Document:

Ex-10.7

 

U.S. CD Manufacturing And Related Services Agreement*

	1.0  	Overview:
	 
	   	This U.S. CD Manufacturing 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 CDs
and related services 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 Manufacturing Requirements
from Supplier, excluding (i) any Manufacturing Requirements which Customer or such
Universal Music Group member is permitted to purchase from a third party under Sections
6.8, 6.10 or 9.3 of this Agreement or Section 9.3 of the U.S. Distribution Agreement;
(ii) [*****] million CDs; (iii) any Manufacturing Requirements of a party who becomes a
Universal Music Group member by acquisition after the Effective Date but only to the
extent and for the period that such Manufacturing Requirements are contractually
committed to a third party as of the date of signing of the relevant acquisition
agreement; and (iv) the following quantities as long as and to the extent that they
are contractually committed to the Joint Ventures under valid written agreements
existing as of the Effective Date:

	 	 	 	 	 	 
	 
	 	Calendar Year* 	 	 	Excluded CDs	 
	 	2005

	 	 	[*****] million, less the amount

purchased by UML from [*****] during

the period beginning 1/1/05 through

the Effective Date	 
	 	2006

	 	 	[*****] million	 
	 	2007

	 	 	[*****] million	 
	 

	*	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: [*****].

 

 

	 	 	 	 	 	 
	 
	 	Calendar Year* 	 	 	Excluded CDs	 
	 	2008 and each year thereafter during
the Term

	 	 	None	 
	 

* Prorated for any partial years.

	 	   	It being understood by the parties hereto that if any of the supply agreements with
the Joint Ventures are terminated in 2005, 2006 or 2007, the number of CDs excluded
from the Manufacturing Requirements of Customer and the other members of the
Universal Music Group under the provisions of Section 4.1(iii) (“Excluded
CDs”) shall be reduced by the Manufacturing Requirements applicable to such
agreement.
	 
	 	4.2  	Customer will provide Supplier with purchase orders and input materials in
accordance with the requirements outlined in Article 6.0.
	 
	 	4.3  	Intentionally deleted.
	 
	 	4.4  	Subject to the provisions of Section 4.1, Customer agrees that it will not
permit any of the Manufacturing Requirements of any member of the Universal Music Group
to be exercised by, or transferred to, another entity outside of the Universal Music
Group, without also assigning, in whole or in part, this Agreement so that any
transferred Manufacturing 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 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 Manufacturing Services to be
requested from Supplier or minimizes the risks that such Manufacturing Services shall
not be required by Customer, including, without limitation, any obligation to extend or
renew any agreements with third parties. Supplier acknowledges that there are no
minimum requirements associated with this Agreement.
	 
	 	4.6  	Intentionally deleted.

	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).

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	 	5.2  	Supplier will supply the Manufacturing Services set forth on Schedule 10.1 in
accordance with the requirements outlined in Article 6.0. These Manufacturing Services
will at a minimum meet the quality specifications outlined in Article 8.0. In the
event that Customer requests that Supplier supply any Manufacturing Services 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 a Customer request to provide a Manufacturing Service
not set forth on Schedule 10.1 provided (i) Customer and Supplier have followed the
procedure described in Sections 10.5.1 through and including 10.5.5 and (ii) the
requested Manufacturing Service is normally and customarily provided by manufacturers
in businesses substantially equivalent to Supplier’s business.
	 
	 	5.4  	Supplier shall have the right to subcontract up to [*****] % of any particular
Manufacturing Services in each quarter (with no rollover of any unused subcontracting
capacity) provided to Customer hereunder to the third party manufacturers and service
providers listed on Schedule 5.4 hereto, provided, however, if [*****]% of the
Manufacturing Services requested by Customer exceeds Supplier’s capacity to provide
such Manufacturing Services, then Supplier may subcontract in excess of [*****]% of the
Manufacturing Services provided to Customer so long as the percentage of subcontracted
Manufacturing Services provided to Customer is no more than the percentage of
subcontracted services provided to any other customer of similar services.
Notwithstanding the foregoing, Supplier may subcontract a greater percentage of
Manufacturing Services for Customer than it does for (a) other customers with respect
to their Spot Market Orders, or (b) other customers who purchase less than [*****]%, on
[*****] basis, of Universal Music Group’s Manufacturing Requirements. 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 add or delete previously
approved subcontractors at any time and from time to time provided that, in the case of
deletions, (i) Customer’s deletion is not unreasonable; (ii) Customer consults with
Supplier prior to the deletion; (iii) Customer provides Supplier with at least [*****]
days prior written notice of the deletion; (iv) Customer permits Supplier,
notwithstanding such deletion, to continue to use such subcontractor to fulfill any
volume commitments to such subcontractor existing as of the date of receipt of such
notice of deletion; and (v) after the deletion, a commercially reasonable number of
approved subcontractors, and in any event no less than [*****], remain listed on
Schedule 5.4 and any amendments thereto.

	 	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.

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	 	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 any Manufacturing Services
involving hand packaging, refurbishing and other non-automated services, or
constituting Excess Orders.

	 	5.5  	Supplier shall maintain and employ plant 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  	Without the advance written consent of Customer, which consent shall not
unreasonably be withheld, Supplier shall use the King’s Mountain facility to provide
all Manufacturing Services which Supplier is both (a) obligated to provide to Customer
under this Agreement, and (b) not permitted to subcontract to third parties under the
terms of this Agreement.
	 
	 	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 Manufacturing 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 the [*****] of the Term, Supplier will
(a) meet the standards as set forth herein and established hereunder, and (b) subject
to Section 5.9, further meet industry standards as required by Section 5.8.
	 
	 	5.8  	The Parties hereto acknowledge and agree that the standards applicable to the
Manufacturing 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
manufacturing services provided by Supplier to any other customer are

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	 	   	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 6.5,
7.4, 7.5.1, 7.5.3 or 7.6.5 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  	Forecasts, Orders, Production and Delivery:

	 	6.1  	Customer will provide, [*****]a forecast for CDs that will cover a period of
time of no less than [*****] months. The first six weeks of each forecast will be
divided into Work Week requirements (with each Work Week forecast being a “Work
Week Forecast”), with the remainder of the forecast divided into months. No
Customer forecast shall be binding as an Order, but shall represent Customer’s good
faith estimate, at the time provided, of its anticipated requirements to meet expected
demand. Customer shall provide Supplier at least once a [*****] with Customer’s own
internal forecasts made for Customer’s internal budgeting purposes.
	 
	 	6.2  	Customer shall place purchase orders for Manufacturing Services through
Supplier’s electronic order system (each, an “Order”).
	 
	 	6.3  	Customer shall provide Supplier with all necessary input materials (“Input
Materials”) for each Order, including as applicable product bills of material,
production masters (or components to create a master), packaging components (or artwork
to produce same) and disc label film. Customer shall use commercially reasonable
efforts to provide all Input Materials in Supplier’s digital/electronic format ready
for component manufacturing. Supplier shall not charge Customer for any initiation
costs (e.g., mastering) unless rework is required.

	 	6.3.1  	For a limited number of artists [*****], Supplier will supply
test pressings (runs of not more than [*****] CDs, together with all applicable
packaging) at no additional charge and will only commence the

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	 	   	commercial manufacture of the relevant CDs after receipt of the appropriate
approvals of the test pressing and packaging.

	 	6.4  	Orders will be considered workable (“Workable Orders”) upon:

	 	(a)  	Receipt by Supplier of Customer’s Order by [*****] Eastern Time
on a Working Day (if received after such time, the Order will be deemed to have
been received the following Working Day), provided that such Order, when
assessed collectively with Customer’s other Orders, does not exceed the Maximum
Weekly CD Orders unless otherwise agreed to in writing by Supplier;
	 
	 	(b)  	Receipt and approval, if required, from Customer, of all of the
Input Materials for the ordered Manufacturing Services. Supplier will use
reasonable efforts to work with Customer to commence manufacture before all
Input Materials are available in order to reduce lead times for specific
Orders, if requested by Customer; and
	 
	 	(c)  	To the extent applicable, receipt of Customer’s written
approval of any test pressings or packaging provided to Customer under the
provisions of Section 6.3.1.
	 
	 	   	Customer also agrees to cooperate with Supplier and use all reasonable
efforts to make all Orders submitted hereunder into Workable Orders, and
Customer acknowledges that Supplier shall not be liable for any failure to
perform hereunder to the extent such failure is caused by Customer’s failure
to provide approvals required hereunder or perform its other obligations
hereunder.

	 	6.5  	Workable Orders for CDs and associated assembly/packaging services will be
manufactured in the following lead times, to the extent consistent with Prevailing
Practices:

	 	6.5.1  	One Working Day: Maximum of [*****] selections,
designated by Customer, totaling the lesser of (a) [*****] CDs, and (b) [*****]
CDs, multiplied by the result of dividing the average daily output (based on
the output for the 14 Working Days immediately preceding the placement of the
applicable Workable Order) by [*****] Items included must be automated (no hand
packing required) including any inserts, and must be reorders (i.e., not New
Release Orders).
	 
	 	6.5.2  	Two Working Days: Maximum of the lesser of (a)
[*****] CDs, and (b) [*****] CDs, multiplied by the result of dividing the
average daily output (based on the output for the 14 Working Days immediately
preceding the placement of the applicable Workable Order) by [*****],
designated by Customer and additional to the CDs in 6.5.1. Products must be
automated (no hand packing) including any inserts, and must be reorders (i.e.,
not New Release Orders).

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	 	6.5.3  	Three Working Days. Products not requiring hand
packing and not included in Sections 6.5.5 or 6.5.6 below.
	 
	 	6.5.4  	Four Working Days: Products that require hand packing
and not considered items subject to Sections 6.5.5 or 6.5.6 below.
	 
	 	6.5.5  	Six Working Days: Products identified as “New
Releases” in the Customer system. These items have a future date specified for
in-store sales. In the event a New Release Workable Order exceeds [*****] CDs,
the six Working Day lead time will be increased by one Working Day for each
incremental [*****] CDs in the Workable Order.
	 
	 	6.5.6  	Ten Working Days: Products identified as “Deep
Catalog” in the Customer system.
	 
	 	6.5.7  	Customer may designate any Workable Order for a 6.5.3, 6.5.4,
6.5.5 or 6.5.6 item not requiring hand packing to be manufactured within the
lead times described in 6.5.1 or 6.5.2 so long as the total orders in 6.5.1 or
6.5.2 do not exceed the maximum limit described therein.

	 	For purposes of summary and clarity, any Workable Order for an item not a New Release or
Deep Catalog and not designated by Customer for shorter lead times as described in Sections
6.5.1 or 6.5.2 will be manufactured in four Working Days. Supplier will use commercially
reasonable efforts to provide faster service when requested.
	 
	 	6.6  	An Order will be deemed fulfilled if:

	 	6.6.1  	Shipments are made by Supplier prior to,[*****] local plant
time, on the designated due date. By way of example, for purposes of clarity,
a Workable Order received at Supplier’s NC plant prior to [*****] Eastern Time
on a Working Day, if designated by Customer a one-day lead-time must Ship
by.[*****] Eastern Time the next Working Day.
	 
	 	6.6.2  	The number of CDs Shipped is within the variances set forth in
Schedule 6.6, provided (i) where either (A) Supplier has agreed in writing to
ship exact quantities for certain customer shipments or for certain CDs or (B)
where exact quantities are specified by Customer for certain customer shipments
or for certain CDs as a result of a condition imposed by a customer of
Customer, and Supplier has been given timely notice of such requirement,
Supplier must ship the exact quantities specified, and (ii) invoices must be
for the actual number of CDs shipped.

	 	6.7  	Intentionally deleted.
	 
	 	6.8  	Without limitation of Customer’s other remedies hereunder, if Supplier is
unable or otherwise fails to fulfill any Workable Order in accordance with this
Agreement within three days of the date required under this Agreement, then

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	 	   	Customer may secure the services of a third party or parties to fulfill the
unfulfilled portion of such Workable Order(s).
	 
	 	6.9  	Customer will not issue Orders less than [*****] CDs for any line item (i.e.,
excluding promotional items), unless a contractual requirement between Customer and its
third party, non-Universal Music Group member customer requires otherwise.
	 
	 	6.10  	To the extent that any one or more Customer Orders would exceed the Maximum
Weekly CD Orders for such Work Week (to the extent any such Order exceeds such
quantities, an “Excess Order”), the Supplier shall either, at its option, reject or
accept such Excess Order, and shall provide Customer with notice of its rejection or
acceptance within 24 hours of receipt of the Excess Order; provided, however, that if
Supplier rejects such Excess Order, Customer shall be entitled to fulfill the Excess
Order portion of such Order with any third party supplier.
	 
	 	6.11  	In the event Supplier (a) fails to manufacture and Ship the aggregate number of
CDs in all Workable Orders in a given Work Week, so long as such amount ordered does
not exceed the Maximum Weekly CD Orders or (b) fails to manufacture and Ship Workable
Orders within the lead times described in 6.5 and 6.6 (any of such orders in (a) or (b)
hereafter shall be referred to collectively as “Late Orders”), Customer shall
have the right to debit its payables balance with Supplier by the Late Order Fee for
any such Late Order, which right shall be limited to one Late Order Fee for each Late
Order. Except with respect to the partial loss of exclusivity provided for in Section
9.3.1 and the rights provided for in Sections 9.3.2, 9.3.3, 9.3.4, 9.3.5 and 9.3.6, the
Late Order Fee shall be Customer’s sole remedy, and Supplier’s sole liability, for each
Late Order. Supplier shall have the right to dispute any Late Order Fee debit, and if
such a debit is subsequently reversed it shall bear interest as provided in Section
10.2.1.
	 
	 	6.12  	No additional or conflicting terms and conditions on any 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,
provided such items are consistent with the requirements of this Agreement.
	 
	 	6.13  	Supplier’s warehouse shall confirm receipt of each shipment of goods shipped to
Supplier’s warehouse hereunder, and Supplier must confirm to Customer that the shipper
and receiver information match within 48 hours of receipt. To the extent the shipper
and receiver information does not match, Customer’s payment period shall be extended by
one day for every day that such confirmation is delayed past such 48-hour period.

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	7.0  	Specific Related Services:
	 
	   	Supplier will provide the services to support the Manufacturing Services that are set forth
in this Article 7.0 (the “Specific Related Services”). Except as expressly provided
herein to the contrary, including, without limitation, in Schedule 10.1 and Section 10.9,
the Specific Related Services will be performed by Supplier at no additional cost to
Customer. Specific Related Services shall include:

	 	7.1  	Supplier will evaluate all Input Materials for defects and identify items out
of Customer specification, within a timely manner, as agreed on by the Parties.
	 
	 	7.2  	Supplier will process for shipment up to [*****] orders directly to Customer’s
customers on a daily basis. Customer will pay any carrier costs associated with this
service.
	 
	 	7.3  	Supplier will provide services to support Customer’s promotional products
requirements commonly referred to as DJ Promo. Services include:

	 	7.3.1  	Promotional manufacturing orders, processed through the normal
manufacturing services function. Manufacturing lead times for DJ Promo orders
will be three Working Days. The aforementioned notwithstanding, Customer may
designate two DJ Promo orders per Working Day to be manufactured in two Working
Days.
	 
	 	7.3.2  	Supplier will receive and process specific Customer shipping
instructions that are directed to Supplier’s DJ Promo Department. Lead-time
for distribution is included in the manufacturing lead times (i.e., the Product
shall ship or be available for shipping by the end of the manufacturing lead
times). Supplier will store DJ Promo Input Materials for up to [*****] calendar
days at no cost to Customer. At the end of [*****] calendar days, as directed
by Customer, Supplier will either continue to store the materials at a monthly
fee as noted in Schedule 10.1, destroy the materials or ship them to a
Customer-designated location via a Customer-designated carrier, as directed by
Customer. Customer is responsible for any carrier fees associated with DJ
Promo distribution services.

	 	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:

	   	[*****]
	 
	   	Supplier will provide such additional reports and electronic data as Customer shall
reasonably require, and the parties shall mutually agree upon how additional costs, if any
are actually incurred by Supplier for any such reports or electronic data feeds, will be
shared or allocated.

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	 	7.5  	Supplier agrees and understands that it has normal and customary custodial
responsibilities for Customer-owned components and parts (including paper parts) in
Supplier’s possession and Supplier specifically agrees to:

	 	7.5.1  	To the extent consistent with Prevailing Practices, maintain
and provide to Customer on hand inventory balance information and to employ
systems and procedures such that, at any given time, [*****]% of said balances
are within +/- [*****]% of the actual amount on hand.
	 
	 	7.5.2  	Once per 12 months, at Customer’s direction and under
Customer’s supervision, conduct a physical inventory of all Customer-owned
components and parts in its possession. Customer will pay Supplier its actual,
incremental costs incurred to perform such physical inventory(ies). Customer
and Supplier agree to establish cycle counts as soon as reasonably practical.
	 
	 	7.5.3  	Be responsible for, and at Customer’s request pay Customer its
cost for, any Lost Inventory of Customer-owned printed or other components in
its possession exceeding [*****]% of the amount delivered to Supplier (or such
other percentage as is consistent with Prevailing Practices).
	 
	 	   	Notwithstanding the foregoing, for certain non-standard, high cost packaging
items (by way of example, for purposes of clarity but without limitation,
non-standard, high cost packaging items include multi-disc boxes, multi-disc
booklets and Customer-owned DVDs) specified from time to time by Customer,
Supplier shall pay for Lost Inventory exceeding [*****]% of the amount
delivered to Supplier (or such other percentage as is consistent with
Prevailing Practices).
	 
	 	7.5.4  	At least twice per Working Day, provide Customer
electronically (a) on hand inventory balances by SKU and (b) receipts by SKU
from Customer’s 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, this
Section 7.5.4, Customer shall reimburse Supplier for all such costs.

	 	7.6  	Supplier Ordering Printed Components On Behalf of Customer

	 	7.6.1  	Supplier will order and receive components (that will be owned
by Customer) and pay printed component vendors, following the order quantity
and order timing procedures shown in Schedule 7.6.1, provided that Customer may
change or supplement such schedule from time to time by written notice to
Supplier. The agreements, if any, between the printed component vendors and
the Customer shall be utilized by the Supplier in

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	 	   	placing such orders, and Supplier agrees to comply with the payment and
other terms applicable to the ordering of product under such vendor
agreements; provided that (a) Supplier shall be Customer’s agent for the
purposes of placing orders under such agreements, (b) no modifications,
renegotiations or amendments of such agreements will be made without
consultation with Supplier, and (c) such agreements do not require payment
to the third-party vendor prior to [*****] days after shipment to Supplier.
	 
	 	7.6.2  	Supplier will invoice Customer, within [*****] days following
the end of each calendar month, for the cost Supplier has paid or incurred for
all printed components the Supplier purchased and received on behalf of
Customer for the month. Supplier’s invoice (a) will include, as backup
documentation, copies of the print vendor invoices (or detailed EDI invoicing
files), the total of which shall agree with the Supplier’s invoice total, (b)
will be calculated in accordance with the sample variance report provided in
Schedule 7.6.2, and (c) will take into account any prior invoices for such
materials. Customer will pay Supplier’s invoice in accordance with the other
terms of this Agreement. All such printed components shall be owned by the
Customer.
	 
	 	7.6.3  	Supplier will include Customer-owned printed components,
invoiced at the prices set forth in Schedule 10.1, in its invoices of
Manufactured Services to Customer, which Customer will pay in accordance with
the other terms of this Agreement.
	 
	 	7.6.4  	[*****] days following the end of each calendar month,
Supplier will calculate the sum of the dollar amounts of printed components
included in its invoices of Manufacturing Services to Customer for the month
and issue a credit memo or check to Customer for the difference between the sum
of the calculated amount and the amount invoiced under Section 7.6.2.
	 
	 	7.6.5  	Supplier shall conform to all performance standards set forth
on Schedule 7.6.1 with respect to the ordering of printed components on the
behalf of Customer to the extent consistent with Prevailing Practices. Subject
to Section 5.7, if Supplier fails to meet any such performance standards,
Supplier shall be responsible for all of Customer’s direct costs attributable
to such failure.
	 
	 	7.6.6  	Customer may, for any reasonable business purpose, at any time
elect to order printed components and pay printed component vendors directly.
In the event Customer elects to order printed components itself and pay printed
component vendors directly under the foregoing provisions, (a) Supplier will
cease including the cost of Customer-supplied printed components in its
invoices of applicable finished product to Customer as of the effective date of
such change, (b) Customer shall provide Supplier

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	 	   	with [*****] days written notice of its intention to implement this change,
(c) Customer shall reimburse Supplier for any one-time costs of removing
such service from the scope of this Agreement (e.g., redundancy costs), and
(d) Supplier and Customer shall agree to a reduction in the prices in
Schedule 10.1 to equitably reflect the corresponding decrease in Supplier’s
ongoing costs.
	 
	 	7.6.7  	Supplier will indemnify, defend and hold harmless the
Customer, and its parent, subsidiaries, affiliated companies, its and their
shareholders, officers, employees and agents from any and all third party
claims, demands, causes of action, liability, judgments, damages, costs and
expense (including reasonable attorney’s fees) asserted against, imposed upon
or suffered by such parties as a result of Supplier’s failure to pay any
amounts owed by Supplier to any printed component vendor under this Section 7.6
when such amounts are due (provided Customer has paid such amounts to
Supplier).

	8.0  	Product Quality:

	 	8.1  	All CDs shall conform to the Input Material for such CD provided by Customer.
	 
	 	8.2  	The quality of the CDs manufactured by Supplier, and the Specified Related
Services provided by Supplier to Customer shall (a) conform to the standards set forth
in the relevant industry manual (e.g., CD manufacturing levels will be sufficient to
meet the Sony-Philips Red Book CD specifications, also known as the Sony Philips
Optical Disc Specifications), and (b) conform to the AQL standards set forth in
Schedule 8.2.
	 
