Exhibit 10.4
[LETTERHEAD OF COLUMBIA HOUSE APPEARS HERE]
June 12, 1998
The Music Connection Corporation
000 Xxxxxxxx Xxxxx, Xxxxx X
Xxxxxxx, Xxxxxxxx 00000
Ladies and Gentlemen:
The following, when signed by you and by us, will constitute our agreement
with you:
1. (a) "Custom CD's", below, means compact disc compilations of music
sound recordings produced on a custom basis for individual consumers, each
consisting of selections requested separately by the customer concerned.
(b) During the Term of this agreement (defined below), you will
offer Custom CD's for sale to our customers, through our Columbia House and
Total E websites (the "CHC Websites") and through promotional inserts in our
mailings. All sound recordings which you are authorized to distribute in Custom
CD's (currently, about 40,000 titles) will be available for selection by our
customers for Custom CD's under this agreement. All references below to sales to
our customers will include sales to prospective customers resulting from our
mailings to them and sales by you to customers accessing your websites from the
CHC websites.
(c) We will not authorize any other supplier of Custom CD's to offer
them through the CHC Websites or our mailings during the Term of this agreement,
except a supplier offering a significant repertoire of sound recordings which
you do not make available to our customers under this agreement.
(d) You will not authorize any other music club operation to offer,
sell or distribute Custom CD's during the Term of this agreement without our
consent. If we consent to such an arrangement the profits derived from your
distributions through that club operation will be shared equally by you and us,
in accordance with a formula to be agreed upon in that event.
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2. (a) You will do the following:
(1) Design and implement an interface and links between the CHC
Websites and your websites offering Custom CD's (the "TMC Websites"), for the
purpose of providing our customers with access to the TMC Websites in order to
select and order Custom CD's, and to enable them to return to the CHC Websites.
Your design and implementation of the interface and links will be subject to our
prior written approval;
(2) Design, produce and supply us with promotional materials
offering Custom CD's to our customers, for insertion in our mailings. The
inserts will be subject to our prior written approval;
(3) Manufacture the Custom CD's to be sold to our customers,
conforming to the same quality standards as the units of the highest quality
which you distribute to other customers;
(4) Process all orders for our customers for Custom CD's
including every aspect of each transaction, including but not limited to
receipt, credit card authorization processing, fulfillment, billing, collection
of payments, tracking, transaction security, and all customer service functions.
(b) You will obtain all licenses or other authorizations and make
all royalty and other payments required in connection with the Custom CD's
distributed under this agreement, including authorizations from and payments to
owners of copyright in the sound recordings and musical compositions reproduced
in them;
(c) You will perform your obligations under this agreement in
consultation with our Chairman or his designees. All sales to our customers
under this agreement will be conducted as transactions between the customers and
you, and we will not be a party to them.
(d) You will not make any use of names or addresses of our customers
or other information about them which you acquire in the course of your
activities under this agreement, except for the limited purpose of servicing
their orders as required by section 2(a)(4). Without limiting the generality of
the preceding sentence, all such customer data will constitute "Confidential
Information" for the purposes of paragraph 8.
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3. (a) We will display your "Musicmaker" icon on the CHC Websites as a
link to the TMC Websites, and will include promotional inserts supplied by you
in mailings to our customers and prospective customers, at our election, at
least six (6) times per year during the Term. You will reimburse us for our
actual expenses incurred directly in doing so (not including any indirect costs
or allocations of overhead), promptly upon our request.
(b) If the Sony Music or Warner Music organization authorizes us to
use its sound recordings in Custom CD's on an exclusive basis, we will make
those recordings available to you for use in the Custom CD's to be offered to
our customers under this agreement, to the extent to which those authorizations
permit us to do so, and you will make them available for selection by our
customers. You will index, digitize and store those recordings in your database
and supply us with copies of those digitizations in accordance with our
requests.
4. (a) The term of this agreement (the "Term") will be the three (3)
year period beginning September 1, 1998.
(b) If we so request during the last 90 days of the Term, you will
negotiate with us in good faith regarding renewal of this agreement.
