meet each established release schedule
provided that
Company has had the initial order of finished units of the
applicable Product
manufactured and delivered to WEA's warehouses in reasonably
sufficient time for
WEA to do so. In connection therewith, WEA
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shall furnish Company with new release book due dates, merchandise
in depots due
dates and WEA's requirements for product release schedules.
5.
Company's Financial Obligations. Company shall be solely
responsible
for and shall account for and pay: (a) any and all sales and use
taxes levied on
any of the amounts payable to Company hereunder or on the sale of
units of
Products or any other taxes relating to units of Products which are
in the
possession or control of WEA, (b) all costs incurred in the
creation of
Products, (c) all costs incurred in the manufacturing and packaging
of units of
Products, and (d) all monies becoming payable to all parties
rendering services
or otherwise in respect of sales of units of Products (e.g., artist
royalties,
mechanical royalties, union costs (if applicable), producer
royalties, etc.). In
addition, Company shall obtain all consents and permissions
required for the
release of Products hereunder and WEA shall have no obligations
with regard
thereto. For the avoidance of doubt, Company shall not be
responsible for
payment of: (i) any taxes applicable to the sale of units of
Products by WEA's
customers to consumers or (ii) any of WEA's indirect or general
overhead charges
or the salaries of WEA's regular employees.
6. Other
Company Obligations.
(a) Advertising, Marketing and Promotion. The advertising,
marketing
and promotion of Products hereunder shall be Company's sole
responsibility and
at Company's sole cost and expense.
(b) Company Reporting. On or before September 1 of each
calendar
year of the Term, Company will provide WEA with sales projections
for Products
for the next fiscal year of the Term. Company will provide WEA with
an update
for each such sales projection on a quarterly basis.
7. Sale of
Products.
(a) Determination of Price Categories. Company shall determine
the
price category designation (e.g., top-line, mid-line, budget, etc.)
of Products
and/or, if Company so chooses, the suggested retail list prices for
Products, it
being understood that Company shall use the same price category
designation or
list prices which WEA uses. Company may change such price category
designation
and/or suggested retail list price of a Product upon 60 days'
written notice to
WEA.
(b) Determination of Customer Prices. WEA shall determine the
wholesale selling price of Products to customers and the terms of
sale for
Products, including, without limitation, cash discounts (i.e.,
discounts for
timely or expedited payments from customers) and credit, dating and
returns
policies, in a manner consistent with policies customarily applied
to products
of the WMG Labels; provided, however, that WEA shall obtain
Company's written
consent as to any "special dating" which will result in a delayed
payment to
Company pursuant to subparagraph 9(a), special program free goods
and special
sales discounts.
8.
Inventory.
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(a) Storage and Shrinkage. WEA shall accept and store all
Products
delivered to WEA hereunder. WEA shall not be responsible for
inventory shrinkage
of up to 1% of the total volume of all Products in finished good
form delivered
to WEA during any calendar year of the Term. With respect to
inventory shrinkage
in excess of 1%, the sole liability shall be payment to Company of
the
Replacement Cost therefor.
(b) Surplus Units Determination and Removal. Promptly after
WEA's
written request, Company shall remove from WEA's warehouses, or
order the
destruction of, at Company's sole expense, the stock of any Surplus
Units of
Products. Company shall be deemed to have ordered the destruction
of Surplus
Units if, 60 days after the date of the written request from WEA,
Company has
not given instructions to WEA for the immediate delivery of such
Surplus Units
to a public warehouse or other non-WEA location at Company's sole
expense and
for Company's account.
(c) Marking Inventory. WEA may deface the bar code on or re-bar
code
all units of Products prior to any removal by Company or delivery
to Company of
such units of Products, and Company shall reimburse WEA, promptly
following
WEA's request therefor, with the amount of any direct,
out-of-pocket costs
incurred by WEA in connection with such defacing or
re-bar-coding.
(d) Deletions. On not less than 60 days' written notice to WEA,
Company may elect to delete any particular Product from WEA's
distribution and
sale obligations hereunder when Company determines, in Company's
good faith
business judgment, such deletion is commercially reasonable. Any
Product so
deleted shall not be distributed by Company or any third party
during the Term
in the Territory. Returns of deleted Products will be accepted in
accordance
with WEA's standard policies and procedures for such returns.
9.
Statements and Payments.
(a) Rendition of Statements. WEA shall account for and pay to
Company all Net Receipts derived from sales of Products. WEA shall
render a
statement for sales of Products occurring during each fiscal month
of the Term
within 60 days following the last Friday of each calendar month,
said 60-day
period to be extended accordingly on a Product-by-Product basis
where a customer
is granted "special dating" by WEA with Company's consent.
Concurrently with the
rendition of each such statement, WEA shall pay any Net Receipts
shown to be due
thereby less any amounts which may be applied in recoupment of the
Advance. Any
such payments shall be less any reserves established by WEA against
returns,
credits and advertising authorizations, as provided below. In each
month of the
Term, a base reserve established by WEA against returns and credits
plus the
amount of any open but not yet credited advertising authorizations
issued on
behalf of Company shall be deducted from any such payments. Such
reserve shall
not exceed 25% of WEA Gross Sales for any month of the Term plus
the amount of
any such open but not yet credited advertising authorizations;
provided,
however, that in the last six months of the Term, such reserve
shall not exceed
the sum of: (i) the greater of: (A) 35% of WEA Gross Sales for any
such month or
(B) the positive difference, if any, between: (I) the then-current
aggregate
amount of the open return authorizations issued by WEA and (II)
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the then-current aggregate amount of the returns reserves being
held by WEA;
plus (ii) the amount of open but not yet credited advertising
authorizations
issued by WEA on behalf of Company. WEA shall fully liquidate
the
returns-related portion of each base reserve as initially
established, less any
credits issued therefrom, within six months from the date that such
base reserve
was established. If any statement shall show a balance in WEA's
favor (the
"Negative Balance"), Company shall make payment of the Negative
Balance to WEA
within five business days after the date of rendition of the
statement.
Notwithstanding the foregoing, WEA shall also have the right to
deduct the
Negative Balance from any monies becoming payable to Company
pursuant to this
Agreement.
(b) Audits. Company shall have the right at Company's sole
expense
to appoint a certified public accountant or chartered accountant
who is not then
currently engaged in an outstanding audit of WEA to examine WEA's
books and
records as same pertain to the distribution of Products; provided,
however, that
any such examination shall be for a reasonable duration and shall
take place at
WEA's offices during normal business hours on reasonable prior
written notice
and shall not occur more than once in any calendar year or more
than once for
any statement.
(c) Objections to Statements. Company shall be deemed to have
consented to all accountings rendered by WEA hereunder and said
accountings
shall be binding upon Company and shall not be subject to any
objection by
Company for any reason unless specific objection, in writing,
stating the basis
thereof, is given to WEA within two years after the date rendered,
and after
such written objection, unless suit is instituted within three
years after the
date rendered.
10.
Post-Term Procedures.
(a) Manufacturing and Packaging Services and Distribution
Services.
(i) Upon the expiration of the Term, WEA shall cause the
cessation of all Distribution Services and all Manufacturing and
Packaging
Services and shall have no further rights or obligations with
respect to
Products except as provided herein and all unshipped orders for
Products shall
be canceled. Within 30 days following the expiration of the Term,
WEA shall
provide Company with a list of all units of