	 	8.3  	Supplier will perform such inspections as are called for on Schedule 8.2 and
shall certify and send the written results of all such inspections to Customer for the
previous calendar month within seven Working Days of the end of such month.
	 
	 	8.4  	For purposes of this Agreement, an “Epidemic Multiple Defectives Event”
(or “EMDE”) shall be deemed to have occurred if either (a) at least [*****]% or
(b) more than [*****] of the CDs of any given Order(s) exhibit the same type of defect,
in which said defect renders the CDs not merchantable or fit for their intended purpose
(such defective CDs, “Epidemic Multiple Defectives”) and (i) senior management
of Supplier actually learns of such defect, or (ii) Customer promptly notifies Supplier
in writing, providing reasonable particulars of such defect. In the event of an EMDE,
Supplier in accordance with usual Customer procedures, shall immediately make available
a non-defective replacement of the defective CDs to the applicable distributor,
retailer and/or other customer who purchased any such defective copies, at Supplier’s
sole cost and expense. In such event, Customer agrees to use reasonable efforts to
determine the extent of the problem among its customers, to assist Supplier in
resolving any problems with Epidemic Multiple Defectives in order that Supplier may
provide replacement

12

 

	 	   	CDs promptly and to assist in Customer’s mitigation of any negative effects on
Customer.

	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 remedies to which Customer may be entitled under Section 6.11
or Section 10.7 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 Supplier’s sole liability and as
Customer’s sole remedy for such Key Failure(s), to source up to [*****]% of the
Manufacturing Services with any other entity or entities for a period of
[*****] months.

13

 

	 	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 Supplier’s sole liability and as
Customer’s sole remedy for such Key Failure(s), to source up to [*****]% of the
Manufacturing 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.
	 
	 	9.3.3  	Notwithstanding Section 9.3.2, if two Key Failures under
“Production” or “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 Supplier’s sole liability and as Customer’s sole remedy for such Key
Failure(s), to source up to [*****]% of the Manufacturing 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.
	 
	 	9.3.4  	If three Key Failures of the same category (e.g., EMDE) 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 Supplier’s sole liability and as Customer’s sole remedy for
such Key Failure(s), to either (a) source up to[*****] % of the Manufacturing
Services with any other entity or entities for the remainder of the Term, or
(b) terminate this Agreement.
	 
	 	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 Supplier’s sole
liability and as Customer’s sole remedy for such Key Failure(s), to source up
to [*****]% of the Manufacturing 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.
	 
	 	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 Supplier’s sole
liability and as Customer’s sole remedy for such Key Failure(s), to either (a)
source up to [*****]% of the Manufacturing Services with any other entity or
entities for the remainder of the Term, or (b) terminate this Agreement.
	 
	 	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

14

 

	 	   	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 “Quality” or “Multiple Defective” 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
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 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. If Customer elects to source [*****]% of the Manufacturing Services
with another entity or entities for the remainder of the Term under Section
9.3.4 or Section 9.3.6, Supplier shall be relieved of its capacity commitments
under this Agreement for the remainder of the Term.

	 	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; (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 HDFD Manufacturing Agreement, the U.S.
Distribution Agreement, or the Asset Purchase Agreement.

	10.0  	Pricing, Rebate:

	 	10.1  	Schedule 10.1 contains (i) the prices (excluding the prices associated with the
items set forth in Section 10.3) for Manufacturing Services, in each case existing as
of the Effective Date and (ii) a list of all no charge Manufacturing Services.

15

 

	 	   	Subject to Section 10.9, these prices are fixed through the term of the Agreement,
with the exception(s) described in this Agreement, including, without limitation,
pursuant to Sections 10.3, 10.5 and 10.6. The Parties agree that Supplier will not
charge, and Customer will not pay for, any service or activity that is not listed on
Schedule 10.1 or elsewhere referenced or included in this Agreement unless Customer
has approved such services and any charges in writing.
	 
	 	10.2  	Supplier shall invoice Customer each Working Day upon shipment and subject to
Section 6.13, Customer shall pay all invoices within [*****] calendar days of receipt
of invoice. Such invoices shall reflect the prices contemplated by Sections 10.1 and
10.3, or as may be agreed upon by the Parties pursuant to Section 10.5.

	 	10.2.1  	Customer shall pay interest on any amounts (excluding those disputed in good
faith, including without limitation, where the late payment is the result of
Supplier’s action or inaction, e.g. Supplier’s warehouse receipt does not match
Supplier’s invoice) past due under this Agreement at a monthly rate equal to
the lesser of (a) the London Interbank Offered Rate (“LIBOR”) + 0.5% or (b) the
maximum rate permitted by law.
	 
	 	10.2.2  	If Customer becomes delinquent in the payment of any amount (excluding
amounts disputed in good faith) in excess of [*****] million, Supplier shall
have the right to suspend some or all shipments hereunder pending such payment,
and any such failure to make shipments will not be a default, breach, Key
Failure or Uncured Key Failure under this Agreement and will not entitle
Customer to terminate this Agreement or to any other damages or remedy.
	 
	 	10.2.3  	In the case of a disputed invoice, Customer will pay the undisputed amount of
the invoice and Customer and Supplier will work together in good faith to
resolve the disputed amount. In the event an agreement cannot be reached on
the disputed amount within 30 days of the invoice due date, either Supplier or
Customer may submit the matter to arbitration as provided in Article 14.0
“Dispute Resolution” to resolve the disputed amount, but without the need for
or right to preliminary discussions provided for in Article 14.0. Upon
resolution of the dispute, Customer will pay the Supplier the amount, if any,
determined to be due to Supplier.

	 	10.3  	Supplier shall issue a quarterly charge or credit to Customer depending on
changes in Supplier’s costs for polycarbonate and CD jewel boxes via the following
formulas:

	 	10.3.1  	On Supplier’s month end in June 2005, and at the end of each subsequent
three-month period during the Term (provided that the last calculation shall
occur on the last day of the Term if it is a month end, or, if not, on the
month end immediately preceding the last day of the Term), Supplier will
calculate: (i) the Polycarbonate Reference Price minus (ii) Supplier’s daily
average net price per pound paid for polycarbonate for the applicable

16

 

	 	   	three-month period (or portion thereof, as provided above), with the
remainder (iii) multiplied by the number of CDs shipped to Customer
multiplied by [*****]. If this calculation produces a negative result, that
dollar amount will be charged to Customer, subject to 10.3.3 - 10.3.5 below.
If this calculation produces a positive result, that dollar amount will be
credited to Customer, subject to 10.3.3 - 10.3.5 below. The initial
“Polycarbonate Reference Price” shall be $[*****] per pound. The
Polycarbonate Reference Price shall be reset at the end of each of
Customer’s fiscal years to equal the average price per pound paid by
Supplier for polycarbonate during the most recently completed three-month
period. Upon each such readjustment of the Polycarbonate Reference Price,
the prices in Schedule 10.1 shall be updated accordingly.
	 
	 	10.3.2  	On Supplier’s month end in June 2005, and at the end of each subsequent
three-month period during the Term (provided that the last calculation shall
occur on the last day of the Term if it is a month-end, or, if not, on the
month end immediately preceding the last day of the Term), Supplier will
calculate: (i) the Jewel Box Reference Price minus (ii) Supplier’s daily
average net price paid for standard jewel boxes and trays for the current
three-month period (or portion thereof, as provided above), with the remainder
(iii) multiplied by [*****] times the number of finished goods containing jewel
boxes and trays shipped to Customer. If this calculation produces a negative
result, that dollar amount will be charged to Customer, subject to 10.3.3 -
10.3.5. If this calculation produces a positive result, that dollar amount
will be credited to Customer subject to 10.3.3 - 10.3.5. The initial “Jewel
Box Reference Prices” are contained in Schedule 10.3.2. The Jewel Box
Reference Price shall be reset at the end of each of Customer’s fiscal years to
equal the average price per pound paid by Supplier for standard jewel boxes and
trays during the most recently completed three-month period. Upon each such
readjustment of the Jewel Box Reference Price, the prices in Schedule 10.1
shall be updated accordingly.
	 
	 	10.3.3  	Supplier agrees and understands that the terminology contained in 10.3.1 and
10.3.2, “... Supplier’s daily average net price...” includes all discounts, rebates
and any and all other economic related considerations Supplier receives from
its suppliers of polycarbonate and jewel boxes/trays.
	 
	 	10.3.4  	Supplier will perform the calculations described in 10.3.1 and 10.3.2 within
[*****] Working Days following the end of each calendar quarter and submit the
results to Customer, along with data and records that support the calculation
of Supplier’s daily average net price. Customer will have the right to request
additional data and records and/or audit Supplier’s financial records
concerning Supplier’s daily average net price.

17

 

	 	10.3.5  	In the event Customer agrees with Supplier’s calculation of the charges or
credits for changes in Supplier’s prices for jewel boxes and polycarbonate,
Customer will notify Supplier to issue debit or credit memo’s within [*****]
Working Days of receipt of the data and calculations described in 10.3.4. In
the event Customer does not agree with Supplier’s calculation of the charges or
credits for changes in Supplier’s prices for jewel boxes and polycarbonate,
Customer will promptly schedule a meeting with Supplier to discuss approaches
to resolve the disagreement.

	 	10.4  	All prices will be FCA (INCOTERMS 2000) from Supplier’s manufacturing location.
Subject to the terms and conditions of the U.S. Distribution Agreement, (a) Customer
will have the right to select all carriers and will pay all associated freight costs,
and (b) Supplier will coordinate with such carriers and make appropriate arrangements
for pick-ups on Customer’s account. However, if sourced from a manufacturing location
that has a higher transportation cost than if produced at the Kings Mountain location,
Supplier will issue a credit to Customer equal to the additional costs to deliver the
product to the Customer Distribution Center. Supplier will use normal and customary
efforts to obtain the lowest and best price from any third party providers. Supplier
will use normal and customary efforts to obtain the lowest and best price from
providers of polycarbonate and jewel boxes.
	 
	 	10.5  	Subject to Section 10.10, in the event a Manufacturing Service which is not
listed on Schedule 10.1 is required by Customer or any Universal Music Group member,
the following procedure will be followed by Customer and Supplier to establish a price
for said Manufacturing Services.

	 	10.5.1  	Customer will request the Manufacturing Service from Supplier in writing.
	 
	 	10.5.2  	Within [*****] Working Days of receipt of a written request described in
Section 10.5.1 above from Customer, Supplier will propose a price equal to
[*****]. Notwithstanding the foregoing, if the new Manufacturing Service will
replace or substantially replace an existing Manufacturing Service, Supplier’s
price will include the Facility Fixed Costs allocated to such existing
Manufacturing Service, plus or minus, as applicable, the net incremental change
in [*****] Costs, if any, due to the new Manufacturing Service. In the event
the requested Manufacturing Service is a new CD configuration, Supplier’s
proposed price shall have a $[*****] margin per CD. Supplier will supply
documentation to Customer that supports the calculation of its proposed price.
	 
	 	10.5.3  	Customer may accept or reject Supplier’s proposed price.
	 
	 	10.5.4  	In the event Customer accepts Supplier’s proposed price, such Manufacturing
Service and associated price shall be added to Schedule 10.1.

18

 

	 	10.5.5  	In the event Customer rejects Supplier’s proposed price, Customer may audit
the documentation supporting the calculation of Supplier’s proposed price.
[*****]. All of the foregoing information constitutes trade secrets of
Supplier, unless otherwise publicly disclosed by Supplier.
	 
	 	10.5.6  	Following the completion of Customer’s audit, parties will meet and engage in
good faith negotiations concerning Supplier’s proposed price. In the event an
agreement cannot be reached on the proposed price within [*****] days of
Supplier’s proposal of a price, either Supplier or Customer may invoke Article
14.0 “Dispute Resolution” to determine the price for a configuration or service
not contained in Schedule 10.1, provided that solely for purposes of resolving
disputes under this Section 10.5, AAA procedures shall not be used and: (A) the
arbitrator shall be a single person who shall be a CPA currently in practice at
a national accounting firm which firm shall be selected by the parties
mutually, and which shall be asked to name the person to so act, (B) there
shall be no discovery (other than that which has occurred pursuant to Section
10.5.5), (C) each party shall submit, on the tenth business day after the
arbitrator is named, its proposed price and any support it has for the price as
proposed (including, e.g., any documentation submitted under Section 10.5.2 and
the results of any audit under Section 10.5.5), and (D) the arbitrator shall
choose, within ten business days of the submissions under clause (C) between
the price proposed by Supplier and the price proposed by Customer, without
change, addition or deletion, based on which price is closer (in the
arbitrator’s view, as informed by the documents submitted pursuant to clause
(C)) to the price as determined by the formula set forth in Section 10.5.2.
Once such price is determined, such Manufacturing Service and associated price
shall be added to Schedule 10.1.
	 
	 	10.5.7  	In the event Customer objects to Supplier’s proposed price for new
Manufacturing Services, but there is no mutual agreement and neither party
refers the matter to arbitration in accordance with Section 10.5.6 within
[*****] days of Supplier’s proposal of a price, Supplier’s proposal shall be
deemed rejected and Customer shall not be required to use Supplier for such
Manufacturing Services.

	 	10.6  	On the fifteenth (15th) day following each anniversary of the Effective Date
during the Term, Customer shall notify Supplier of the dollar amount equal to $[*****]
multiplied by the positive result, if any, of subtracting [*****] from the total number
of CDs and Dual Discs purchased by Customer during the twelve months immediately
preceding the applicable anniversary of the Effective Date from either (a) Supplier or
(b) a third party, to the extent Customer is permitted to make such third party
purchases as a result of any of the conditions specified in Section 6.8 or 9.3 (the
“Disc Amount”), and Customer shall be entitled to debit the Disc Amount against all
then-outstanding invoices of Supplier to Customer, and to the extent the Disc Amount is
in excess of all such then-outstanding invoices, then Supplier shall issue to Customer
a credit, in the amount of the

19

 

	 	   	excess of the Disc Amount over the debits, to be applied (to the maximum extent
possible) against invoices for Orders for the first month, then, if necessary, the
second month, and then, if necessary, the third month, and Supplier shall pay to
Customer in cash on the fifth business day after the end of the third month, the
amount by which the Disc Amount exceeds the debits and credits given to Customer in
the immediately preceding three months, provided, however, that at
all times, the total number of CDs purchased by [*****] from Supplier for the
relevant periods shall be deemed to be purchased by Customer from Supplier for
purposes of all calculations pursuant to this Section 10.6.
	 
	 	10.7  	Without limiting Supplier’s obligations to meet the standards set forth in this
Agreement, within [*****] days of the end of each quarter, Supplier will provide
Customer a credit equal to [*****]% of the total amount of all invoices paid in such
quarter as compensation for defectives. In the event either of the Parties can
reasonably demonstrate that the long term, average defective rate is materially
different than [*****]% of manufactured CDs, the Parties agree to conduct good faith
negotiations to establish a different percentage as a basis to compensate Customer for
defective manufacturing. The foregoing remedy shall be Supplier’s sole liability for
defective units, and Customer’s sole remedy, except as set forth in Section 8.4 and
Article 9.
	 
	 	10.8  	On each of the dates specified below, Customer shall be entitled to debit the
amount set forth below (across from each applicable date) against all then-outstanding
invoices of Supplier to Customer, or other obligations owed by Customer to Supplier,
and to be paid by Supplier on each such date, in cash, to the extent such amount is in
excess of all then outstanding invoices or other such obligations.

	 	 	 	 	 
	           
  Date	 	Amount	 
	December 15, 2005
	 	$	2,200,000	 
	May 31, 2006
	 	$	3,900,000	 
	May 31, 2007
	 	$	6,400,000	 
	May 31, 2008
	 	$	6,800,000	 
	May 31, 2009
	 	$	1,400,000	 

	 	10.9  	Either party shall have the right to dispute the accuracy of the Aggregate 2003
Manufacturing Costs, as a whole, or the Allocated 2003 Manufacturing Costs, on a line
item basis, as follows:

	 	10.9.1  	Either Party may notify the other Party of an error or omission in the
Aggregate 2003 Manufacturing Costs or any Allocated 2003 Manufacturing Costs
(which it discovers within [*****] months of the Effective Date) in writing
within [*****] months of the Effective Date and request an adjustment of the
Aggregate 2003 Manufacturing Costs and/or any Allocated Manufacturing Costs,
either up or down, as required

20

 

	 	   	to accurately reflect the dollar amount of such error(s) or omission(s) (any
such requested adjustments, the “Requested Cost Adjustment”).
	 
	 	10.9.2  	Within 15 days of receiving notification of a Requested Cost Adjustment,
Customer and Supplier will meet and conduct good faith negotiations and attempt
to reach agreement on whether such adjustments are appropriate and in the
correct amount. Either party may audit the other’s books, records and
supporting documentation supporting the calculation of the data in, or the data
used in preparing, Schedule 10.1 and the Requested Cost Adjustment. Such
audits shall be performed with reasonable advance written notice, during normal
business hours, and in a manner not disruptive of the audited party’s
operations. Once a Requested Cost Adjustment has been agreed or determined
hereunder (the “Final Cost Adjustment”), the Aggregate 2003 Manufacturing Costs
and the Allocated 2003 Manufacturing Costs shall be modified as follows:

	 	10.9.2.1  	If the dispute involves an error in the allocation of the Allocated
2003 Manufacturing Costs, the Final Cost Adjustment shall be added to
or subtracted from the existing cost allocation for any and each
disputed line item which contains the cost item and the amount of the
Final Cost Adjustment shall be offset by a subtraction (in the case of
an addition above) or addition (in the case of a subtraction above) for
one or more other cost items in the relevant line items in which such
other cost items are contained such that, had the adjusted costs been
used to calculate the Aggregate 2003 Manufacturing Costs, based on the
2003 Product Mix, the Aggregate 2003 Manufacturing Costs would not have
changed. As an example of the application of the following, if
pursuant to this Section 10.9.2.1 the pricing on Schedule 10.1 for
“Setup Cost – Spine Sticker” was increased, that element of each
configuration which included “Setup Cost – Spine Sticker” would be
increased by the same amount, in another cost item or items which, when
applied to the configurations which include such other cost item(s),
and further applied to the 2003 Product Mix, would cause the Aggregate
2003 Manufacturing Costs to remain unchanged.
	 
	 	10.9.2.2  	If the dispute involves increasing or adding a cost item or amount
to the Aggregate 2003 Manufacturing Costs, the Final Cost Adjustment
for such cost item shall be added to the Aggregate 2003 Manufacturing
Costs, and to the relevant line items of the Allocated 2003
Manufacturing Costs such that, had the adjusted costs been used to
calculate the Aggregate 2003 Manufacturing Costs, based on the 2003
Product Mix, the Aggregate 2003 Manufacturing Costs would have
increased by the amount of the Final Cost Adjustment.

21

 

	 	10.9.2.3  	If the dispute involves reducing or removing a cost item or amount
from the Aggregate 2003 Manufacturing Costs, the Final Cost Adjustment
for such cost item shall be subtracted from the Aggregate 2003
Manufacturing Costs, and from the relevant line items of the Allocated
2003 Manufacturing Costs such that, had the adjusted costs been used to
calculate the Aggregate 2003 Manufacturing Costs, based on the 2003
Product Mix, the Aggregate 2003 Manufacturing Costs would have
decreased by the amount of the Final Cost Adjustment.

	 	10.9.3  	Once a Final Cost Adjustment has been made to the Allocated 2003
Manufacturing Costs as described in Section 10.9.2 above, the Parties shall
adjust the prices (other than the $[*****] per CD margin reflected therein)
shown on Schedule 10.1 to take into account the adjustments described in
Sections 10.9.2.1 through 10.9.2.3. In the event an agreement cannot be
reached on any cost changes or any changes in Schedule 10.1 within two weeks of
the commencement of negotiations under Section 10.9.2, either Party may invoke
Section 14.0 (Dispute Resolution) to determine the appropriate Schedule 10.1
prices, provided that solely for purposes of resolving disputes under this
Section 10.9, AAA procedures shall not be used and (A) the arbitrator shall be
a single person who shall be a CPA currently in practice at a national
accounting firm which firm shall be selected by the parties mutually, and which
shall be asked to name the person to so act, (B) there shall be no discovery
(other than that which has occurred pursuant to Section 10.9.2), (C) each party
shall submit, on the tenth business day after the arbitrator is named, its
proposal on price adjustments and any support it has for its position
(including, e.g., any documentation submitted under Section 10.9.1 and the
results of any audit under Section 10.9.2), and the arbitrator shall make a
determination, within 10 days of such submissions, of how the prices on
Schedule 10.1 shall be adjusted, provided that such determination must comply
with the parameters set forth in this Section 10.9. If the parties fail to
invoke the arbitration provision, the prices on Schedule 10.1 shall remain
unadjusted, and if one party fails to submit its proposal timely to the named
arbitrator, the arbitrator shall accept the other party’s proposal provided
such proposal meets the parameters set forth in this Section 10.9. Once the
prices for all configurations are agreed or determined pursuant to this Section
10.9, such new prices shall be deemed to amend Schedule 10.1 accordingly, and
shall be applied both retroactively (to the Effective Date) and prospectively,
and all amounts owing from one Party to the other as a result of such
adjustment shall be paid within thirty days of the final determination of the
changes in such prices.
	 
	 	10.9.4  	Recourse to the procedures and remedies set forth in this Section 10.9 shall
be Customer’s sole liability, and Supplier’s sole remedy, in the event of a
breach by Customer of its representation and warranty in Section 12.2(D).

22

 

	 	10.10  	Notwithstanding Section 10.5, in the event Supplier uses third parties to
provide for certain parts of Manufacturing Services, particularly packaging or assembly
services for non-standard configurations, that are not identified and priced in Section
10.1, Supplier’s price to Customer for such parts of the Manufacturing Services shall
be equal to Supplier’s price from the third party.
	 
	 	10.11  	On each of the dates specified below, Supplier shall be entitled to invoice
Customer the amount set forth below (across from each applicable date) and Customer
shall pay all such invoices within 15 calendar days of receipt of invoice. The terms
of Sections 10.2.1, 10.2.2 and 10.2.3 shall apply to the payment of such invoices.

	 	 	 	 	 
	        
      Date	 	Amount	 
	December 15, 2005
	 	$	500,000	 
	December 15, 2006
	 	$	500,000	 
	December 15, 2007
	 	$	500,000	 
	December 15, 2008
	 	$	500,000	 
	December 15, 2009
	 	$	500,000	 
	December 15, 2010
	 	$	500,000	 
	December 15, 2011
	 	$	500,000	 
	December 15, 2012
	 	$	500,000	 
	December 15, 2013
	 	$	500,000	 
	December 15, 2014
	 	$	500,000	 

	11.0  	Royalties Paid to Philips and DVA by Supplier for CDs Sold to Customer:

	 	11.1  	Customer must pay Supplier for royalty costs within [*****] calendar days of
receipt of invoice. Customer will pay only the actual cost of Supplier’s royalty
payments themselves net any form of rebate and Customer will have no obligation to
compensate Supplier for any compliance, administration or legal costs related to the
royalties paid by Supplier.
	 
	 	11.2  	Supplier shall present evidence of payment of royalties to Phillips and DVA and
solely attributable to CDs manufactured for Customer or any Universal Music Group
member on a quarterly basis, consisting of proof of funds transferred along with normal
and customary back-up documentation, including the number of CDs and royalty rates that
form the basis for the royalty amount.
	 
	 	11.3  	Supplier shall consult with Customer prior to entering into, extending or
amending any agreement which would require the payment of royalties on CDs manufactured
for Customer hereunder, and shall use all its reasonable best efforts to effect
Customer’s instructions on such issues as are raised by the agreement, extension or
amendment that could affect Customer’s costs under this Agreement; provided that
Customer indemnifies Supplier for any cost, expenses, liabilities or claims, as well as
lost profits resulting from a legally mandated shut down of one or more of Supplier’s
facilities or enjoinment of Supplier’s shipments, in each

23

 

	 	   	case incurred by Supplier as a direct result of Supplier’s adherence to such
instructions (but only to the extent Supplier (i) promptly provided Customer with
any advance notice received by Supplier regarding any action on the part of any
third party that could reasonably be expected to result in any such costs, expenses,
liabilities, claims, or lost profits, and (ii) used all its reasonable best efforts
to effect any revised instructions received by Customer thereafter.

	12.0  	Representations of the Parties

	 	12.1  	Representations of Supplier:
	 
	 	   	As of the Effective Date, and at all times during the Term, Supplier represents and
warrants as follows:

	 	(A)  	Supplier is a valid existing limited liability company and in
good standing under the laws of the State of Delaware. Supplier has the
corporate power and authority required to carry on its activities as they are
now conducted.
	 
	 	(B)  	Supplier has full legal right and corporate power, without the
consent of any other person to execute, deliver and to perform its obligations
under this Agreement.
	 
	 	(C)  	All corporate and other actions required to be taken by
Supplier to authorize the execution, delivery and performance of this Agreement
and all transactions contemplated hereby have been duly and properly taken. No
consent, approval or authorization of, or filing of any certificate, notice
application, report or other document with any governmental authority is
required on the part of Supplier in connection with the valid execution and
delivery of this Agreement or the performance by Supplier of any of its
obligations hereunder.

	 	12.2  	Representations of Customer and Parent:
	 
	 	   	As of the Effective Date, and at all times during the Term, Customer represents and
warrants as follows:

	 	(A)  	It is a valid existing corporation and in good standing under
the laws of its state of incorporation. It has the corporate power and
authority required to carry on its activities as they are now conducted.
	 
	 	(B)  	It has full legal right and corporate power, without the
consent of any other person to execute, deliver and to perform its obligations
under this Agreement.
	 
	 	(C)  	All corporate and other actions required to be taken by it to
authorize the execution, delivery and performance of this Agreement and all
transactions contemplated hereby have been duly and properly taken. No
consent, approval or authorization of, or filing of any certificate, notice

24

 

	 	   	application, report or other document with any governmental authority is
required on the part of it in connection with its valid execution and
delivery of this Agreement or the performance by it of any of its
obligations hereunder.
	 
	 	(D)  	The Aggregate 2003 Manufacturing Costs accurately reflect UML’s
actual, recurring, aggregate stand-alone cost of providing the Manufacturing
Services for the Universal Music Group’s Manufacturing Requirements for
calendar year 2003, after certain adjustments mutually agreed upon by Customer
and Supplier. Such stand-alone cost, after such agreed upon adjustments, is
set forth on Schedule 10.1.
	 
	 	(E)  	The Joint Ventures listed on Schedule 2.5 attached hereto are
the complete list of all joint ventures or other contracts or arrangements
which any Universal Music Group entity is a party to, as of the Effective Date,
under which any amount of the Universal Music Group Manufacturing Requirements
is committed to any party under such joint venture or other contract or
arrangement.
	 
	 	(F)  	The amounts set forth in the table in Section 4.1 as the
volumes contractually committed to all Joint Ventures under valid written
agreements as of the Effective Date are complete and accurate.
	 
	 	(G)  	The Manufacturing Requirements of the Universal Music Group in
calendar year 2003 totaled not less than [*****] million CDs, and no corporate
reorganizations have occurred in or since such period which could reasonably be
expected to reduce such Manufacturing Requirements. Of the aggregate number of
CDs set forth in the preceding sentence, certain amounts are attributable to
orders from customers over which the Universal Music Group does not have
unilateral control and that have time limited agreements with the Universal
Music Group, as set forth on Schedule 12.2(G).
	 
	 	(H)  	Customer has the right to authorize Supplier to perform the
Manufacturing Services on Customer’s behalf as contemplated by this Agreement.

	 	12.3  	Warranty Disclaimers:

	 	   	EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, ALL WARRANTIES AND CONDITIONS,
WHETHER EXPRESS OR IMPLIED BY STATUTE, COMMON LAW OR OTHERWISE (INCLUDING, BUT NOT
LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT) ARE HEREBY EXCLUDED.

25

 

	13.0  	Termination:

	 	13.1  	This Agreement may be terminated:

	 	(a)  	By mutual written consent of the parties at any time;
	 
	 	(b)  	By Customer pursuant to Section 9.3.4 or Section 9.3.6;
	 
	 	(c)  	In the event there is a Change of Control during the Term of
this Agreement, notwithstanding any other provision of this Agreement, Customer
may terminate this Agreement upon 90 calendar days written notice to Supplier,
which notice must be provided within three months of Supplier’s written notice
to Customer of such Change of Control;
	 
	 	(d)  	By Customer, in the event Supplier is adjudged insolvent, makes
a general assignment for the benefit of its creditors, effects a voluntary or
compulsory liquidation or dissolution, files a petition for relief under
applicable bankruptcy or insolvency law or a receiver is appointed on account
of Supplier’s insolvency; or
	 
	 	(e)  	By Customer, if Supplier has materially breached its
obligations under Section 5.5 or Section 27, without cure (after written notice
by Customer and reasonable opportunity to do so) of such breaches, [*****] or
more times in any [*****]-month period. For the purposes of this Section
13.1(e), “cure” shall mean undertaking the same cure process as is set forth in
Sections 9.2.1 through 9.2.3 for Key Failures. For purposes of this Section
13.1(e), “material breach” shall mean that such breach resulted in a material
loss to Customer’s property (e.g., a master).
	 
	 	(f)  	By Customer, if Supplier has materially breached its
obligations under Section 10.8 or Section 18 (with respect to assignment to a
Competitor), without cure (after written notice by Customer and reasonable
opportunity to do so) of such breaches.

	 	13.2  	Upon any termination or expiration of this Agreement, all of the provisions of
this Agreement will terminate, except for the following provisions, which will survive
in perpetuity: Sections 13.2, 13.3, 14.0, 15.0, 20.0, 21.0, 24.0 and 31.0. No
termination or expiration of this Agreement will relieve Customer or Supplier of any
payment obligations outstanding at the time of such termination or expiration.
	 
	 	13.3  	At the expiration of the Term or upon earlier termination, Customer will be
entitled to repossess all of its manufacturing and packaging components (e.g. tapes,
paper parts, packaging, etc.) provided by it to Supplier over the Term. Supplier will
pack such parts appropriately and make them available for pick up by Customer with a
clear dispatch and content note per shipment in agreement with Customer. Customer
commits to take back such components within 120 days after the expiration of the Term
or earlier termination. Customer shall reimburse Supplier for any direct out-of-pocket
packaging, retrieval or storage

26

 

	 	   	costs incurred by Supplier for this service during this period, unless Customer
terminated this Agreement pursuant to Section 9.3.4, 9.3.6 or 13.1(e).
	 
	 	13.4  	Upon any termination of this Agreement, Customer may elect to exclude the CD
volumes under this Agreement from its Distribution Requirements (as such term is
defined in the U.S. Distribution Agreement) under the U.S. Distribution Agreement, by
written notice to Supplier of such election within 90 days of such termination.

	14.0  	Dispute Resolution:
	 
	   	During the pendency of any dispute, the Agreement shall continue to be in force and the
Parties shall abide by all terms of the Agreement. Any dispute concerning the
interpretation of this Agreement or any party’s performance under any provision of this
Agreement (including, without limitation, any dispute regarding a proposed increase to the
prices set forth on Schedule 10.1 pursuant to Section 5.9 or 5.11) shall be discussed by the
parties, and if the parties are unable to reach agreement concerning such matter, it shall
be submitted to arbitration in accordance with the then-current commercial arbitration rules
of the American Arbitration Association (“AAA”). The number of arbitrators selected
shall be three. Each party shall select one arbitrator and the two arbitrators selected
shall select the third arbitrator. The arbitration shall take place in the City of New
York. Judgment upon any arbitration award may be entered in any court of competent
jurisdiction. Arbitration shall occur over consecutive business days and in no event shall
an arbitration procedure continue for more than two weeks. This Agreement shall be enforced
and interpreted under the laws of the State of New York, without regard for its conflicts of
laws rules or choice of law principles.

	 	14.1  	Notwithstanding the foregoing, either party may pursue the remedy of specific
performance of any provision contained herein, or seek a preliminary or permanent
injunction against the breach of any such provision or in aid of the exercise of any
power granted herein, or any combination thereof, in any court having jurisdiction
thereof without resort to arbitration.
	 
	 	14.2  	In the event of any arbitration between the parties hereto with respect to any
of the transactions contemplated herein or the subject matter hereof, the prevailing
party shall, in addition to such other relief as the arbitrators may award, be entitled
to recover reasonable attorney’s fees, expenses and costs of investigation, all as
actually incurred, including without limitation, attorneys’ fees, expenses and costs of
investigation incurred in any case or proceeding under any bankruptcy, insolvency or
reorganization proceeding.
The non-prevailing party shall bear the cost of such arbitration.

	15.0  	Retention of Rights:
	 
	   	All Input Materials and other source and graphic materials provided by Customer in
connection herewith, and all rights therein, shall remain the exclusive property of
Customer. All work product produced hereunder specifically and solely for Customer

27

 

	   	and for incorporation into Customer CDs, artwork or other materials, from its inception,
will be considered a “work made for hire” for Customer, which entitles Customer to, among
other things, the copyright and all other rights, title and interest therein and such work
product shall be and remain the sole property of Customer. Customer shall not provide
Supplier with any original or irreplaceable materials under this Agreement. Notwithstanding
the above, to the extent Customer nevertheless provides Supplier with any such original or
irreplaceable materials, Supplier shall use commercially reasonable efforts to ensure the
safety and security of such materials but shall not be liable for any damages other than
those specified in Section 21.1 below, in the event that such materials are lost, damaged,
destroyed or stolen.
	 
	16.0  	Binding Effect and No Other Agreements:
	 
	   	This Agreement and the U.S. Distribution Agreement together constitute the entire agreement
between the Parties on the subjects herein contained and supercede, cancel and terminate all
other understandings between the parties with respect to the subject matter hereof.
	 
	17.0  	Amendments:
	 
	   	No modification of or supplement to this Agreement shall be effective unless signed in
writing by each Party.
	 
	18.0  	Successors and Assigns; Assignment: 
	 
	   	The rights and obligations of the Parties hereunder shall attach to their successors and
permitted assigns. Supplier shall have the right to assign this Agreement or any of the
rights granted to Supplier hereunder, including without limitation, the right to assign any
interests under this Agreement to (a) lenders providing financing to Supplier from time to
time and (b) to any third party acquiring all or substantially all of Supplier’s assets or
equity, provided that such third party is not a Competitor and agrees in writing to assume
all of Supplier’s obligations hereunder. Except as provided in this Section 18.0, Supplier
shall not assign, or grant any lien or encumbrance on, any property of Customer (including
finished goods). Customer shall not have the right, without Supplier’s prior written
consent, which consent shall not be unreasonably withheld, conditioned or delayed, to assign
this Agreement or any of the rights, obligations or interests of Customer hereunder, in
whole or in part, by operation of law, pursuant to a change of control, or otherwise;
provided, however, that Customer shall have the right without Supplier’s consent to assign
its rights and obligations under this Agreement to any Affiliate of Parent or to any third
party acquiring all or substantially all of Customer’s assets or equity, provided that (i)
such Affiliate or third party agrees in writing to assume all of Customer’s obligations
hereunder, and (ii) Customer and such third party have confirmed in writing to Supplier that
(A) it then-currently has Manufacturing Requirements substantially similar to or greater
than Customer’s then-current Manufacturing Requirements, and (B) its then-current forecasts
for Manufacturing Requirements for the remainder of the Term are substantially similar to or
greater than Customer’s then-current forecasts for Manufacturing Requirements for the
remainder of

28

 

	   	the Term. Notwithstanding the foregoing, in the event a non-Affiliate third party acquires
all or substantially all of Customer’s assets or equity, such third party shall thereafter
only be bound by the purchase commitment in Section 4.1 for the volume that is Customer’s
and any other member of the Universal Music Group’s volume (i.e., no Customer Affiliate not
part of the Universal Music Group immediately prior to the transaction shall be bound by
this Agreement).
	 
	19.0  	Compliance:
	 
	   	Any express or implied waiver by any Party of any breach hereof by any other Party,
including by any Party failing to notify any other Party of a breach hereof by such other
Party, shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure by such other Party to comply with the terms and conditions in this Agreement,
notwithstanding any custom, practice or course of dealing to the contrary.
	 
	20.0  	Confidentiality:
	 
	   	Except as may be required by law, no Party shall disclose to any third party any
confidential information on business or technology of any other party obtained in connection
with this Agreement for three years from the date of the disclosure of any such confidential
information without the prior written consent of the other Party. If goods purchased under
this Agreement are to be specifically fabricated for Customer, Supplier agrees to keep
confidential the processes, methods and designs used or applied in producing each such item.
	 
	21.0  	Indemnification:
	 
	   	Each Party (the “Indemnifying Party”) hereto agrees to and does hereby indemnify,
defend and hold harmless, the other party and its parent, subsidiaries, affiliated
companies, and its and their shareholders, officers, employees and agents (“Indemnified
Party”) from any and all third party claims, demands, causes of action, liability,
judgments, damages, costs and expense (including reasonable attorney’s fees) asserted
against, imposed upon or suffered by an Indemnified Party to the extent any such claims are
caused by the Indemnifying Party’s performance of this Agreement, including but not limited
to any claims for bodily injury, death or property damage, product liability and any
infringement of any proprietary right, patent, copyright or trademark.

	 	21.1  	Supplier agrees to be expressly and solely responsible for any property of
Customer (including, without limitation, masters, components, paper parts, etc.) while
such property is in the care or custody of or under the control of Supplier or any
subcontractor, whether or not such possession constitutes a legal bailment, and in the
event of any damage to or loss of such property while in the possession of Supplier or
any subcontractor, if the property is not an original or irreplaceable item or items,
Supplier shall promptly pay Customer the full replacement value of such property or the
costs to repair the damage or restore the loss to any such property, as applicable,
regardless of cause. If, notwithstanding Section 15.0, Customer has provided Supplier
or any subcontractor with original or

29

 

	 	   	irreplaceable items which are damaged or lost while in possession of Supplier or any
subcontractor, Supplier shall be liable only for the cost of repair or replacement
as if the lost or damaged original were a copy.

	22.0  	Favored Nations:

	 	22.1  	As to Significant Customers. In the event Supplier sells any
Manufacturing Services to a Significant Customer under similar or more favorable (to
the other customer) terms and conditions to those described in Sections 1.0 through
10.0, 13, 21 and 25 herein for net prices for such Manufacturing Services (including
all discounts, rebates and all other economic-related considerations) lower than those
then in effect for Customer under Section 10.0 and this Section 22.1, Supplier will
lower Customer’s prices for such Manufacturing Services such that they are equivalent
to the prices paid by said Significant Customer effective as of the date of the first
invoice to the Significant Customer, and for the duration that such Significant
Customer receives such lower prices.
	 
	 	22.2  	As To Other Customers. In the event Supplier sells any Manufacturing
Services under similar or more favorable terms and conditions to those described in
Sections 1.0 through 10.0, 13, 21 and 25 herein to a customer other than a Significant
Customer (an “MFN Customer”) for net prices for such Manufacturing Services (including
all discounts, rebates, and all other economic related considerations) lower than those
then in effect for Customer under Section 10.0 and Section 22.1 (said lower
configuration price(s) called the “MFN Configuration Price”), Supplier will:

	 	(a)  	immediately notify Customer in writing of such sale and the
pricing therefor; and
	 
	 	(b)  	15 days following the end of each calendar quarter during which
the MFN Customer receives the MFN Configuration Price, issue the Customer a
credit to Customer’s payables equal to the number of units for each
configuration sold to the MFN Customer(s) multiplied times the MFN Factor shown
in Schedule 22.0.

	 	22.3  	For purposes of clarity, only Section 22.1 or Section 22.2 shall apply to any
one sale to another customer, but each section may be used multiple times, whether for
the same or different customers, and both sections may be operative at the same time
(e.g., (1) if Significant Customer A receives a lower price than Customer, Customer’s
prices shall be adjusted under Section 22.1, and if Significant Customer B receives an
even lower price than Customer’s adjusted prices, Customer’s prices shall be reduced
again; (2) If MFN Customer I receives a lower price than Customer, Customer shall
receive a rebate as to MFN Customer I under Section 22.2, and if MFN Customer II
receives a lower price than Customer (but not as low as MFN Customer I), Customer shall
also receive a rebate as to MFN Customer II under Section 22.2(calculated for that MFN
Customer II), and (3) if Customer’s prices are lowered as a result of Section 22.1,

30

 

	 	   	and then an MFN Customer receives an even lower price, Customer shall retain the
prices set pursuant to Section 22.1, and shall be entitled to the rebate set forth
in Section 22.2 for the latter sale).

	   	Notwithstanding any other provision of this Section 22, Customer shall receive no price
adjustment or other benefit under this Section 22: (a) with respect to orders from other
Supplier customers which are Spot Market Orders, or (b) with respect to orders from other
Supplier customers which are not Significant Customers and which are fulfilled using assets
and facilities other those purchased by Supplier from Customer under the Asset Purchase
Agreement, or (c) with respect to orders from a Significant Customer if such orders are
fulfilled using assets and facilities purchased by Supplier from such Significant Customer.
	 
	23.0  	Audit Rights:

	 	(a)  	Customer shall have the right to inspect Supplier’s books and records related
to its performance under this Agreement, including Section 22.0 hereof, provided such
right shall not be exercised more than once per calendar year and provided, further,
that any information subject to a confidentiality agreement with a third party shall
only be subject to inspection by an independent third party auditor hired by Customer
that enters into a confidentiality agreement with Supplier that maintains the
confidentiality of third party information and permits the auditor to report on
Supplier’s performance to Customer. Such audits shall be performed with reasonable
advance written notice, during normal business hours, and in a manner not disruptive of
Supplier’s operations.
	 
	 	(b)  	Supplier shall have the right to inspect Customer’s books and records related
to its performance under Section 4.1 of this Agreement, provided such right shall not
be exercised more than once per calendar year and provided, further, that any
information subject to a confidentiality agreement with a third party shall only be
subject to inspection by an independent third party auditor hired by Supplier that
enters into a confidentiality agreement with Customer that maintains the
confidentiality of third party information and permits the auditor to report on
Customer’s performance to Supplier. Such audits shall be performed with reasonable
advance written notice, during normal business hours, and in a manner not disruptive of
Customer’s operations.

	24.0  	Notice:
	 
	   	All notices, requests, claims, demands and other communications hereunder shall be in
writing (in the English language) and shall be given or made (and shall be deemed to have
been duly given or made upon receipt) by delivery in person, by courier service, by telecopy
or by registered or certified mail (postage prepaid, return receipt requested) to the
respective Parties at the following addresses (or at such other address for a Party as shall
be specified in a notice given in accordance with this Section 24.0):

31

 

	   	If to CUSTOMER:
	 
	   	Universal Manufacturing & Logistics

10 Universal City Plaza

Suite 350

Universal City, CA 91608

Attn: Peter N. Scifres

Fax: (818) 733-1125
	 
	   	With a copy to:
	 
	   	Universal Music Group

2220 Colorado Blvd.

Santa Monica CA 90404

Attn: Executive Vice President Business & Legal Affairs

Fax: (310) 865-9954
	 
	   	If to SUPPLIER:
	 
	   	Entertainment Distribution Company (USA) LLC

360 Madison Avenue, Suite 500

New York, NY 10017

Attn: CFO

Fax: (212) 253-4166
	 
	   	and
	 
	   	Entertainment Distribution Company (USA) LLC

11360 Lakefield Drive

Duluth, GA 30097

Attn: CFO

Fax: (770) 497-3992
	 
	   	With copies to:
	 
	   	Greenberg Traurig, LLP

The Forum

3290 Northside Parkway, Suite 400

Atlanta, GA 30327

Attn: James S. Altenbach, Esq.

Fax: (678) 553-2445
	 
	25.0  	Force Majeure:

	 	25.1  	Notwithstanding any provision hereof to the contrary, Supplier shall not be
liable for any damages incurred by Customer whatsoever, or any Late Order Fees, due to
delays or failures in Supplier’s performance of its obligations under this

32

 

	 	   	Agreement due to a Force Majeure Event, and such delays or failures shall not be
deemed a breach of this Agreement.
	 
	 	25.2  	Immediately upon becoming aware of the Force Majeure Event, Supplier will (a)
use commercially reasonable efforts to end or circumvent the Force Majeure Event, (b)
keep Customer apprised of those efforts on a timely basis, and (c) communicate with,
coordinate with and assist Customer in resolving any impact on Customer caused by the
Force Majeure Event.
	 
	 	25.3  	If a Force Majeure Event continues for a period longer than [*****] days, then
Customer shall have the right to place Orders during the pendency of such Force Majeure
Event with other manufacturing companies, provided that (a) such Orders shall not be
for volumes in excess of the volumes Customer would ordinarily contract for during such
period, and (b) upon notice from Supplier that Supplier can resume performance under
the terms of this Agreement, Customer shall cease placing such Orders with such third
parties and place them with Supplier under the terms of this Agreement.
	 
	 	25.4  	Notwithstanding the [*****]-day period in Section 25.3, if there would be no
doubt in the mind of a reasonable person that Supplier would be unable to resume
performance under the terms of this Agreement within [*****]days of the Force Majeure
Event, then Customer shall have the right to immediately seek the remedy provided under
Section 25.3, without waiting for the [*****]-day period to elapse; provided, however,
that Customer shall consult with Supplier and coordinate its activities with Supplier’s
in such circumstance.

	26.0  	Designated Person:
	 
	   	Customer and Supplier each agree that each will designate a single organization, department,
and/or person to be the primary point of contact with the other with the ability to take
action as may be required pursuant to this Agreement.
	 
	27.0  	Anti-Piracy:
	 
	   	Subject to Section 5.9, Supplier agrees to either maintain, or obtain within 1 year of the
Effective Date of this Agreement and subsequently maintain, IRMA Anti-Piracy Certification
at all of its manufacturing locations servicing Customer during the Term, unless (i) IRMA
ceases to provide this certification, or (ii) obtains Customer’s written approval that it
need not comply with this section.
	 
	28.0  	Press Aheads.
	 
	   	Supplier is prohibited without Customer’s prior written approval from pressing ahead stock
of Customer or from retaining over-pressings or keeping stock of semi-finished product in
anticipation of future Customer orders.

33

 

	29.0  	Consents and Approvals:
	 
	   	Neither Party shall unreasonably withhold, condition or delay any consents, authorizations
or approvals required under this Agreement.
	 
	30.0  	Employee Purchase Program:
	 
	   	Supplier and Customer will implement and administer a mutually agreeable employee-purchase
program.
	 
	31.0  	Governing Law:
	 
	   	The Agreement shall be governed by the laws of the State of New York without giving effect
to any applicable conflict of laws provisions.
	 
	32.0  	Counterparts:
	 
	   	This Agreement may be executed in one or more counterparts (and by facsimile), all of which
shall be considered one and the same agreement, and shall become effective when one or more
counterparts have been signed by each of the Parties and delivered to the other Parties.
	 
	33.0  	Enforcement:
	 
	   	Customer shall be entitled to enforce the provisions of this Agreement on behalf of each
member of the Universal Music Group who places Orders with Supplier. Customer shall be
responsible for all actions or omissions by such parties as if such actions or omissions
were Customer’s hereunder.

	 	 	 	 	 	 	 	 	 
	Supplier	 	 	 	Customer
	 
	 	 	 	 	 	 	 	 
	By:
	 	/s/ THOMAS COSTABILE	 	 	 	By:
	 	/s/ MICHAEL OSTROFF
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Its:

	 	EVP & CEO	 	 	 	Its:	 	EXECUTIVE VICE PRESIDENT
	

	 
	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Date: May 31, 2005	 	 	 	Date: May 31, 2005

CD Manufacturing
Agreement (US)

 

 

SCHEDULE 2.0

Definitions

The following capitalized terms shall have the meanings attributed to such terms in the following
subsections.

“2003 Product Mix” means the Universal Music Group’s 2003 Manufacturing Requirements
expressed as a product mix on a line-item-by-line-item basis and included on Schedule 10.1.

“Affiliate” means, as to any person or entity, any person or entity controlling,
under common control with or controlled by such person or entity.

“Aggregate 2003 Manufacturing Costs” means the aggregate cost amount set forth on
Schedule 10.1.

“Allocated 2003 Manufacturing Costs” means the Aggregate 2003 Manufacturing Costs,
allocated on a line-item-by-line-item basis, and included on Schedule 10.1 hereto.

“Asset Purchase Agreement” means that certain Asset Purchase Agreement, by and among
Supplier, as purchaser, and UML and Universal Music and Video Distribution, Corp., as
sellers, dated May 9, 2005.

“Business Day” means any weekday on which banks in Los Angeles, California are open.

“CD” means optical discs (CD-Audio and CD-ROM) in all formats utilized by Customer
as of the Effective Date and any optical disc of any diameter or shape that is consistent
with Phillips Red, Yellow, Green and Orange Book Standards or any Philips specification for
Non-Standard CDs.

“Change of Control” means the acquisition by a Competitor, directly or indirectly,
and whether by sale, pledge, proxy agreement or otherwise, of [*****]% or more of the voting
or equity economic interests in Supplier, or the sale of all or substantially all of
Supplier’s assets to a Competitor, or any acquisition by a Competitor of voting or equity
economic interests in or assets of Supplier that results in such Competitor owning or
holding, as applicable, [*****]% or more of the voting or equity economic interests in
Supplier, or all or substantially all of Supplier’s assets.

“Competitor” means any entity owned or controlled by a Major Music Company or one of
its Affiliates.

“Customer” means UMG Recordings, Inc. and, unless the context otherwise requires,
all other members of the Universal Music Group, provided, however, that where a notice,
delivery or similar action on the part of “Customer” is required in this Agreement such
action may be taken by UMG Recordings, Inc. alone.

“Effective Date” means the effective date of this Agreement, June 1, 2005.

 

 

“European Agreement” means the International Manufacturing and Related Services
Agreement entered into as of the Effective Date between Supplier (through its subsidiary,
EDC Germany GmbH) and Universal International Music B.V., related to the terms, conditions,
obligations, remedies, and other related matters concerning the purchase and supply of
optical discs and related services for the territories referenced therein (the “European
Territories”).

“Facility Fixed Costs” means all fixed cost categories referred to in Schedule 10.1.

“Force Majeure Event” means fire, flood, storm, earthquake, landslide, volcanic
activity or other acts of God; acts of terrorism or vandalism; riot, war, civil disturbance
or insurrection; strikes, lockout or other labor unrest; power, transportation, Internet or
other utility or carrier delays or outages, interference by any governmental authority, or
any other event(s) beyond the reasonable control of Supplier.

“HDFD Manufacturing Agreement” means that certain U.S. HDFD Manufacturing and
Related Services Agreement, by and between Supplier and Customer, and entered into on the
Effective Date.

“Joint Ventures” mean those commercial relationships listed in Schedule 2.5.

“Late Order Fee” is a dollar number equal to (a) the number of CDs Supplier is
obligated to ship in such Work Week pursuant to the terms of this Agreement minus the number
of CDs actually shipped in such Work Week, times (b) $[*****]. For purposes of this
definition, Excess Orders shall not be subject to a Late Order Fee unless Supplier notifies
Customer that it will fulfill such Excess Orders and such Excess Orders thereafter become
Workable Orders.

“Lost Inventory” shall be calculated on a component reference number by component
reference number basis (each such unique component a “Component”), subtracting as of a
particular date the Amount Used of such Components and the Actual Inventory of such
Component from the Amount Delivered, where (i) “Amount Used” means the quantity of such
Components manufactured by Supplier into products prior to the particular date, (ii) “Amount
Delivered” means the quantity of such Components delivered by Customer’s vendor to Supplier
(based on receiving information supplied by Supplier) prior to the particular date, and
(iii) “Actual Inventory” means the quantity of such Components on-hand as determined by a
physical count as of the particular date.

“Major Music Company” means Sony BMG, EMI Group or Warner Music Group, or any of
their successors.

“Manufacturing Requirements” means, as applied to a member of the Universal Music
Group, (i) all requirements by the member of the Universal Music Group for Manufacturing
Services for its own account with respect to CDs to be sold within the United States or to
be imported by Universal Music Group members into the European Territory, and (ii) any
requirements for Manufacturing Services for a third party’s account with respect to CDs to
be sold in the United States or to be imported by Universal Music Group members into the
European Territory for as long as any

 

 

Universal Music Group member has the unilateral contractual right to provide or control the
provision of the Manufacturing Services to such third party, provided that such Universal
Music Group member had such unilateral right as of the Effective Date, excluding, however
(A) third party CDs to be offered for sale through the Universal Music Group special
markets/special products business unit through non-traditional distribution outlets, and (B)
CDs to be marketed under third party names and not for distribution by a member of the
Universal Music Group.

“Manufacturing Services” means mastering of Universal Music Group-supplied files;
molding, printing and assembling of CDs into designated configurations with Supplier or
Universal Music Group components; the Specific Related Services described in Section 7 of
the Agreement; and any service or activity priced pursuant to Section 10.1. The term
“Manufacturing Services” means any particular Manufacturing Service or, as the context may
require, all Manufacturing Services collectively.

“Maximum Weekly CD Orders” means the product of [*****] times the first Work Week
Forecast for such Work Week provided by Customer to Supplier pursuant to Section 6.1. As an
example, on April 2, 2004, the forecast would for the first time include a Work Week
Forecast for the Work Week commencing May 9, 2004; assume that Work Week Forecast for May 9,
2004 shows a forecasted need of [*****] million CDs. On April 9, 2004, the forecast again
includes a Work Week Forecast for the Work Week commencing May 9, now revised to show a
forecasted need of [*****] million CDs. The Maximum Weekly CD Orders for the Work Week
commencing May 9, 2004 is [*****], based on the first forecast provided by Customer for such
week.

“P&D Agreement” means a production and distribution agreement between Universal
Music Group and a non-Universal Music Group third party entered into after the Effective
Date, or any other agreement between Universal Music Group and a non-Universal Music Group
third party entered into after the Effective Date under which Universal may or does direct
the sourcing of any Manufacturing Services for any such third party.

“Parent” means Polygram Holdings, Inc.

“Prevailing Practices” means the procedures, timeframes, service levels or response
times generally followed by UML during the 12 months prior to the Effective Date.

“Ship” means making CDs available to the selected carrier for transportation from
the Supplier’s facilities and coordinating with and assisting such carrier, in a manner
consistent with Prevailing Practices, but does not include actual transportation of the CDs
from the Supplier’s facility.

“Significant Customer(s)” means any Major Music Company and any of the entities
listed on Schedule 22.1.

“Spot Market Orders” means orders for Manufacturing Services that (i) originate from
a customer that Supplier supplies a small number of orders per year to and in general does
not have an ongoing relationship with; (ii) originate from a customer for which Supplier

 

 

does not provide ancillary services such as long term component storage and promotional
mailings; and (iii) are ordered in large quantities, significantly greater than Customer’s
average order size.

“Transition Services Agreement” means that certain Information Technology Transition
Services Agreement between Supplier and UML, dated as of May 31, 2005.

[*****]

[*****]

“Universal Music Group” means (i) Parent, (ii) Customer and (iii) each subsidiary,
sister company or Affiliate, directly or indirectly, more than [*****]% owned by Parent or
Customer (or any of their respective successors or permitted assigns). For purposes of
clarity, (i) no entity whose CDs are distributed by a member of the Universal Music Group
(but which is not directly or indirectly more than [*****]% owned by Parent or Customer)
shall be a member of the Universal Music Group, and (ii) on the date on which an entity is
no longer directly or indirectly more than [*****]% owned by Parent or Customer or their
respective successors or permitted assigns, it shall cease to be a member of the Universal
Music Group.

“UML” means Universal Music Group Manufacturing and Logistics, Inc.

“U.S. Distribution Agreement” means that certain Distribution and Related Services
Agreement, by and between Supplier and Customer, and entered into on the Effective Date.

“Working Day” means those days as agreed by Customer and Supplier set forth at the
commencement of the Term as Schedule 2.11 hereto and updated weekly as mutually agreed upon
by Customer and Supplier in connection with the forecasts provided under Section 6.1.

“Work Week” means a seven-day period commencing on each Sunday at 12:00 a.m. during
the term and ending at 11:59 p.m. the next Saturday (regardless of whether any day therein
is a Working Day or Business Day).

 

 

The following terms have the meanings set forth in the Sections indicated.

	 	 	 
	Term	 	Section
	AAA
	 	14.0
	Agreement
	 	1.0
	CAP
	 	9.2.1
	Cure Period
	 	9.2.2
	Customer
	 	1.0
	EMDE
	 	8.4
	Epidemic Multiple Defectives
	 	8.4
	Excess Order
	 	6.10
	Excluded CDs
	 	4.1
	Failure Notice
	 	9.1
	Incremental Volume Offer
	 	10.6
	Incremental Volumes
	 	10.6
	Indemnified Party
	 	21.0
	Indemnifying Party
	 	21.1
	Input Materials
	 	6.3
	Key Failure
	 	9.1
	Late Orders
	 	6.11
	Uncured Key Failure
	 	9.2
	Order
	 	6.2
	Parties
	 	1.0
	Section 5.11 Notice
	 	5.11
	Specific Related Services
	 	7.0
	Specified Standards
	 	5.11
	Supplier Incremental Volume Proposal
	 	10.6
	Supplier
	 	1.0
	Term
	 	3.1
	Work Week Forecast
	 	6.1
	Workable Orders
	 	6.4

 

 

SCHEDULE 2.5

Existing Joint Venture Relationships

[*****]

 

 

SCHEDULE 2.11

Working Days

     In each year, for the months of January through August, six (6) days in each Work Week; and
from September through and including December 24, seven (7) days in each Work Week; and from
December 25 through and including December 31, four (4) days in each Work Week.

 

 

SCHEDULE 5.4

Pre-Approved Subcontractors

	 	 	 
	Entity	 	Type of Service
	 
	[*****]

	 	All

 

 

SCHEDULE 6.6

Permitted
Variances

     All Workable Orders will be subject to variance by Supplier from the purchase order quantity per
the following schedule:

	 	 	 	 	 
	Order Size	 	% Variance	 	Not to Exceed
	Up to 1,200
	 	+/-[*****]%
	 	N/A
	 	 	 	 	 
	1,201 to 5,000
	 	+[*****]%
	 	N/A
	
	 	-[*****]%
	 	N/A
	 	 	 	 	 
	5,001 to 50,000
	 	+[*****]%
	 	N/A
	
	 	-[*****]%
	 	N/A
	 	 	 	 	 
	Over 50,000
	 	+[*****]%
	 	[*****]
	
	 	-[*****]%
	 	N/A

 

 

SCHEDULE 7.6.1

Printed Component Ordering Procedures

New Release — Commercial/Deluxe

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.

Reorders

	 	•  	Reorders that will reduce on hand inventory below our reorder point will create a
demand for print. The buyer will do a net asset computation to determine the quantity
to be ordered? Reorder quantity = Reorder Point Quantity + FG Reorder Quantity -
Printed Material On Hand.
	 
	 	•  	The Reorder Point Quantity is recalculated, and changed if applicable, each time the
printed material is reordered. Various factors including sales, finished goods
inventory, and market intelligence are considered when assessing Reorder Point
Quantities.

New Release — Limited Edition

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer keeps the Reorder Point Quantity at [*****]; printed material is only ordered
on demand.

Reorders

	 	•  	Printed material is only ordered when finished goods orders are received.
	 
	 	•  	Buyers order print in the quantity of [*****]% of the finished goods quantity.

 

 

New Release — Single

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.

	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.

	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.
Reorders

	 	•  	Reorder strategy is the same as New Release — Commercial/Deluxe.

Promotional

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.

	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.

	 	•  	Buyer keeps the Reorder Point Quantity at [*****]; printed material is only ordered
on demand.

Reorders

	 	•  	Printed material is only ordered when finished goods orders are received.

	 	•  	Buyers order print in the quantity of [*****]% of the finished goods quantity.

DVD

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.

	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity.

	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.
Reorders

	 	•  	Reorder strategy is the same as New Release — Commercial/Deluxe.

 

 

Immediate Change

Selections less than three months past release date

	 	•  	Use current Reorder Point

Selections greater than three months past release date

	 	•  	Determine average monthly sales; not to exceed [*****]. This calculation will
determine the Reorder Point Quantity to be used in the net asset calculation.
	 
	 	•  	The buyer will do a net asset computation to determine the quantity to be ordered?
Reorder quantity = (Difference between Printed Material On Hand FG Reorder) + Reorder
Point Quantity.

Running Change

	 	•  	Use old components to completion.

	 	•  	New components are ordered using the Immediate Change strategy.

	 	 	 

	

	Notes:

	 	Selections with release dates of greater then three month are subject to the Reorder strategy.

Printed material suppliers may ship orders up to [*****]% over or under the order quantity.

 

 

Printed Component
Ordering Guidelines – New Release

(Initial Manufacturing Ordering Date Through 90 Days After In-Store Date)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Vendor	 	 
	 	 	 	 	 	 	Contract	 	 
	 	 	Initial	 	 	 	Scale	 	 
	Order Types	 	Order quantity	 	Reorder Point	 	+/- %	 	Reorder Qty.
	 
	New release-Commercial

	 	FG x [*****] rounded to next price break
	 	[*****] % of FG
	 	[*****]
	 	(A)
	New Release-Limited Edition

	 	FG x [*****] rounded to next price break
	 	on demand
	 	[*****]
	 	on demand
	New Release-Deluxe

	 	FG x [*****] rounded to next price break
	 	[*****] % of FG
	 	[*****]
	 	(A)
	New Release-Single

	 	FG x [*****] rounded to next price break
	 	[*****] % of FG
	 	[*****]
	 	(A)
	DVD

	 	FG x [*****]
	 	[*****] % of FG
	 	[*****]
	 	(F)
	Promo

	 	FG rounded to next price break
	 	none
	 	[*****]
	 	on demand
	 
	 	 	 	 	 	 	 	 
	**Reorder

	 	na
	 	(B)
	 	[*****]
	 	(A)
	Immediate change

	 	(C) or (D)
	 	(B)
	 	[*****]
	 	(A)
	Running Change

	 	(E)
	 	(B)
	 	[*****]
	 	(E)
	BOX SETS

	 	LABEL SUPPLIED
	 	none
	 	na
	 	na

Footnote:

	(A)  	Reorder quantity = Reorder Point Quantity + FG
Manufacture Order Quantity – Printed Material On Hand (rounded up to next price break)
	 
	(B)  	Average Monthly FG Sales (for Selections > [*****] months old) up to [*****]
	 
	(C)  	Perform (B), then (A)
	 
	(D)  	If Selection < [*****] months old, use current established ROP
	 
	(E)  	Use old component to depletion, then perform (B), then (A)
	 
	(F)  	DVD onhand – FG Manufacture Order Quantity + Reorder Point = Reorder Quantity

**note: once an order has a [*****] month life or greater, it becomes a “Reorder” Order Type

 

 

	 	 	 	 	 
	 	 	New Reorder	 	Reorder
	Order Type	 	Point	 	Quantity
	 
	Reorder

	 	(A) Normal Monthly Sales Trends
	 	(D)
	

	 	(B) Sudden Upward Monthly Sales Trends
	 	(D or E)
	

	 	(C) Sudden Downward Monthly Sales Trends
	 	(D)

	(A)  	Average Last [*****] Months FG Sales
	 
	(B)  	(Average Last [*****] Months FG Sales) x [*****] (for sudden upward sales trends over last [*****] months)
	 
	(C)  	(Average Last [*****] month FG Sales) x [*****] (for sudden downward sales trends over last [*****] months)
	 
	(D)  	FG Manufacture Order Quantity – PM Onhand + New Reorder Point = Reorder Quantity (for reorder quantities < [*****] (E) applies)
	 
	(E)  	(FG Manufacture Order Quantity – PM Onhand + New Reorder Point) x 2 = Reorder Quantity

Notes:

Reorder points are not recalculated unless the previous calculation is more than [*****] months old

Sudden trends (upward or downward) are defined as at least [*****] % increase/decrease from month to month (last [*****] month sales)

Reorder quantities will not exceed [*****].

Reorder quantities are rounded to the next price break unless that price break quantity exceeds [*****] times the ROP

 

 

SCHEDULE 7.6.2

Monthly Print Purchase Price Variance Report

See attached.

 

 

EDC Monthly Print Purchase Price Variance Report

For Month Ended xx/xx/xx

SCHEDULE 7.6.2

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	per unit	 	total	 	 	 	 	 	 
	 	 	component	 	selection	 	 	 	 	 	super	 	 	 	 	 	invoice	 	Invoice	 	vendor	 	vendor	 	per unit	 	total std	 	 
	vendor	 	#	 	#	 	artist	 	title	 	label	 	mr co	 	invoice #	 	date	 	qty	 	cost	 	cost	 	std cost	 	cost	 	PPV
	example	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	[*****]
	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

Definitions:

per unit standard cost = print cost from vendor at [*****] print quantity plus [*****] % obsolescence factor (the print cost included in the packaged price from EDC)

per unit vendor cost = actual print cost from vendor

PPV = total standard cost - total vendor cost

     if negative, UML owes EDC

     if positive, EDC owes UML

 

 

SCHEDULE 8.2

Finished Goods Audit and Minimum Acceptable Quality Level %

Initial Evaluation Period

Beginning on the Effective Date, the Parties will promptly evaluate the actual operating quality
level of 1,500 Products (which for purposes of this Schedule 8.2 means finished goods ready for
sale to Customer’s customers), randomly selected from recently manufactured inventory in the
Fishers, Indiana distribution center. The aggregate results of these evaluations will be the
Minimum Acceptable Quality Level for the remainder of the Term. The period during which this
process is conducted shall be the “Initial Evaluation Period.”

Audit Plan

Following the Initial Evaluation Period, once per calendar month, Customer will have shipped to
Supplier a quantity of products not to exceed 300 individual items. For the purpose of improving
measurement accuracy, Supplier may, at its sole discretion, increase the quantity of Products
evaluated. The Products will be selected by Customer from inventory lots which to the Customer’s
best knowledge represent Products manufactured by Supplier within the most recent 45 days.

Evaluation Process and Criteria

Each individual Product will be evaluated by Supplier. Customer may observe the evaluation process
of up to 100% of the Products sent to Supplier, provided it has given Supplier five Working Days
notice of its intent to observe said Evaluation Process. Supplier will evaluate each Product by
all of the criteria shown below, determining in each instance if the evaluation result is “Pass” or
“Fail”. The aforementioned collectively is the “Evaluation Process”.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	Pass/Fail (under	 
	 	 	 	 	 	 	 	 	 	 	 	 	minimum	 
	 	 	 	 	 	 	 	 	 	 	 	 	specification = Fail;	 
	 	 	 	 	 	 	 	Minimum	 	 	otherwise = Pass)	 
	 	 	 	 	 	 	 	Specification or	 	 	(Yes = Pass)	 
	 	 	 	 	Criteria	 	 	Yes/No	 	 	(No = Fail)	 
	 	1

	 	 	Bler
	 	 	<=220
	 	 	 	 
	 	2

	 	 	Burst
	 	 	<=6
	 	 	 	 
	 	3

	 	 	E32
	 	 	 	0	 	 	 	 	 
	 	4

	 	 	13/ltop
	 	 	b/w .30 and .70
	 	 	 	 
	 	5

	 	 	Eccentricity
	 	 	<=70
	 	 	 	 
	 	6

	 	 	Birefringence
	 	 	 	=/-100	 	 	 	 	 
	 	7

	 	 	Print on disc matches music on disc
	 	 	 	Y/N	 	 	 	 	 
	 	8

	 	 	Disc matches printed components
	 	 	 	Y/N	 	 	 	 	 
	 	9

	 	 	Print (colors, legibility, etc) on
disc matches proof
	 	 	 	Y/N	 	 	 	 	 
	 	10

	 	 	Wrap tight and neat
	 	 	 	Y/N	 	 	 	 	 
	 

 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	Pass/Fail (under	 
	 	 	 	 	 	 	 	 	 	 	 	 	minimum	 
	 	 	 	 	 	 	 	 	 	 	 	 	specification = Fail;	 
	 	 	 	 	 	 	 	Minimum	 	 	otherwise = Pass)	 
	 	 	 	 	 	 	 	Specification or	 	 	(Yes = Pass)	 
	 	 	 	 	Criteria	 	 	Yes/No	 	 	(No = Fail)	 
	 	11

	 	 	No damage in print or jewel case
	 	 	 	Y/N	 	 	 	 	 
	 	12

	 	 	Correct sticker(s)
	 	 	 	Y/N	 	 	 	 	 
	 	13

	 	 	Stickers in correct position and orientation
	 	 	 	Y/N	 	 	 	 	 
	 	14

	 	 	Correct and legible spine label
	 	 	 	Y/N	 	 	 	 	 
	 	15

	 	 	Correct and readable barcode
	 	 	 	Y/N	 	 	 	 	 
	 	16

	 	 	Correct tray color
	 	 	 	Y/N	 	 	 	 	 
	 	17

	 	 	Correct disc position (multidisc sets)
	 	 	 	Y/N	 	 	 	 	 
	 

Quality Level

“Fails” in Criteria
1. – 9. are Fatal Errors. In addition, if on any given product there are 3 or
more “Fails” in Criteria 10. – 17. that will also be considered a Fatal Error for that product.
The Quality Level will be the number of products in the month with 1 or more Fatal Errors divided
by the total number of products evaluated in the month.

 

 

SCHEDULE 9.1

Key Failure Events (Manufacturing)

	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	Definition and	 	 	KPI Repeated Failure	 
	 	KPI	 	 	Performance Standard	 	 	Event	 
	 	Production

	 	 	Making and shipping
Customer’s aggregate
Workable Orders of CDs
in a Work Week as
described in Section
6.11(a)
	 	 	Supplier fails to
perform in accordance
with Section 6.11(a) for
any [*****] Work Weeks
in a
[*****]-rolling-week
period	 
	 	Delivery

	 	 	Meeting lead time
parameters as described
in Sections 6.5 and 6.6
	 	 	Supplier fails to
perform in accordance
with Section 6.11(b) for
any [*****] Work Weeks
in a
[*****]-rolling-week
period	 
	 	Quality

	 	 	Maintaining average
outgoing quality level
as described in Section
8.2
	 	 	Supplier fails to
achieve AQL defined in
Section 8.2 and Schedule
8.2 for any [*****]
months in a
rolling-[*****]-month
period	 
	 	Multiple Defective

	 	 	Avoiding Epidemic
Multiple Defective
Events (EMDEs) as
described in Section 8.4
	 	 	3 EMDE’s in any calendar
quarter, or [*****]
EMDE’s in any calendar
year or [*****] EMDE’s
in any rolling [*****]
months	 
	 

 

 

SCHEDULE 10.1

Pricing

[*****]

 

 

SCHEDULE 10.3.2

Jewel Box Reference Prices

	 	 	 	 	 	 
	 
	 	 	 	 	Jewel Box Reference Prices	 
	 	Standard Jewel Box

	 	 	[*****]	 
	 	Standard Tray

	 	 	[*****]	 
	 	Star Tray

	 	 	[*****]	 
	 	Smart Tray

	 	 	[*****]	 
	 	Brilliant Box (with tray)

	 	 	[*****]	 
	 	Fat Box (without tray)

	 	 	[*****]	 
	 

Notes:

	1.  	Star Tray and Smart Tray both use standard jewel box.
	 
	2.  	Fat Box uses 2 standard trays.

 

 

SCHEDULE 12.2(G)

Third Party Volumes/Expiration Dates

	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Manufacturing
	 	 	 	 	 	 	 	 	 	 	Related Exceptions to
	 	 	 	 	Relationship	 	 	 	Agreement	 	Agreement Expiration
	Customer	 	Type	 	with....	 	2003 CDs	 	Expiration Date	 	Date
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	

	 	 	 	 	 	[*****]	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	

	 	 	 	 	 	 	 	 	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 
	 	 	 	 	 	 	 	 	 	 
	

	 	 	 	 	 	[*****]	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	[*****]

	 	 	 	 	 	[*****]	 	 	 	 

 

 

SCHEDULE 22.0

If Customer Configuration Price minus

	 	 	 
	MFN Configuration Price Is:	 	Then the MFN Factor Is:
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]
	 
	 	 
	[*****]

	 	[*****]

 

 

SCHEDULE 22.1

Additional Significant Customers

[*****]Ex-10.8

 

U.S. HDFD Manufacturing And Related Services Agreement*

	1.0  	Overview:
	 
	   	This U.S. HDFD Manufacturing 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 HDFDs
and related services in the United States.
	 
	2.0  	Definitions: Definitions are set forth in Schedule 2.0 of this Agreement.
	 
	3.0  	Term:

	 	3.1  	The Term of this Agreement shall commence on the Effective Date and end on May
31, 2015, subject to earlier termination pursuant to other provisions of this Agreement
(the “Term”). 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.
	 
	 	3.2  	During the Term, pricing shall be established annually as set forth in Section
10.1.2.

	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, [*****] % of its and their respective Manufacturing
Requirements from Supplier, excluding (i) any Manufacturing Requirements which Customer
or such Universal Group Member is permitted to purchase from a third party under
Sections 6.8, 6.10 or 9.3 of this Agreement or Section 9.3 of the U.S. Distribution
Agreement, and (ii) any Manufacturing Requirements of a party who becomes a Universal
Music Group member by acquisition after the Effective Date but only to the extent and
for the period that such Manufacturing Requirements are contractually committed to a
third party as of the date of signing of the relevant acquisition agreement.
	 
	 	4.2  	Customer will provide Supplier with purchase orders and input materials in
accordance with the requirements outlined in Article 6.0.
	 
	 	4.3  	[Intentionally deleted]
	 
	 	4.4  	Subject to the limitations set forth in Section 4.1, Customer agrees that it
will not permit any of the Manufacturing 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
Manufacturing Requirements continue to be subject to this Agreement.

	 	*  	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 [*****].

 

 

	 	   	Nothing contained herein 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
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 Manufacturing Services to be
requested from Supplier or minimizes the risks that such Manufacturing Services shall
not be required by Customer, including, without limitation, any obligation to extend or
renew any agreements with third parties. Supplier 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 Manufacturing Services set forth on Schedule 10.1 in
accordance with the requirements outlined in Article 6.0 and Article 8.0. These
Manufacturing Services will at a minimum meet the quality specifications outlined in
Article 8.0. In the event that Customer requests that Supplier supply any
Manufacturing Services 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 a Customer request to provide a Manufacturing Service
not set forth on Schedule 10.1 provided (i) Customer and Supplier have followed the
procedure described in Sections 10.5.1 through and including 10.5.5 and (ii) the
requested Manufacturing Service is normally and customarily provided by manufacturers
in businesses substantially equivalent to Supplier’s business.
	 
	 	5.4  	Supplier shall have the right to subcontract (i) up to [*****]% of any
particular Manufacturing Services in each [*****] in excess of Supplier’s Installed
Capacity, and (ii) up to [*****]% of Supplier’s Installed Capacity of any particular
Manufacturing Services in each [*****] (with no rollover of any unused subcontracting
capacity), in each case to the Preferred Provider or, if the Preferred Provider is not
the least expensive provider of the relevant Manufacturing Services, to the third party
manufacturers and service providers listed on Schedule 5.4 hereto, provided however,
the percentage of subcontracted Manufacturing Services provided to Customer is no more
than the percentage of subcontracted services provided to any other customer of similar
services. Notwithstanding the foregoing, Supplier may subcontract a greater percentage
of Manufacturing Services for Customer than it does for (a) other customers with

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	 	   	respect to Spot Market Orders, or (b) other customers who purchase less than
[*****]%, on an [*****] basis, of Universal Music Group’s Manufacturing
Requirements. Supplier will use normal, customary and reasonable business judgment
to identify, propose and select subcontractors that are capable of meeting all of
the requirements described in this Agreement, particularly but not limited to those
set forth in Section 6.5. 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) change the Preferred Provider at any time and from time
to time, or (ii) add or delete previously approved subcontractors at any time and
from time to time provided that in each case (A) Customer’s deletion or change is
not unreasonable; (B) Customer consults with Supplier prior to the deletion or
change; (C) Customer provides Supplier with at least [*****] days prior written
notice of the deletion or change; (D) Customer permits Supplier, notwithstanding
such deletion or change, to continue to use such subcontractor to fulfill any volume
commitments to such subcontractor existing as of the date of receipt of such notice;
and (E) after any deletion, a commercially reasonable number of approved
subcontractors (including the Preferred Provider), and in any event
no less than, [*****] remain listed on Schedule 5.4 and any amendments thereto.

	 	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 any Manufacturing Services
involving hand packaging, refurbishing and other non-automated services.

	 	5.5  	Supplier shall maintain and employ (and shall require all subcontractors to
maintain and employ) plant 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 Preferred Provider
manufacturing facilities as of the Effective Date.

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	 	5.6  	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 Manufacturing 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 5.6 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 further acknowledge and agree that,
notwithstanding the foregoing provisions of this Section 5.6, after the [*****]of the
Term, Supplier will (a) meet the standards as set forth herein, and (b) subject to
Section 5.8, further meet industry standards as required by Section 5.7.
	 
	 	5.7  	The Parties hereto acknowledge and agree that the standards applicable to the
Manufacturing 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
manufacturing 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 5.7 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.
	 
	 	5.8  	[*****]
	 
	 	5.9  	Prior to adopting any standards pursuant to the provisions of Sections 7.4,
7.5.1, 7.5.3 or 7.6.5 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.
	 
	 	5.10  	[*****]

	6.0  	Forecasts, Orders, Production and Delivery:

	 	6.1  	Customer will provide [*****] a forecast for HDFDs that will cover a period of
time of no less than [*****] months. The first [*****] weeks of each forecast

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	 	   	will be divided into Work Week requirements (with each Work Week forecast being a
“Work Week Forecast”), with the remainder of the forecast divided into
months. No Customer forecast shall be binding as an Order, but shall represent
Customer’s good faith estimate, at the time provided, of its anticipated
requirements to meet expected demand. Customer shall provide Supplier at least once
a [*****] with Customer’s own internal forecasts made for Customer’s internal
budgeting purposes.

	 	6.2  	Customer shall place purchase orders for Manufacturing Services through
Supplier’s electronic order system (each, an “Order”).
	 
	 	6.3  	Customer shall provide Supplier (or shall provide the applicable subcontractor)
with all necessary input materials (“Input Materials”) for each Order,
including as applicable product bills of material, production masters (or components to
create a master), packaging components (or artwork to produce same) and disc label
film. Customer shall use commercially reasonable efforts to provide all Input
Materials in digital/electronic format ready for component manufacturing. Supplier
shall not charge Customer for any initiation costs (e.g. mastering) unless rework is
required.

	 	6.3.1  	If requested by Customer, Supplier will supply test pressings
[*****] together with all applicable packaging) free of charge and will only
commence the commercial manufacture of the relevant HDFDs after receipt of the
appropriate approvals of the test pressing and packaging. Supplier must
deliver to Customer the test pressings, in disc or other requested format, 3
calendar days following receipt of Input Materials. Customer will make
reasonable efforts to minimize the number of instances in which test pressings
are required

	 	6.4  	Orders will be considered workable (“Workable Orders”) upon:

	 	(a)  	Receipt by Supplier of Customer’s Order by [*****] Eastern Time
on a Working Day (if received after such time, the Order will be deemed to have
been received the following Working Day), provided that such Order, when
assessed collectively with Customer’s other Orders, does not exceed the Maximum
Weekly HDFD Orders unless otherwise agreed to in writing by Supplier;
	 
	 	(b)  	Receipt from Customer of all of the Input Materials for the
ordered Manufacturing Services. Supplier will use reasonable efforts to work
with Customer to commence manufacture before all Input Materials are available
in order to reduce lead times for specific Orders, if requested by Customer;
and
	 
	 	(c)  	To the extent applicable, receipt of Customer’s written
approval of any test pressings or packaging provided to Customer under the
provisions of Section 6.3.1.

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	 	   	Customer also agrees to cooperate with Supplier and use all reasonable
efforts to make all Orders submitted hereunder into Workable Orders, and
Customer acknowledges that Supplier shall not be liable for any failure to
perform hereunder to the extent such failure is caused by Customer’s failure
to provide approvals required hereunder or perform its other obligations
hereunder.

	 	6.5  	In the event Supplier manufactures HDFDs at a plant or plants owned, controlled
or managed by Supplier the following lead times for Workable Orders will apply:

	 	6.5.1  	One Working Day: Maximum of [*****] selections at any
time, designated by Customer, totaling no more than [*****]% of Supplier’s
Installed Capacity. Items included must be automated (no hand packing
required) including any inserts.
	 
	 	6.5.2  	Two Working Days: Maximum of [*****]% of Supplier’s
Installed Capacity, designated by Customer and additional to the HDFDs in
6.5.1.
	 
	 	6.5.3  	Three Working Days. Products not requiring hand
packing and not included in Sections 6.5.5 or 6.5.6 below.
	 
	 	6.5.4  	Five Working Days: Products that require hand packing
and that are not considered items subject to Sections 6.5.5 or 6.5.6 below.
	 
	 	6.5.5  	Seven Working Days: Products identified as “New
Releases” in the Customer system. These items have a future date specified for
in-store sales.
	 
	 	6.5.6  	Ten Working Days: Products identified as “Deep
Catalog” in the Customer system.
	 
	 	6.5.7  	Customer may designate any Workable Order for a 6.5.3, 6.5.4,
6.5.5 or 6.5.6 item to be manufactured within the lead times described in 6.5.1
or 6.5.2 so long as the total orders in 6.5.1 or 6.5.2 do not exceed the
maximum limit described therein.

	 	   	For purposes of summary and clarity, any Workable Order for an item not a New
Release or Deep Catalog and not designated by Customer for shorter lead times as
described in Sections 6.5.1 or 6.5.2 will be manufactured in five Working Days.
Supplier will use commercially reasonable efforts to provide faster service when
requested.
	 
	 	   	In the event Supplier does not manufacture at a plant or plants owned, controlled or
managed by Supplier the following lead times for Workable Orders will apply:

	 	6.5.8  	New Releases (products identified as “New Releases” in
the Customer system and not previously mastered): 7 Working Days.

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	 	6.5.9  	Reorders (selections previously mastered): 5 Working
Days.

	 	6.6  	An Order will be deemed fulfilled if:

	 	6.6.1  	Shipments are made by Supplier prior to [*****] local plant
time, on the designated due date. By way of example, for purposes of clarity,
a Workable Order received by Supplier prior to [*****] Eastern Time on a
Working Day, if designated by Customer a one-day lead-time must Ship by [*****]
p.m. Supplier’s local time the next Working Day (if subject to Section 6.5.1),
and by [*****] p.m. the Subcontractor’s local time seven Working Days later if
subject to Section 6.5.7.
	 
	 	6.6.2  	The number of HDFDs Shipped is within the variances set forth
in Schedule 6.6, provided (i) where either (A) Supplier has agreed in writing
to ship exact quantities for certain Customer shipments or for certain HDFDs or
(B) where exact quantities are specified by Customer for certain customer
shipments or for certain HDFDs as a result of a condition imposed by a
customer, and Supplier has been given timely notice of such requirement,
Supplier must ship the exact quantities specified, and (ii) invoices must be
for the actual number of HDFDs shipped. In no event will Supplier deliver less
than the quantity ordered.

	 	6.7  	Intentionally deleted.
	 
	 	6.8  	Without limitation of Customer’s other remedies hereunder, if Supplier is
unable or otherwise fails to fulfill any Workable Order in accordance with this
Agreement within three days of the date required under this Agreement, then Customer
may secure the services of a third party or parties to fulfill the unfulfilled portion
of such Workable Order(s).
	 
	 	6.9  	Customer will not issue Orders less than [*****] HDFDs for any line item (i.e.,
excluding promotional items), unless a contractual requirement between Customer and its
third party, non-Universal Music Group member customer requires otherwise.
	 
	 	6.10  	To the extent that any one or more Customer Orders would exceed the Maximum
Weekly HDFD Orders for such Work Week (to the extent any such Order exceeds such
quantities, an “Excess Order”), the Supplier shall either, at its option,
reject or accept such Excess Order, and shall provide Customer with notice of its
rejection or acceptance within 24 hours of receipt of the Excess Order; provided,
however, that if Supplier rejects such Excess Order, Customer shall be entitled to
fulfill the Excess Order portion of such Order with any third party supplier.
	 
	 	6.11  	In the event Supplier (a) fails to manufacture and Ship the aggregate number of
HDFDs in all Workable Orders in a given Work Week, so long as such amount ordered does
not exceed the Maximum Weekly HDFD Orders or (b) fails to manufacture and Ship Workable
Orders within the lead times described in 6.5 and 6.6 (any of such orders in (a) or (b)
hereafter shall be referred to collectively as

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	 	   	“Late Orders”), Customer shall have the right to debit its payables balance
with Supplier by the Late Order Fee for any such Late Order, which right shall be
limited to one Late Order Fee for each Late Order. Except with respect to the
partial loss of exclusivity provided for in Section 9.3.1 and the rights provided
for in Sections 9.3.2, 9.3.3, 9.3.4, 9.3.5 and 9.3.6, the Late Order Fee shall be
Customer’s sole remedy, and Supplier’s sole liability, for each Late Order.
Supplier shall have the right to dispute any Late Order Fee debit, and if such a
debit is subsequently reversed it shall bear interest as provided in Section 10.2.1.

	 	6.12  	No additional or conflicting terms and conditions on any 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,
provided such items are consistent with the requirements of this Agreement.
	 
	 	6.13  	Supplier’s warehouse shall confirm receipt of each shipment of goods shipped to
Supplier’s warehouse hereunder, and Supplier must confirm to Customer that the shipper
and receiver information match within 48 hours of receipt. To the extent the shipper
and receiver information does not match, Customer’s payment period shall be extended by
one day for every day that such confirmation is delayed past such 48-hour period.

	7.0  	Specific Related Services: 
	 
	   	Supplier will provide the services to support the Manufacturing Services that are set forth
in this Article 7.0 (the “Specific Related Services”). Except as expressly provided herein
to the contrary, including, without limitation, in Section 10.1 and Section 10.9, the
Specific Related Services will be performed by Supplier at no additional cost to Customer.
Specific Related Services shall include:

	 	7.1  	Supplier will evaluate all Input Materials for defects and identify items out
of Customer specification, within a timely manner, as agreed on by the Parties.
	 
	 	7.2  	Supplier will process for shipment up to [*****] orders directly to Customer’s
customers on a daily basis. Customer will pay any carrier costs associated with this
service.
	 
	 	7.3  	Supplier will provide services to support Customer’s promotional products
requirements commonly referred to as DJ Promo. Services include:

	 	7.3.1  	Promotional manufacturing orders, processed through the normal
manufacturing services function. Manufacturing lead times for DJ Promo orders
will be three Working Days. The aforementioned notwithstanding, Customer may
designate two DJ Promo orders per Working Day to be manufactured in two Working
Days.

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	 	7.3.2  	Supplier will receive and process specific Customer shipping
instructions that are directed to Supplier’s DJ Promo Department. Lead-time
for distribution is included in the manufacturing lead times (i.e., the Product
shall ship or be available for shipping by the end of the manufacturing lead
times). Supplier will store DJ Promo Input Materials for up to [*****] calendar
days at no cost to Customer. At the end of [*****] calendar days, as directed
by Customer, Supplier will either continue to store the materials at a monthly
fee as noted in Schedule 10.1, destroy the materials or ship them to a
Customer-designated location via a Customer-designated carrier, as directed by
Customer. Customer is responsible for any carrier fees associated with DJ
Promo distribution services.

	 	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:
	 
	 	   	[*****]
	 
	 	   	Supplier will provide such additional reports and electronic data as Customer shall
reasonably require, and the parties shall mutually agree upon how additional costs,
if any are actually incurred by Supplier for any such reports or electronic data
feeds, will be shared or allocated.
	 
	 	7.5  	Supplier agrees and understands that it has normal and customary custodial
responsibilities for Customer-owned components and parts (including paper parts) in
Supplier’s possession and Supplier specifically agrees to:

	 	7.5.1  	To the extent consistent with Prevailing Practices, maintain
and provide to Customer on hand inventory balance information and to employ
systems and procedures such that, at any given time, [*****]% of said balances
are within +/- [*****]% of the actual amount on hand.
	 
	 	7.5.2  	Once per 12 months, at Customer’s direction and under
Customer’s supervision, conduct a physical inventory of all Customer-owned
components and parts in its possession. Customer will pay Supplier its actual,
incremental costs incurred to perform such physical inventory(ies). Customer
and Supplier agree to establish cycle counts as soon as reasonably practical.
	 
	 	7.5.3  	Be responsible for, and at Customer’s request pay Customer its
cost for, any Lost Inventory of Customer-owned printed or other components in
its possession exceeding [*****]% of the amount delivered to Supplier (or such
other percentage as is consistent with Prevailing Practices).
	 
	 	   	Notwithstanding the foregoing, for certain non-standard, high cost packaging
items (by way of example, for purposes of clarity but without limitation,
non-standard, high cost packaging items include multi-disc boxes, multi-disc
booklets and Customer-owned DVDs) specified from

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	 	   	time to time by Customer, Supplier shall pay for Lost Inventory exceeding
[*****]% of the amount delivered to Supplier (or such other percentage as is
consistent with Prevailing Practices).

	 	7.5.4  	At least twice per Working Day, provide Customer
electronically (a) on hand inventory balances by SKU and (b) receipts by SKU
from Customer’s 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, this
Section 7.5.4, Customer shall reimburse Supplier for all such costs.

	 	7.6  	Supplier Ordering Printed Components On Behalf of Customer

	 	7.6.1  	Supplier will order and receive components (that will be owned
by Customer) and pay printed component vendors, following the order quantity
and order timing procedures shown in Schedule 7.6.1, provided that Customer may
change or supplement such schedule from time to time by written notice to
Supplier. The agreements, if any, between the printed component vendors and
the Customer shall be utilized by the Supplier in placing such orders, and
Supplier agrees to comply with the payment and other terms applicable to the
ordering of product under such vendor agreements; provided that (a) Supplier
shall be Customer’s agent for the purposes of placing orders under such
agreements, (b) no modifications, renegotiations or amendments of such
agreements will be made without consultation with Supplier, and (c) such
agreements do not require payment to the third-party vendor prior to [*****]
days after shipment to Supplier.
	 
	 	7.6.2  	Supplier will invoice Customer, within [*****] days following
the end of each calendar month, for the cost Supplier has paid or incurred for
all printed components the Supplier purchased and received on behalf of
Customer for the month. Supplier’s invoice (a) will include, as backup
documentation, copies of the print vendor invoices (or detailed EDI invoicing
files), the total of which shall agree with the Supplier’s invoice total, (b)
will be calculated in accordance with the sample variance report provided in
Schedule 7.6.2, and (c) will take into account any prior invoices for such
materials. Customer will pay Supplier’s invoice in accordance with the other
terms of this Agreement. All such printed components shall be owned by the
Customer.
	 
	 	7.6.3  	Supplier will include Customer-owned printed components,
invoiced at the prices set forth in Schedule 10.1, in its invoices of
Manufactured Services to Customer, which Customer will pay in accordance with
the other terms of this Agreement.

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	 	7.6.4  	[*****] following the end of each calendar month, Supplier
will calculate the sum of the dollar amounts of printed components included in
its invoices of Manufacturing Services to Customer for the month and issue a
credit memo or check to Customer for the difference between the sum of the
calculated amount and the amount invoiced under Section 7.6.2.
	 
	 	7.6.5  	Supplier shall conform to all performance standards set forth
on Schedule 7.6.1 with respect to the ordering of printed components on the
behalf of Customer to the extent consistent with Prevailing Practices. Subject
to Section 5.6, if Supplier fails to meet any such performance standards,
Supplier shall be responsible for all of Customer’s direct costs attributable
to such failure.
	 
	 	7.6.6  	Customer may, for any reasonable business purpose, at any time
elect to order printed components and pay printed component vendors directly.
In the event Customer elects to order printed components itself and pay printed
component vendors directly under the foregoing provisions, (a) Supplier will
cease including the cost of Customer-supplied printed components in its
invoices of applicable finished product to Customer as of the effective date of
such change, (b) Customer’s shall provide Supplier with [*****] days written
notice of its intention to implement this change, (c) Customer shall reimburse
Supplier for any one-time costs of removing such service from the scope of this
Agreement (e.g., redundancy costs), and (d) Supplier and Customer shall agree
to a reduction in the prices in Schedule 10.1 to equitably reflect the
corresponding decrease in Supplier’s ongoing costs.
	 
	 	7.6.7  	Supplier will indemnify, defend and hold harmless the
Customer, and its parent, subsidiaries, affiliated companies, its and their
shareholders, officers, employees and agents from any and all third party
claims, demands, causes of action, liability, judgments, damages, costs and
expense (including reasonable attorney’s fees) asserted against, imposed upon
or suffered by such parties as a result of Supplier’s failure to pay any
amounts owed by Supplier to any printed component vendor under this Section 7.6
when such amounts are due (provided Customer has paid such amounts to
Supplier).

	8.0  	Product Quality:

	 	8.1  	All HDFDs shall conform to the Input Material for such HDFD provided by
Customer.
	 
	 	8.2  	The quality of the HDFDs manufactured by Supplier, and the Specific Related
Services provided by Supplier to Customer shall (a) conform to the standards set forth
in the relevant industry manual and (b) conform to the AQL standards set forth in
Schedule 8.2.

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	 	8.3  	Supplier will perform such inspections as are called for on Schedule 8.2 and
shall certify and send the written results of all such inspections to Customer for the
previous calendar month within seven Working Days of the end of such month.
	 
	 	8.4  	For purposes of this Agreement, an “Epidemic Multiple Defectives Event”
(or “EMDE”) shall be deemed to have occurred if either (a) at least [*****]% or
(b) more than [*****] of the HDFDs of any given Order(s) exhibit the same type of
defect, in which said defect renders the HDFDs not merchantable or fit for their
intended purpose (such defective HDFDs, “Epidemic Multiple Defectives”) and (i)
senior management of Supplier actually learns of such defect, or (ii) Customer promptly
notifies Supplier in writing providing reasonable particulars of such defect. In the
event of an EMDE, Supplier in accordance with usual Customer procedures, shall
immediately make available a non-defective replacement of the defective HDFDs to the
applicable distributor, retailer and/or other customer who purchased any such defective
copies, at Supplier’s sole cost and expense. In such event, Customer agrees to use
reasonable efforts to determine the extent of the problem among its customers, to
assist Supplier in resolving any problems with Epidemic Multiple Defectives in order
that Supplier may provide replacement HDFDs promptly and to assist in Customer’s
mitigation of any negative effects on Customer.

	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 Section
6.11 or Section 10.7 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;

12

 

	 	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

	 	9.3  	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.

	 	9.3.1  	The effects of Key Failures and Uncured Key Failures shall be
as follows:
	 
	 	9.3.2  	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 Supplier’s sole liability and as
Customer’s sole remedy for such Key Failure(s), to source up to [*****]% of
the Manufacturing Services with any other entity or entities for a period of
[*****] months.
	 
	 	9.3.3  	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 Supplier’s sole liability and as
Customer’s sole remedy for such Key Failure(s), to source up to [*****]% of
the Manufacturing 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.
	 
	 	9.3.4  	Notwithstanding Section 9.3.2, if two Key Failures under
“Production” or “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 Supplier’s sole liability and as Customer’s sole remedy for such Key
Failure(s), to source up to [*****]% of the Manufacturing 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.
	 
	 	9.3.5  	If three Key Failures of the same category (e.g., EMDE) 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 Supplier’s sole liability and as Customer’s sole remedy for
such Key Failure(s), to either (a) source up to [*****]% of the Manufacturing
Services with any other entity or entities for the remainder of the Term, or
(b) terminate this Agreement.

13

 

	 	9.3.6  	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 Supplier’s sole
liability and as Customer’s sole remedy for such Key Failure(s), to source up
to [*****]% of the Manufacturing 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.
	 
	 	9.3.7  	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 Supplier’s sole
liability and as Customer’s sole remedy for such Key Failure(s), to either (a)
source up to [*****]% of the Manufacturing Services with any other entity or
entities for the remainder of the Term, or (b) terminate this Agreement.
	 
	 	9.3.8  	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 “Quality” or “Multiple Defective” 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.
	 
	 	9.3.9  	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
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 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.
	 
	 	9.3.10  	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. If
Customer elects to source [*****]% of the Manufacturing Services with another
entity or entities for the

14

 

	 	   	remainder of the Term under Section 9.3.4 or Section 9.3.6, Supplier shall
be relieved of its capacity commitments under this Agreement for the
remainder of the Term.

	 	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; (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 CD Manufacturing Agreement, the U.S.
Distribution Agreement or the Asset Purchase Agreement.

	10.0  	Pricing, Rebate:

	 	10.1  	Base Pricing of Manufacturing Requirements

	 	10.1.1  	Schedule 10.1.1 contains calendar year 2005 pricing for the manufacture of
HDFDs (“HDFD Pricing”). In the event that HDFD Pricing for 2005 has
not been agreed upon before the Effective Date, the procedures set forth in
Section 10.1.2 (but notwithstanding Section 10.1.2.1, before December 1, 2005)
will be used to establish HDFD Pricing for 2005.
	 
	 	10.1.2  	Customer and Supplier will follow the procedure described in subsections
10.1.2.1 through 10.1.2.4 below to establish the HDFD Pricing from time to
time.
	 
	 	   	10.1.2.1 Customer may, at any time other than between [*****] of any year,
and no more often than [*****] month period, notify Supplier that it wishes
to establish or re-establish the market price for HDFDs (the “Market
Pricing Notice”). At the time of delivery of such Market Pricing
Notice, or within ten (10) days thereof, Customer shall submit to Supplier,
in writing, the Market Pricing Information, and will make available to
Supplier (and to any arbitrator selected under Section 10.1.2.6) copies of
the quotations upon which such Market Pricing Information is based (subject
to Section 10.1.2.2).
	 
	 	   	10.1.2.2 “Market Pricing Information” means the individual prices
for each type of HDFD then set forth on Schedule 10.1, obtained within
[*****] days of the Market Pricing Notice from [*****] identified Qualified
HDFD Manufacturers, based on an annual volume of at least [*****]% of
Customer’s HDFD volume in the twelve-month period prior to the Market
Pricing Notice and on order lot sizes and lead times similar to Customer’s,
unless the lower of such prices is less than [*****] multiplied by the
higher of such prices, in which case the Market Pricing Information must
include [*****] prices for each HDFD format obtained within [*****] days of
the Market Pricing Notice from three Qualified

15

 

	 	   	HDFD Manufacturers, such prices based on an annual volume of least [*****]%
of Customer’s HDFD volume in the prior twelve-month period and on order lot
sizes and lead times similar to Customer’s. At Supplier’s request, Customer
must show Supplier written proposals received from Qualified HDFD
Manufacturers. Customer at its discretion may redact information on such
written proposals that would reveal the identity of the Qualified HDFD
Manufacturers prior to providing them to Supplier, and Supplier shall not be
entitled to retain copies of such proposals.

	 	   	10.1.2.3 Intentionally deleted.
	 
	 	   	10.1.2.4 The Supplier shall have five (5) business days after receipt of the
Market Pricing Information to object to such Market Pricing Information,
provided the only grounds for such objection can be that the Proposed Prices
do not meet the parameters required by the definition of Market Pricing
Information. If Supplier makes such an objection the matter shall be
subject to arbitration as set forth in Section 10.1.2.6 below.
	 
	 	   	10.1.2.5 For each type of HDFD, the average of each Qualified HDFD
Manufacturer’s price, as included in the Market Pricing, for such HDFD type
(“Average Market Prices”) shall become the effective HDFD Pricing (and be
reflected on Schedule 10.1) on the 30th day after the delivery of
the Market Pricing Information (such 30th day, the “Market
Price Reset Date”). If an arbitration under Section 10.1.2.6 is still
pending on such 30th day, on the date the arbitrator makes a
final determination of such dispute, the Average Market Prices (as
determined by such arbitrator) shall be retroactively effective as of the
Market Price Reset Date.
	 
	 	   	10.1.2.6 For purposes of resolving a dispute under this Section 10.1.2, AAA
procedures shall not be used and (A) the arbitrator shall be a single person
who shall be a CPA currently in practice at a national accounting firm which
firm shall be selected by the parties mutually, and which shall be asked to
name the person to so act, (B) there shall be no discovery other than under
Section 10.1.2.2, (C) Supplier shall present its evidence that the prices
proposed by Customer under Sections 10.1.2.1 and 10.1.2.2 (“Proposed
Prices”) do not meet the parameters of the definition of Market Pricing
Information, with a copy to Customer; (D) Customer shall have ten business
days thereafter to respond to Supplier’s submission; (E) the arbitrator
shall rule within ten business days thereafter on all issues, or may during
such period require either party to obtain and provide additional Proposed
Prices; (F) any additional Proposed Prices obtained by order of the
arbitrator shall be averaged by the arbitrator with all other Proposed
Prices which the arbitrator determines meet the parameters of the definition
of Market Pricing Information (the resulting average, the “Revised
Average Market Prices”) and (G) the arbitrator shall set the Revised
Average Market Prices as the new HDFD Pricing. The cost of such procedure
shall be shared equally by Customer and Supplier.

16

 

	 	   	10.1.2.7 In the event neither party timely invokes the arbitration
provisions of this Section 10.1.2, as required in the time frame described
in Section 10.1.2.4, the Average Market Prices based on the Market Pricing
Information as provided by Customer shall be the new HDFD pricing effective
as of the Market Pricing Reset Date.
	 
	 	   	10.1.2.8 Notwithstanding the foregoing provisions of this Section 10.1.2,
Supplier will not charge Customer prices for HDFDs higher than the prices
that Supplier is paying third-party suppliers for similar volumes of HDFDs
on similar terms. Customer may audit Supplier’s records of the prices paid
to third-party suppliers of HDFDs, in the manner described in Section 23.
	 
	 	10.1.3  	Prices for all Manufacturing Services other than the manufacture of the HDFD
itself (which shall be determined as set forth in Section 10.1.2) will be equal
to the Supplier’s cost (unless a no charge item as described herein,
particularly in Section 7.0). In the event Supplier has third parties provide
any such Manufacturing Requirement (i.e. other than the manufacture of the HDFD
itself), the price to Customer will be equal to Supplier’s cost (i.e. the price
from third parties). In the event Supplier provides such Manufacturing Service
from its Installed Capacity, Supplier and Customer will follow the process
described in Section 10.5 to establish a price for said Manufacturing Service.
	 
	 	10.1.4  	The Parties agree that Supplier will not charge, and Customer will not pay
for, any service or activity that is not listed on Schedule 10.1.1, agreed
pursuant to Section 10.1.2, or elsewhere referenced in this Agreement unless
Customer has approved such services and any charges in writing.
	 
	 	10.1.5  	The parties may change the market-based pricing mechanism set forth in
Section 10.1.2 to a cost-based formulation upon the mutual written agreement of
the parties, and the parties shall discuss such a transition in good faith if
requested by either party.

	 	10.2  	Supplier shall invoice Customer each Working Day upon shipment and subject to
Section 6.13, Customer shall pay all invoices within [*****] calendar days of receipt
of invoice. Such invoices shall reflect the prices contemplated by Sections 10.1.1 and
10.1.3, or as may be agreed upon by the Parties pursuant to Sections 10.1.2 and 10.5.

	 	10.2.1  	Customer shall pay interest on any amounts (excluding those disputed in good
faith, including without limitation, where the late payment is the results of
Supplier’s action or inaction, e.g. Supplier’s warehouse receipt does not match
Supplier’s invoice) past due under this Agreement at a monthly rate equal to
the lesser of (a) the London Interbank Offered Rate (“LIBOR”) + 0.5% or
(b) the maximum rate permitted by law.

17

 

	 	10.2.2  	If Customer becomes delinquent in the payment of any amount under this
Agreement (excluding amounts disputed in good faith) in excess of ,[*****]
Supplier shall have the right to suspend some or all shipments hereunder
pending such payment, and any such failure to make shipments will not be a
default, breach, EMDE, Key Failure or Uncured Key Failure under this Agreement
and will not entitle Customer to terminate this Agreement or to any other
damages or remedy.
	 
	 	10.2.3  	In the case of a disputed invoice, Customer will pay the undisputed amount of
the invoice and Customer and Supplier will work together in good faith to
resolve the disputed amount. In the event an agreement cannot be reached on
the disputed amount within 30 days of the invoice due date, either Supplier or
Customer may submit the matter to arbitration as provided in Article 14.0
“Dispute Resolution” to resolve the disputed amount, but without the need for
or right to preliminary discussions provided for in Article 14.0. Upon
resolution of the dispute, Customer will pay the Supplier the amount, if any,
determined to be due to Supplier.

	 	10.3  	[Intentionally deleted]
	 
	 	10.4  	All prices will be FCA (INCOTERMS 1990) from Supplier’s (or its
subcontractor’s) manufacturing location. Subject to the terms and conditions of the
U.S. Distribution Agreement, (a) Customer will have the right to select all carriers
and will pay all associated freight costs, and (b) Supplier will coordinate with such
carriers and make appropriate arrangements for pick-ups on Customer’s account.
However, if sourced from a manufacturing location that has a higher transportation cost
than if produced at the Preferred Provider’s location, Supplier will issue a credit to
Customer equal to the additional costs to deliver the product to the Customer
Distribution Center. Supplier will use normal and customary efforts to obtain the
lowest and best price from any third party providers.
	 
	 	10.5  	In the event a Manufacturing Service which is not listed on Schedule 10.1 (and
is not for the manufacture of HDFDs, which shall be priced under Section 10.1.2) is
required by Customer or any Universal Music Group member, the following procedure will
be followed by Customer and Supplier to establish a price for said Manufacturing
Services if to be provided by Supplier directly (not through subcontractors).

	 	10.5.1  	Customer will request the Manufacturing Service from Supplier in writing.
	 
	 	10.5.2  	Within [*****] Working Days of receipt of a written request described in
Section 10.5.1 above from Customer, Supplier will propose a price equal
to[*****]. Supplier will supply documentation to Customer that supports the
calculation of its proposed price.
	 
	 	10.5.3  	Customer may accept or reject Supplier’s proposed price.

18

 

	 	10.5.4  	In the event Customer accepts Supplier’s proposed price, such Manufacturing
Service and associated price shall be added to Schedule 10.1.
	 
	 	10.5.5  	In the event Customer rejects Supplier’s proposed price, Customer may audit
the documentation supporting the calculation of Supplier’s proposed price.
[*****]. All of the foregoing information constitutes trade secrets of
Supplier, unless otherwise publicly disclosed by Supplier.
	 
	 	10.5.6  	Following the completion of Customer’s audit, parties will meet and engage in
good faith negotiations concerning Supplier’s proposed price. In the event an
agreement cannot be reached on the proposed price within [*****] days of
Supplier’s proposal of a price, either Supplier or Customer may invoke Article
14.0 “Dispute Resolution” to determine the price for a configuration or service
not contained in Schedule 10.1, provided that solely for purposes of resolving
disputes under this Section 10.5, AAA procedures shall not be used and: (A) the
arbitrator shall be a single person who shall be a CPA currently in practice at
a national accounting firm which firm shall be selected by the parties
mutually, and which shall be asked to name the person to so act, (B) there
shall be no discovery (other than that which has occurred pursuant to Section
10.5.5), (C) each party shall submit, on the tenth business day after the
arbitrator is named, its proposed price and any support it has for the price as
proposed (including, e.g., any documentation submitted under Section 10.5.2 and
the results of any audit under Section 10.5.5), and (D) the arbitrator shall
choose, within ten business days of the submissions under clause (C) between
the price proposed by Supplier and the price proposed by Customer, without
change, addition or deletion, based on which price is closer (in the
arbitrator’s view, as informed by the documents submitted pursuant to clause
(C)) to Supplier’s [*****]. Once such price is determined, such Manufacturing
Service and associated price shall be added to Schedule 10.1.
	 
	 	10.5.7  	In the event Customer objects to Supplier’s proposed price for new
Manufacturing Services, but there is no mutual agreement and neither party
refers the matter to arbitration in accordance with this Section 10.5 within
[*****] days of Supplier’s proposal of a price, Supplier’s proposal shall be
deemed rejected and Customer shall not be required to use Supplier for such
Manufacturing Services.

	 	10.6  	The Parties agree and understand that subsequent to the Effective Date, but
within the Term of this Agreement, Customer may have access to HDFD manufacturing
volumes other than for Universal Music Group Manufacturing Requirements, including
volumes (a) from non-Universal Music Group companies or labels with which it currently
has no written agreements; (b) for sale in countries or territories not in the United
States and not included as European Territories under the European Agreement; (c) for
sale by Universal Music Group’s special

19

 

	 	   	markets/special products business unit through non-traditional distribution outlets;
and (d) Manufacturing Requirements of a party who becomes a Universal Music Group
member by acquisition after the Effective Date to the extent and for the period that
such Manufacturing Requirements are contractually committed to a third party as of
the date of signing of the relevant acquisition agreement. All and any such HDFD
manufacturing will be hereafter referred to as “Incremental Volumes”. For
purposes of clarity, an example of such Incremental Volumes would include, but not
be limited to, HDFD s manufactured pursuant to a future P&D Agreement.

	 	   	On each occasion on which Customer gains access to any Incremental Volumes which
could be placed under this Agreement (i.e., volumes to be sold within the United
States), Customer shall notify Supplier of the volumes, terms, conditions, and any
other relevant information related to such Incremental Volume necessary for Supplier
to prepare a proposal to supply such Incremental Volume to Customer (each such
notice, an “Incremental Volume Offer”). Within [*****] of its receipt of an
Incremental Volume Offer, Supplier must advise Customer of its interest in supplying
such Incremental Volume which is the subject of the Incremental Volume Offer, and
set forth in such acceptance its proposal all the necessary terms for such
acceptance, which shall include all the terms set forth in the Incremental Volume
Offer (each such acceptance, the “Supplier Incremental Volume Proposal”).
Supplier’s decision not to submit, or its failure to provide a Supplier Incremental
Volume Proposal within the [*****], shall mean that, notwithstanding Section 4.1,
Customer may take the Incremental Volume subject to the Incremental Volume Offer to
any entity.
	 
	 	   	[*****]
	 
	 	   	Without limiting Supplier’s obligations to meet the standards set forth in this
Agreement, within [*****] days of the end of each quarter, Supplier will provide
Customer a credit equal to [*****]% of the total amount of all invoices paid in such
quarter as compensation for defectives. In the event either of the Parties can
reasonably demonstrate that the long term, average defective rate is materially
different than [*****]% of manufactured HDFDs, the Parties agree to conduct good
faith negotiations to establish a different percentage as a basis to compensate
Customer for defective manufacturing. The foregoing remedy shall be Supplier’s sole
liability for defective units, and Customer’s sole remedy, except as set forth in
Section 8.4 and Article 9.
	 
	 	10.7  	[Intentionally deleted]
	 
	 	10.8  	[Intentionally deleted]
	 
	 	10.9  	[Intentionally deleted]

	11.0  	[Intentionally deleted]

20

 

	12.0  	Representations of the Parties

	 	12.1  	Representations of Supplier:
	 
	 	   	As of the Effective Date, and at all times during the Term, Supplier represents and
warrants as follows:

	 	(A)  	Supplier is a valid existing limited liability company and in
good standing under the laws of the State of Delaware. Supplier has the
corporate power and authority required to carry on its activities as they are
now conducted.
	 
	 	(B)  	Supplier has full legal right and corporate power, without the
consent of any other person to execute, deliver and to perform its obligations
under this Agreement.
	 
	 	(C)  	All corporate and other actions required to be taken by
Supplier to authorize the execution, delivery and performance of this Agreement
and all transactions contemplated hereby have been duly and properly taken. No
consent, approval or authorization of, or filing of any certificate, notice
application, report or other document with any governmental authority is
required on the part of Supplier in connection with the valid execution and
delivery of this Agreement or the performance by Supplier of any of its
obligations hereunder.

	 	12.2  	Representations of Customer and Parent:
	 
	 	   	As of the Effective Date, and at all times during the Term, Customer represents and
warrants as follows:

	 	(A)  	It is a valid existing corporation and in good standing under
the laws of its state of incorporation. It has the corporate power and
authority required to carry on its activities as they are now conducted.
	 
	 	(B)  	It has full legal right and corporate power, without the
consent of any other person to execute, deliver and to perform its obligations
under this Agreement.
	 
	 	(C)  	All corporate and other actions required to be taken by it to
authorize the execution, delivery and performance of this Agreement and all
transactions contemplated hereby have been duly and properly taken. No
consent, approval or authorization of, or filing of any certificate, notice
application, report or other document with any governmental authority is
required on the part of it in connection with its valid execution and delivery
of this Agreement or the performance by it of any of its obligations hereunder.
	 
	 	(D)  	Customer has the right to authorize Supplier to perform the
Manufacturing Services on Customer’s behalf as contemplated by this Agreement.

21

 

	 	12.3  	Warranty Disclaimers:
	 
	 	   	EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, ALL WARRANTIES AND CONDITIONS, WHETHER
EXPRESS OR IMPLIED BY STATUTE, COMMON LAW OR OTHERWISE (INCLUDING, BUT NOT LIMITED
TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT) ARE HEREBY EXCLUDED.

	13.0  	Termination:

	 	13.1  	This Agreement may be terminated:

	 	(a)  	By mutual written consent of the parties at any time;
	 
	 	(b)  	By Customer pursuant to Section 9.3.4 or Section 9.3.6;
	 
	 	(c)  	In the event there is a Change of Control during the Term of
this Agreement, notwithstanding any other provision of this Agreement, Customer
may terminate this Agreement upon 90 calendar days written notice to Supplier,
which notice must be provided within three months of Supplier’s written notice
to Customer of such Change of Control;
	 
	 	(d)  	By Customer, in the event Supplier is adjudged insolvent, makes
a general assignment for the benefit of its creditors, effects a voluntary or
compulsory liquidation or dissolution, files a petition for relief under
applicable bankruptcy or insolvency law or a receiver is appointed on account
of Supplier’s insolvency; or
	 
	 	(e)  	By Customer, if Supplier has materially breached its
obligations under Section 5.5 or Section 27, without cure (after written notice
by Customer and reasonable opportunity to do so) of such breaches, [*****] or
more times in any [*****]-month period. For the purposes of this Section
13.1(e), “cure” shall mean undertaking the same cure process as is set forth in
Sections 9.2.1 through 9.2.3 for Key Failures. For purposes of this Section
13.1(e), “material breach” shall mean that such breach resulted in a material
loss to Customer’s property (e.g., a master).
	 
	 	(f)  	By Customer, if Supplier has materially breached its
obligations under Section 18 (with respect to assignment to a Competitor),
without cure (after written notice by Customer and reasonable opportunity to do
so) of such breaches.

	 	13.2  	Upon any termination or expiration of this Agreement, all of the provisions of
this Agreement will terminate, except for the following provisions, which will survive
in perpetuity: Sections 13.2, 13.3, 14.0, 15.0, 20.0, 21.0, 24.0 and 31.0. No
termination or expiration of this Agreement will relieve Customer or Supplier of any
payment obligations outstanding at the time of such termination or expiration.

22

 

	 	13.3  	At the expiration of the Term or upon earlier termination, Customer will be
entitled to repossess all of its manufacturing and packaging components (e.g. tapes,
paper parts, packaging, etc.) provided by it to Supplier over the Term. Supplier will
pack such parts appropriately and make them available for pick up by Customer with a
clear dispatch and content note per shipment in agreement with Customer. Customer
commits to take back such components within 120 days after the expiration of the Term
or earlier termination. Customer shall reimburse Supplier for any direct out-of-pocket
packaging, retrieval or storage costs incurred by Supplier for this service during this
period, unless Customer terminated this Agreement pursuant to Section 9.3.4, 9.3.6 or
13.1(e).
	 
	 	13.4  	Upon any termination of this Agreement, Customer may elect to exclude the HDFD
volumes under this Agreement from its Distribution Requirements (as such term is
defined in the U.S. Distribution Agreement) under the U.S. Distribution Agreement, by
written notice to Supplier of such election within 90 days of such termination.

	14.0  	Dispute Resolution:
	 
	   	During the pendency of any dispute, the Agreement shall continue to be in force and the
Parties shall abide by all terms of the Agreement. Any dispute concerning the
interpretation of this Agreement or any party’s performance under any provision of this
Agreement (including, without limitation, any dispute regarding a proposed increase to the
prices set forth on Schedule 10.1 pursuant to Section 5.8 or 5.10) shall be discussed by the
parties, and if the parties are unable to reach agreement concerning such matter, it shall
be submitted to arbitration in accordance with the then-current commercial arbitration rules
of the American Arbitration Association (“AAA”). The number of arbitrators selected shall
be three. Each party shall select one arbitrator and the two arbitrators selected shall
select the third arbitrator. The arbitration shall take place in the City of New York.
Judgment upon any arbitration award may be entered in any court of competent jurisdiction.
Arbitration shall occur over consecutive business days and in no event shall an arbitration
procedure continue for more than two weeks. This Agreement shall be enforced and interpreted
under the laws of the State of New York, without regard for its conflicts of laws rules or
choice of law principles.

	 	14.1  	Notwithstanding the foregoing, either party may pursue the remedy of specific
performance of any provision contained herein, or seek a preliminary or permanent
injunction against the breach of any such provision or in aid of the exercise of any
power granted herein, or any combination thereof, in any court having jurisdiction
thereof without resort to arbitration.
	 
	 	14.2  	In the event of any arbitration between the parties hereto with respect to any
of the transactions contemplated herein or the subject matter hereof, the prevailing
party shall, in addition to such other relief as the arbitrators may award, be entitled
to recover reasonable attorney’s fees, expenses and costs of investigation, all as
actually incurred, including without limitation, attorneys’ fees, expenses and

23

 

	 	   	costs of investigation incurred in any case or proceeding under any bankruptcy,
insolvency or reorganization proceeding.
	 	   	The non-prevailing party shall bear the cost of such arbitration.

	15.0  	Retention of Rights:
	 
	   	All Input Materials and other source and graphic materials provided by Customer in
connection herewith, and all rights therein, shall remain the exclusive property of
Customer. All work product produced hereunder specifically and solely for Customer and for
incorporation into Customer HDFDs, artwork or other materials, from its inception, will be
considered a “work made for hire” for Customer, which entitles Customer to, among other
things, the copyright and all other rights, title and interest therein and such work product
shall be and remain the sole property of Customer. Customer shall not provide Supplier with
any original or irreplaceable materials under this Agreement. Notwithstanding the above, to
the extent Customer nevertheless provides Supplier with any such original or irreplaceable
materials, Supplier shall use commercially reasonable efforts to ensure the safety and
security of such materials but shall not be liable for any damages other than those
specified in Section 21.1 below, in the event that such materials are lost, damaged,
destroyed or stolen.
	 
	16.0  	Binding Effect and No Other Agreements:
	 
	   	This Agreement constitutes the entire agreement between the Parties on the subjects herein
contained and supercedes, cancels and terminates all other understandings between the
parties with respect to the subject matter hereof.
	 
	17.0  	Amendments:
	 
	   	No modification of or supplement to this Agreement shall be effective unless signed in
writing by each Party.
	 
	18.0  	Successors and Assigns; Assignment:
	 
	   	The rights and obligations of the Parties hereunder shall attach to their successors and
permitted assigns. Supplier shall have the right to assign this Agreement or any of the
rights granted to Supplier hereunder, including without limitation, the right to assign any
interests under this Agreement to (a) lenders providing financing to Supplier from time to
time and (b) to any third party acquiring all or substantially all of Supplier’s assets or
equity, provided that such third party is not a Competitor and agrees in writing to assume
all of Supplier’s obligations hereunder. Except as provided in this Section 18.0, Supplier
shall not assign, or grant any lien or encumbrance on, any property of Customer (including
finished goods). Customer shall not have the right, without Supplier’s prior written
consent, which consent shall not be unreasonably withheld, conditioned or delayed, to assign
this Agreement or any of the rights, obligations or interests of Customer hereunder, in
whole or in part, by operation of law, pursuant to a change of control, or otherwise;
provided, however, that Customer shall have the right without Supplier’s consent to assign
its rights and obligations under this Agreement to any Affiliate of Parent or to any third
party acquiring all or substantially all of Customer’s

24

 

	   	assets or equity, provided that (i) such Affiliate or third party agrees in writing to
assume all of Customer’s obligations hereunder, and (ii) Customer and such third party have
confirmed in writing to Supplier that (A) it then-currently has Manufacturing Requirements
substantially similar to or greater than Customer’s then-current Manufacturing Requirements,
and (B) its then-current forecasts for Manufacturing Requirements for the remainder of the
Term are substantially similar to or greater than Customer’s then-current forecasts for
Manufacturing Requirements for the remainder of the Term. Notwithstanding the foregoing, in
the event a non-Affiliate third party acquires all or substantially all of Customer’s assets
or equity, such third party shall thereafter only be bound by the purchase commitment in
Section 4.1 for the volume that is Customer’s and any other member of the Universal Music
Group’s volume (i.e., no Customer Affiliate not part of the Universal Music Group
immediately prior to the transaction shall be bound by this Agreement).

	19.0  	Compliance:
	 
	   	Any express or implied waiver by any Party of any breach hereof by any other Party,
including by any Party failing to notify any other Party of a breach hereof by such other
Party, shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure by such other Party to comply with the terms and conditions of this Agreement,
notwithstanding any custom, practice or course of dealing to the contrary.
	 
	20.0  	Confidentiality:
	 
	   	Except as may be required by law, no Party shall disclose to any third party any
confidential information on business or technology of any other party obtained in connection
with this Agreement for three years from the date of the disclosure of any such confidential
information without the prior written consent of the other Party. If goods purchased under
this Agreement are to be specifically fabricated for Customer, Supplier agrees to keep
confidential the processes, methods and designs used or applied in producing each such item.
	 
	21.0  	Indemnification:
	 
	   	Each Party (the “Indemnifying Party”) hereto agrees to and does hereby indemnify,
defend and hold harmless, the other party and its parent, subsidiaries, affiliated
companies, and its and their shareholders, officers, employees and agents (“Indemnified
Party”) from any and all third party claims, demands, causes of action, liability,
judgments, damages, costs and expense (including reasonable attorney’s fees) asserted
against, imposed upon or suffered by an Indemnified Party to the extent any such claims are
caused by the Indemnifying Party’s performance of this Agreement, including but not limited
to any claims for bodily injury, death or property damage, product liability and any
infringement of any proprietary right, patent, copyright or trademark.

	 	21.1  	Supplier agrees to be expressly and solely responsible for any property of
Customer (including, without limitation, masters, components, paper parts, etc.)

25

 

	 	   	while such property is in the care or custody of or under the control of Supplier or
any subcontractor, whether or not such possession constitutes a legal bailment, and
in the event of any damage to or loss of such property while in the possession of
Supplier or any subcontractor, if the property is not an original or irreplaceable
item or items, Supplier shall promptly pay Customer the full replacement value of
such property or the costs to repair the damage or restore the loss to any such
property, as applicable, regardless of cause. If, notwithstanding Section 15.0,
Customer has provided Supplier or any subcontractor with original or irreplaceable
items which are damaged or lost while in possession of Supplier or any
subcontractor, Supplier shall be liable only for the cost of repair or replacement
as if the lost or damaged original were a copy.

	22.0  	[Intentionally deleted]

	23.0  	Audit Rights:

	 	(a)  	Customer shall have the right to inspect Supplier’s books and records related
to its performance under this Agreement, provided such right shall not be exercised
more than once per calendar year and provided, further, that any information subject to
a confidentiality agreement with a third party shall only be subject to inspection by
an independent third party auditor hired by Customer that enters into a confidentiality
agreement with Supplier that maintains the confidentiality of third party information
and permits the auditor to report on Supplier’s performance to Customer. Such audits
shall be performed with reasonable advance written notice, during normal business
hours, and in a manner not disruptive of Supplier’s operations.
	 
	 	(b)  	Supplier shall have the right to inspect Customer’s books and records related
to its performance under Section 4.1 of this Agreement, provided such right shall not
be exercised more than once per calendar year and provided, further, that any
information subject to a confidentiality agreement with a third party shall only be
subject to inspection by an independent third party auditor hired by Supplier that
enters into a confidentiality agreement with Customer that maintains the
confidentiality of third party information and permits the auditor to report on
Customer’s performance to Supplier. Such audits shall be performed with reasonable
advance written notice, during normal business hours, and in a manner not disruptive of
Customer’s operations.

	24.0  	Notice:
	 
	   	All notices, requests, claims, demands and other communications hereunder shall be in
writing (in the English language) and shall be given or made (and shall be deemed to have
been duly given or made upon receipt) by delivery in person, by courier service, or by
registered or certified mail (postage prepaid, return receipt requested) to the respective
Parties at the following addresses (or at such other address for a Party as shall be
specified in a notice given in accordance with this Section 24.0):

26

 

	 	 	 
	

	 	If to CUSTOMER:
	 
	 	 
	

	 	Universal Manufacturing & Logistics
	

	 	10 Universal City Plaza
	

	 	Suite 350
	

	 	Universal City, CA 91608
	

	 	Attn: Peter N. Scifres
	

	 	Fax: (818) 733-1125
	 
	 	 
	

	 	With a copy to:
	

	 	Universal Music Group
	

	 	2220 Colorado Blvd.
	

	 	Santa Monica CA 90404
	

	 	Attn: Executive Vice President Business & Legal Affairs
	

	 	Fax: (310) 865-9954
	 
	 	 
	

	 	If to SUPPLIER:
	 
	 	 
	

	 	Entertainment Distribution Company (USA) LLC
	

	 	360 Madison Avenue, Suite 500
	

	 	New York, NY 10017
	

	 	Attn: CFO
	

	 	Fax: (212) 253-4166
	 
	 	 
	

	 	and
	 
	 	 
	

	 	Entertainment Distribution Company (USA) LLC
	

	 	11360 Lakefield Drive
	

	 	Duluth, GA 30097
	

	 	Attn: CFO
	

	 	Fax: (770) 497-3992
	 
	 	 
	

	 	With copies to:
	 
	 	 
	

	 	Greenberg Traurig, LLP
	

	 	The Forum
	

	 	3290 Northside Parkway, Suite 400
	

	 	Atlanta, GA 30327
	

	 	Attn: James S. Altenbach, Esq.
	

	 	Fax: (678) 553-2445

	25.0  	Force Majeure:

	 	25.1  	Notwithstanding any provision of this Agreement to the contrary, Supplier shall
not be liable for any damages incurred by Customer whatsoever, or Late Order Fees, due
to delays or failures in Supplier’s performance of its obligations under this Agreement
due to a Force Majeure Event, and such delays or failures shall not be deemed a breach
of this Agreement.

27

 

	 	25.2  	Immediately upon becoming aware of the Force Majeure Event, Supplier will (a)
use commercially reasonable efforts to end or circumvent the Force Majeure Event, (b)
keep Customer apprised of those efforts on a timely basis, and (c) communicate with,
coordinate with and assist Customer in resolving any impact on Customer caused by the
Force Majeure Event.
	 
	 	25.3  	If a Force Majeure Event continues for a period longer than [*****] days, then
Customer shall have the right to place Orders during the pendency of such Force Majeure
Event with other manufacturing companies, provided that (a) such Orders shall not be
for volumes in excess of the volumes Customer would ordinarily contract for during such
period, and (b) upon notice from Supplier that Supplier can resume performance under
the terms of this Agreement, Customer shall cease placing such Orders with such third
parties and place them with Supplier under the terms of this Agreement.
	 
	 	25.4  	Notwithstanding the [*****]-day period in Section 25.3, if there would be no
doubt in the mind of a reasonable person that Supplier would be unable to resume
performance under the terms of this Agreement within [*****] days of the Force Majeure
Event, then Customer shall have the right to immediately seek the remedy provided under
Section 25.3, without waiting for the [*****]-day period to elapse; provided, however,
that Customer shall consult with Supplier and coordinate its activities with Supplier’s
in such circumstance.

	26.0  	Designated Person:
	 
	   	Customer and Supplier each agree that each will designate a single organization, department,
and/or person to be the primary point of contact with the other with the ability to take
action as may be required pursuant to this Agreement.
	 
	27.0  	Anti-Piracy:
	 
	   	Subject to Section 5.7, Supplier agrees to either maintain, or obtain within 1 year of the
Effective Date of this Agreement and subsequently maintain, IRMA Anti-Piracy Certification
at all of its manufacturing locations during the term of this Agreement, unless (i) IRMA
ceases to provide this certification, or (ii) Supplier obtains Customer’s written approval
that it need not comply with this section.
	 
	28.0  	Press Aheads.
	 
	   	Supplier is prohibited without Customer’s prior written approval from pressing ahead stock
of Customer or from retaining over-pressings or keeping stock of semi-finished product in
anticipation of future Customer orders.
	 
	29.0  	Consents and Approvals:
	 
	   	Neither Party shall unreasonably withhold, condition or delay any consents, authorizations
or approvals required under this Agreement.

28

 

	30.0  	Employee Purchase Program:
	 
	   	Supplier and Customer will implement and administer a mutually agreeable employee-purchase
program.
	 
	31.0  	Governing Law:
	 
	   	The Agreement shall be governed by the laws of the State of New York without giving effect
to any applicable conflict of laws provisions.
	 
	32.0  	Counterparts:
	 
	   	This Agreement may be executed in one or more counterparts (and by facsimile), all of which
shall be considered one and the same agreement, and shall become effective when one or more
counterparts have been signed by each of the Parties and delivered to the other Parties.
	 
	33.0  	Enforcement:
	 
	   	Customer shall be entitled to enforce the provisions of this Agreement on behalf of each
member of the Universal Music Group who places Orders with Supplier. Customer shall be
responsible for all actions or omissions by such parties as if such actions or omissions
were Customer’s hereunder.

	 	 	 	 	 	 	 	 	 
	Supplier	 	 	 	Customer
	 
	 	 	 	 	 	 	 	 
	By:
	 	/s/ THOMAS COSTABILE	 	 	 	By:	 	/s/ MICHAEL OSTROFF
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Its:

	 	EVP & COO	 	 	 	Its:	 	EXECUTIVE VICE PRESIDENT
	

	 
	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Date: May 31, 2005	 	 	 	Date: May 31, 2005

HDFD Manufacturing Agreement (US)

 

SCHEDULE 2.0

Definitions

The following capitalized terms shall have the meanings attributed to such terms in the
following subsections.

“Affiliate” means, as to any person or entity, any person or entity controlling,
under common control with or controlled by such person or entity.

“Asset Purchase Agreement” means that certain Asset Purchase Agreement, by and among
Supplier, as purchaser, and UML and Universal Music and Video Distribution, Corp., as
sellers, dated May 9, 2005.

“Business Day” means any weekday on which banks in Los Angeles, California are open.

“CD Manufacturing Agreement” means that certain U.S. CD Manufacturing and Related
Services Agreement, by and between Supplier and Customer, and entered into on the Effective
Date.

“Change of Control” means the acquisition by a Competitor, directly or indirectly,
and whether by sale, pledge, proxy agreement or otherwise, of [*****]% or more of the voting
or equity economic interests in Supplier, or the sale of all or substantially all of
Supplier’s assets to a Competitor, or any acquisition by a Competitor of voting or equity
economic interests in or assets of Supplier that results in such Competitor owning or
holding, as applicable, [*****]% or more of the voting or equity economic interests in
Supplier, or all or substantially all of Supplier’s assets.

“Competitor” means any entity owned or controlled by a Major Music Company or one of
its Affiliates.

“Customer” means UMG Recordings, Inc. and, unless the context otherwise requires,
all other members of theUniversal Music Group, provided, however, that where a notice,
delivery or similar action on the part of “Customer” is required in this Agreement such
action may be taken by UMGRecordings, Inc. alone.

“Effective Date” means the effective date of this Agreement, June 1, 2005.

“European Agreement” means the International Manufacturing and Related Services
Agreement entered into as of the Effective Date between Supplier (through its subsidiary,
EDC Germany GmbH) and Universal International Music B.V., related to the terms, conditions,
obligations, remedies, and other related matters concerning the purchase and supply of
optical discs and related services for the territories referenced therein (the “European
Territories”).

“Facility Fixed Costs” means all fixed cost categories referred to in Schedule 10.1.

“Force Majeure Event” means fire, flood, storm, earthquake, landslide, volcanic
activity or other acts of God; acts of terrorism or vandalism; riot, war, civil disturbance
or

 

 

insurrection; strikes, lockout or other labor unrest; power, transportation, Internet or
other utility or carrier delays or outages, interference by any governmental authority, or
any other event(s) beyond the reasonable control of Supplier.

“HDFD” means the following optical disc formats: (DVD-V, 5, 9, 10, 14 or 18; DVD-A
5, 9, 10, 14 or 18; and SACD hybrid, non-hybrid 5 or 9).

“Installed Capacity” means any HDFD molding and disc printing capacity (evaluated
monthly and expressed as a rate per day) installed at a manufacturing facility owned,
controlled or managed by Supplier in the United States.

“Late Order Fee” is a dollar number equal to (a) the number of HDFDs Supplier is
obligated to ship in such Work Week pursuant to the terms of this Agreement minus the number
of HDFDs actually shipped in such Work Week, times (b) [*****]. For purposes of this
definition, Excess Orders shall not be subject to a Late Order Fee unless Supplier notifies
Customer that it will fulfill such Excess Orders and such Excess Orders thereafter become
Workable Orders.

“Lost Inventory” shall be calculated on a component reference number by component
reference number basis (each such unique component a “Component”), subtracting as of
a particular date the Amount Used of such Components and the Actual Inventory of such
Component from the Amount Delivered, where (i) “Amount Used” means the quantity of
such Components manufactured by Supplier into products prior to the particular date, (ii)
“Amount Delivered” means the quantity of such Components delivered by Customer’s
vendor to Supplier (based on receiving information supplied by Supplier) prior to the
particular date, and (iii) “Actual Inventory” means the quantity of such Components
on-hand as determined by a physical count as of the particular date.

“Major Music Company” means Sony BMG, EMI Group or Warner Music Group, or any of
their successors.

“Manufacturing Requirements” means, as applied to a member of the Universal Music
Group, (i) all requirements by the member of the Universal Music Group for Manufacturing
Services for its own account with respect to HDFDs to be sold or further distributed within
the United States or to be imported by Universal Music Group members into the European
Territory, and (ii) any requirements for Manufacturing Services for a third party’s account
with respect to HDFDs to be sold or further distributed in the United States or to be
imported by Universal Music Group members into the European Territory for as long as any
Universal Music Group member has the unilateral contractual right to provide or control the
provision of the Manufacturing Services to such third party, provided that such Universal
Music Group member had such unilateral right as of the Effective Date, excluding, however
(A) third party HDFDs to be offered for sale through the Universal Music Group special
markets/special products business unit through non-traditional distribution outlets, and (B)
HDFDs to be marketed under third party names and not for distribution by a member of the
Universal Music Group.

 

 

“Manufacturing Services” means HDFD mastering of Customer supplied files; molding,
printing, and assembling of HDFDs into designated configurations with Supplier or Universal
Music Group components; the Specific Related Services described in Section 7 of the
Agreement; and any service or activity priced pursuant to Sections 10.1.1 or 10.1.2. The
term “Manufacturing Services” means any particular Manufacturing Service or, as the context
may require, all Manufacturing Services collectively.

“Maximum Weekly HDFD Orders” means the product of [*****] times the first Work Week
Forecast for such Work Week provided by Customer to Supplier pursuant to Section 6.1. As an
example, on April 1, 2005, the forecast would for the first time include a Work Week
Forecast for the Work Week commencing May 8, 2005; assume that Work Week Forecast for May 8,
2005 shows a forecasted need of [*****] million HDFDs. On April 8, 2005, the forecast again
includes a Work Week Forecast for the Work Week commencing May 8, now revised to show a
forecasted need of [*****] million HDFDs. The Maximum Weekly HDFD Orders for the Work Week
commencing May 8, 2005 is [*****], based on the first forecast provided by Customer for such
week.

“Parent” means Polygram Holdings, Inc.

“Preferred Provider” means JVC Disc America, unless and until Customer names another
entity as Preferred Provider pursuant to Section 5.4.

“Prevailing Practices” means the procedures, timeframes, service levels or response
times generally followed by UML during the 12 months prior to the Effective Date.

“Qualified HDFD Manufacturer” means any manufacturer (a) capable of meeting
Universal Music Group’s Manufacturing Requirements at quality and service levels
substantially similar to those required by Customer under this Agreement; (b) not affiliated
with any Universal Music Group member; (c) with whom Customer has an arm’s length
relationship; and (d) whose quoted prices are based on [*****].

“Ship” means making HDFDs available to the selected carrier for transportation from
the Supplier’s facilities and coordinating with and assisting such carrier, in a manner
consistent with Prevailing Practices, but does not include actual transportation of the
HDFDs from the Supplier’s facility.

“Spot Market Orders” means orders for Manufacturing Services that (i) originate from
a customer that Supplier supplies a small number of orders per year to and in general does
not have an ongoing relationship with; (ii) originate from a customer for which Supplier
does not provide ancillary services such as long term component storage and promotional
mailings; and (iii) are ordered in large quantities, significantly greater than Customer’s
average order size.

“Transition Services Agreement” means that certain Information Technology Transition
Services Agreement between Supplier and UML, dated as of May 31, 2005.

“UML” means Universal Music Group Manufacturing and Logistics, Inc.

 

 

“Universal Music Group” means (i) Parent, (ii) Customer and (iii) each subsidiary,
sister company or Affiliate, directly or indirectly more than [*****]% owned by Parent or
Customer (or by any of their respective successors or permitted assigns). For purposes of
clarity, (i) no entity whose HDFDs are distributed by a member of the Universal Music Group
(but which is not directly or indirectly more than [*****]% owned by Parent or Customer)
shall be a member of the Universal Music Group, and (ii) on the date on which an entity is
no longer directly or indirectly more than [*****]% owned by Parent or Customer or their
respective successors or permitted assigns, it shall cease to be a member of the Universal
Music Group.

“U.S. Distribution Agreement” means that certain Distribution and Related Services
Agreement, by and between Supplier and Customer, and entered into on the Effective Date.

“Working Day” means those days as agreed by Customer and Supplier set forth at the
commencement of the Term as Schedule 2.11 hereto and updated weekly as mutually agreed upon
by Customer and Supplier in connection with the forecasts provided under Section 6.1.

“Work Week” means a seven-day period commencing on each Sunday during the term and
ending at 11:59 p.m. the next Saturday (regardless of whether any day therein is a Working
Day or Business Day).

 

 

     The following terms have the meanings set forth in the Sections indicated.

	 	 	 
	Term	 	Section
	AAA
	 	14.0
	Agreement
	 	1.0
	CAP
	 	9.2.1
	Cure Period
	 	9.2.2
	Customer
	 	1.0
	Customer Counter Proposal
	 	10.1.2.3
	Customer Response Period
	 	10.1.2.2
	EMDE
	 	8.4
	Epidemic Multiple Defectives
	 	8.4
	Excess Order
	 	6.10
	Failure Notice
	 	9.1
	Indemnified Party
	 	21.0
	Indemnifying Party
	 	21.1
	Input Materials
	 	6.3
	Key Failure
	 	9.1
	Late Orders
	 	6.11
	Market Price Reset Date
	 	10.1.2.
	Market Pricing Notice
	 	10.1.2.
	Market Pricing Information
	 	10.1.2.
	Uncured Key Failure
	 	9.2
	Order
	 	6.2
	Parties
	 	1.0
	Proposed Prices
	 	10.1.2
	Revised Market Pricing Information
	 	10.1.2
	Section 5.10 Notice
	 	5.10
	Specific Related Services
	 	7.0
	Specified Standards
	 	5.10
	Supplier
	 	1.0
	Supplier Pricing Information
	 	10.1.2.
	Term
	 	3.1
	Work Week Forecast
	 	6.1
	Workable Orders
	 	6.4

 

 

SCHEDULE 2.11

Working Days

In each year, for the months of January through August, six (6) days in each Work Week; and
from September through and including December 24, seven (7) days in each Work Week; and from
December 25 through and including December 31, four (4) days in each Work Week.

 

 

SCHEDULE 5.4

Pre-Approved Subcontractors

	 	 	 
	Entity	 	Type of Service
	[*****]

	 	All

 

 

SCHEDULE 6.7

Permitted Variances

All Workable Orders will be subject to variance by Supplier from the purchase order quantity
per the following schedule:

	 	 	 	 	 
	 Order Size	 	% Variance	 	Not to Exceed
	Up to 1,200
	 	[*****]
	 	N/A
	 	 	 	 	 
	1,201 to 5,000
	 	[*****]
	 	N/A
	
	 	[*****]
	 	N/A
	 	 	 	 	 
	5,001 to 50,000
	 	[*****]
	 	N/A
	
	 	[*****]
	 	N/A
	 	 	 	 	 
	Over 50,000
	 	[*****]
	 	[*****]
	
	 	[*****]
	 	N/A

 

 

SCHEDULE 7.6.1

Printed Component Ordering Procedures

New Release — Commercial/Deluxe

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.

Reorders

	 	•  	Reorders that will reduce on hand inventory below our reorder point will create a
demand for print. The buyer will do a net asset computation to determine the quantity
to be ordered? Reorder quantity = Reorder Point Quantity + FG Reorder Quantity -
Printed Material On Hand.
	 
	 	•  	The Reorder Point Quantity is recalculated, and changed if applicable, each time the
printed material is reordered. Various factors including sales, finished goods
inventory, and market intelligence are considered when assessing Reorder Point
Quantities.

New Release — Limited Edition

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer keeps the Reorder Point Quantity at [*****]; printed material is only ordered
on demand.

Reorders

	 	•  	Printed material is only ordered when finished goods orders are received.
	 
	 	•  	Buyers order print in the quantity of [*****]% of the finished goods quantity.

 

 

New Release — Single

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.
	 
	 	•  	Reorders
	 
	 	•  	Reorder strategy is the same as New Release — Commercial/Deluxe.

Promotional

Initial Order

	 	•  	Print requisition is received from the production office indicating finished goods
quantity.
	 
	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity;
quantity ordered may be rounded up to the next price break point if it makes economic
sense.
	 
	 	•  	Buyer keeps the Reorder Point Quantity at [*****]; printed material is only ordered
on demand.
	 
	 	   	Reorders
	 
	 	•  	Printed material is only ordered when finished goods orders are received.
	 
	 	•  	Buyers order print in the quantity of [*****]% of the finished goods quantity.

DVD

Initial Order

Print requisition is received from the production office indicating finished goods quantity.

	 	•  	Buyer orders print in the quantity of [*****]% of the finished goods quantity.
	 
	 	•  	Buyer sets reorder point at [*****]% of finished goods quantity.

Reorders

	 	•  	Reorder strategy is the same as New Release — Commercial/Deluxe.

Immediate Change

     Selections less than three months past release date

	 	•  	Use current Reorder Point

 

 

Selections greater than three months past release date

	 	•  	Determine average monthly sales; not to exceed [*****]. This calculation will
determine the Reorder Point Quantity to be used in the net asset calculation.
	 
	 	•  	The buyer will do a net asset computation to determine the quantity to be ordered?
Reorder quantity = (Difference between Printed Material On Hand FG Reorder) + Reorder
Point Quantity.

Running Change

	 	•  	Use old components to completion.
	 
	 	•  	New components are ordered using the Immediate Change strategy.

	Notes:	 	Selections with release dates of greater then three month are subject to the Reorder strategy.
	 
	 	 	Printed material suppliers may ship orders up to [*****]% over or under the order quantity.

 

 

Printed Component Ordering Guidelines – New Release

(Initial Manufacturing Ordering Date Through 90 Days After In-Store Date)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Vendor	 	 
	 	 	 	 	 	 	Contract	 	 
	 	 	Initial	 	 	 	Scale	 	 
	Order Types	 	Order quantity	 	Reorder Point	 	+/- %	 	Reorder Qty.
	 
	New release-Commercial
	 	FG x [*****] rounded to next price break

	 	[*****]% of FG
	 	[*****]
	 	(A)
	New Release-Limited Edition
	 	FG x [*****] rounded to next price break

	 	on demand
	 	[*****]
	 	on demand
	New Release-Deluxe
	 	FG x [*****] rounded to next price break

	 	[*****]% of FG
	 	[*****]
	 	(A)
	New Release-Single
	 	FG x [*****] rounded to next price break

	 	[*****]% of FG
	 	[*****]
	 	(A)
	DVD
	 	FG x [*****]

	 	[*****]% of FG
	 	[*****]
	 	(F)
	Promo
	 	FG rounded to next price break

	 	none
	 	[*****]
	 	on demand
	 
	**Reorder
	 	na

	 	(B)
	 	[*****]
	 	(A)
	Immediate change
	 	(C) or (D)

	 	(B)
	 	[*****]
	 	(A)
	Running Change
	 	(E)

	 	(B)
	 	[*****]
	 	(E)
	BOX SETS
	 	LABEL SUPPLIED

	 	none
	 	na
	 	na

	 	 	Footnote:
	 
	(A)	 	Reorder quantity = Reorder Point Quantity + FG Manufacture Order Quantity – Printed Material On Hand (rounded up to next price break)
	 
	(B)	 	Average Monthly FG Sales (for Selections > [*****] months old) up to [*****]
	 
	(C)	 	Perform (B), then (A)
	 
	(D)	 	If Selection < [*****] months old, use current established ROP
	 
	(E)	 	Use old component to depletion, then perform (B), then (A)
	 
	(F)	 	DVD onhand – FG Manufacture Order Quantity + Reorder Point = Reorder Quantity
	 
	**note:	 	once an order has a [*****] month life or greater, it becomes a “Reorder” Order Type

 

 

	 	 	 	 	 
	 	 	New Reorder	 	Reorder
	 Order Type	 	Point	 	Quantity
	 
	Reorder
	 	(A) Normal Monthly Sales Trends	 	(D)
	 
	 	(B) Sudden Upward Monthly Sales Trends	 	(D or E)
	 
	 	(C) Sudden Downward Monthly Sales Trends	 	(D)

	(A)	 	Average Last [*****] Months FG Sales
	 
	(B)	 	(Average Last [*****] Months FG Sales) x [*****] (for sudden upward sales trends over last [*****] months)
	 
	(C)	 	(Average Last [*****] month FG Sales) x [*****] (for sudden downward sales trends over last [*****] months)
	 
	(D)	 	FG Manufacture Order Quantity – PM Onhand + New Reorder Point = Reorder Quantity (for reorder quantities < [*****] (E) applies)
	 
	(E)	 	(FG Manufacture Order Quantity – PM Onhand + New Reorder Point) x [*****] = Reorder Quantity

Notes:

Reorder points are not recalculated unless the previous calculation is more than [*****] months old

Sudden trends (upward or downward) are defined as at least [*****]% increase/decrease from month to month (last 3 month sales)

Reorder quantities will not exceed [*****]

Reorder quantities are rounded to the next price break unless that price break quantity exceeds [*****] times the ROP

 

 

SCHEDULE 7.6.2

Monthly Print Purchase Price Variance Report

EDC Monthly Print Purchase Price Variance Report

For Month Ended xx/xx/xx

SCHEDULE 7.6.2

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	vendor	 	component
#	 	selection #	 	artist	 	title	 	super
label	 	mr co	 	invoice
#	 	invoice
date	 	Invoice
qty	 	per
unit
vendor
 cost	 	total
vendor
cost	 	per
unit
std
cost	 	total std
cost	 	PPV
	Example	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	 	[*****]
	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Total
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	[*****]
	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

Definitions:

per unit standard cost = print cost from vendor at [*****] print quantity plus [*****]% obsolescence factor (the print cost included in the packaged price from EDC)

per unit vendor cost = actual print cost from vendor

PPV = total standard cost — total vendor cost

     if negative, UML owes EDC

     if positive, EDC owes UML

 

 

SCHEDULE 8.2

AQL Standards – Required Inspections

Audit Plan

Once per calendar month, Customer will have shipped to Supplier a quantity of products
(“Products” mean finished goods ready for sale to Customer’s customer) not to exceed 300
individual items. The Products will be selected by Customer from inventory lots which to the
Customer’s best knowledge represent Products manufactured by Supplier within the most recent 45
days.

Evaluation Process and criteria

Each individual Product will be evaluated by Supplier. Customer may observe the evaluation process
of up to 100% of the Products sent to Supplier, provided it has given Supplier five Working Days
notice of its intent to observe said Evaluation Process. Supplier will evaluate each Product by
all of the criteria shown below, determining in each instance if the evaluation result is “Pass” or
“Fail”. The aforementioned collectively is the “Evaluation Process”.

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	Pass/Fail (under
	 	 	 	 	 	 	 	 	minimum specification =
	 	 	 	 	Minimum	 	Fail; otherwise = Pass)
	 	 	 	 	Specification	 	(Yes = Pass)
	 	 	Criteria	 	or Yes/No	 	(No = Fail)
	1

	 	PI Sum 8 errors
	 	<280
	 	 
	2

	 	PO Errors
	 	 	0	 	 	 
	3

	 	DC Jitter
	 	<8.0%
	 	 
	4

	 	Asymmetry
	 	DVD-5 (55% to 85%)
	 	 
	

	 	 	 	DVD-9 (18% to 30%)
	 	 
	5

	 	Radial Deviation (warp)
	 	+/- 0.8°
	 	 
	6

	 	Print on disc matches music on disc
	 	 	Y/N	 	 	 
	7

	 	Disc matches printed components
	 	 	Y/N	 	 	 
	8

	 	Print (colors, legibility, etc) on disc matches proof
	 	 	Y/N	 	 	 
	9

	 	Wrap tight and neat
	 	 	Y/N	 	 	 
	10

	 	No damage in print or jewel case
	 	 	Y/N	 	 	 
	11

	 	Correct sticker(s)
	 	 	Y/N	 	 	 
	12

	 	Stickers in correct position and orientation
	 	 	Y/N	 	 	 
	13

	 	Correct and legible spine label
	 	 	Y/N	 	 	 
	14

	 	Correct and readable barcode
	 	 	Y/N	 	 	 
	15

	 	Correct tray color
	 	 	Y/N	 	 	 
	16

	 	Correct disc position (multidisc sets)
	 	 	Y/N	 	 	 

Quality Level

“Fails” in Criteria 1. – 9. are Fatal Errors. In addition, if on any given product there are 3 or
more “Fails” in Criteria 10. – 16. that will also be considered a Fatal Error for that product.
The Quality Level will be the number of products in the month with 1 or more Fatal Errors divided
by the total number of products evaluated in the month.

Minimum Acceptable Quality Level % (MAQL%)

The minimum acceptable Quality Level will be equal to the average results of the first 500 Products
evaluated following the Effective Date.

 

 

SCHEDULE 9.1

Key Failure Events (Manufacturing)

	 	 	 	 	 
	 	 	Definition and	 	KPI Repeated Failure
	 KPI	 	Performance Standard	 	Event
	Production

	 	Making and shipping
Customer’s aggregate
Workable Orders of HDFDs
in a Work Week as
described in Section
6.11(a)
	 	Supplier fails to
perform in accordance
with Section 6.11(a) for
any [*****] Work Weeks
in a
[*****]-rolling-week
period
	 
	Delivery

	 	Meeting lead time
parameters as described
in Sections 6.5 and 6.6
	 	Supplier fails to
perform in accordance
with Section 6.11(b) for
any [*****] Work Weeks
in a
[*****]-rolling-week
period
	 
	Quality

	 	Maintaining average
outgoing quality level
as described in Section
8.2
	 	Supplier fails to
achieve AQL1
defined in Section 8.2
and Schedule 8.2 for any
[*****] months in a
rolling-[*****]-month
period
	 
	Multiple Defective

	 	Avoiding Epidemic
Multiple Defective
Events (EMDEs) as
described in Section 8.4
	 	3 EMDE’s in any calendar quarter, or [*****]
EMDE’s in any calendar
year or [*****] EMDE’s
in any rolling [*****]
months

	1	 	Have not seen or reviewed the AQL standards yet.

 

 

Schedule 10.1

Pricing

	   	[*****]

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