(c) We may terminate the Term in our discretion, upon not less than
thirty (30) days' notice to you, if:
(1) We determine, at any time after we have completed the first
six (6) promotional mailings offering Custom CD's under this agreement,
that our financial returns under it do not justify its continuance, in our
discretion; or
(2) if Xxxxxxxxx X. Xxxxxxxxxx ceases to function as your
President and Chief Operating Officer (but we will not terminate for this
reason if his successor is appointed in a timely manner and we deem him/her
compatible with our interest in the project contemplated by this agreement,
in our discretion.
5. Net Profits. You will pay us a share of your Net Profits derived from
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the sale of Custom CD's to our customers, in accordance with this paragraph 5.
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(a) Definition. "Net Profits", in this agreement, means all
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revenues derived by you in connection with sales of Custom CD's to our customers
(including shipping and handling charges but excluding transactional taxes),
less only the following amounts:
(1) Your actual expenses incurred directly in performing the
functions referred to in subparagraph 2(a) (not including any indirect
costs or allocations of overhead);
(2) the royalties and any other payments referred to in
subparagraph 2(b);
(3) reimbursements for our expenses actually paid to us under
subparagraph 3(a); and
(4) your actual expenses incurred directly in indexing,
digitizing and storing Sony and Warner recordings under subparagraph 3(b),
and in establishing a separate TMC Website for the purpose of offering them
to our customers only (not including any indirect costs or allocations of
overhead).
(b) Net Profit Share Calculation. The amount of our participation in Net
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profits will be determined as follows:
(1) "Selection", below, means each designation of a sound recording
by our customers for inclusion in Custom CD's they order. (For example: if a
single recording is designated for inclusion on each of four Custom CD's, those
designations will be treated as four Selections.)
(2) You will determine the aggregate number of Selections included
in each of the following categories:
(i) Any recordings you use under licenses entered into in the
future, requiring you to pay the licensors concerned at least fifty percent
(50%) of your profits from the use of the recordings on Custom CD's ("Co-
Ventured Recordings", below);
(ii) the Sony and Warner recordings we make available to you
under subparagraph 3(b) ("Sony/Warner Recordings"); and
(iii) all other recordings ("Other Recordings").
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(3) The total amount of the Net Profits concerned will be allocated
to three separate funds, in proportion to the allocation of Selections to the
categories listed in section 5(b)(2). (For example: if 90% of the Selections
used in Custom CD's sold to CHC Customers are Other Recordings, 90% of the Net
Profits concerned will be allocated to the Other Recordings fund.)
(4) You will pay us the following percentages of the Net Profits
allocated to those funds:
(i) Twenty-five percent (25%) of the Co-Ventured Sound
Recordings fund;
(ii) sixty-five percent (65%) of the Sony/Warner Recordings
fund; and
(iii) fifty percent (50%) of the Other Recordings fund.
(c) Initial Mailings - Minimum Payments.
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(1) You will make separate computations of the Net Profits due us
from sales of Custom CD's resulting from each of the first six (6) mailings to
our customers under this agreement. Each of those computations will include only
revenues derived and expenses incurred solely in connection with the mailing
concerned (for example, those computations will not reflect any deductions for
website interface and link expenses referred to in section 2(a)(l) or expenses
for digitizing Sony/Warner recordings under subparagraph 3(b).)
(2) If the amount of our Net Profit participation computed under
section 5(c)(l) in connection with any of those six initial mailings is less
than the amount we would charge a third party for a "ride-along" insertion in a
comparable promotional mailing (or the amount fixed by our rate card then in
effect if there is no comparable mailing during the time period concerned), you
will pay us the difference promptly upon our request. If you fail to make any
such payment we will have the right to terminate the Term of this agreement upon
five (5) days' notice, without limiting our other rights.
(d) Your revenues derived from sales of Custom CD's to our customers will
be segregated and will not be commingled with your other funds, but will held in
trust in a separate account or accounts designated as Columbia House trust
accounts until disbursed in the following order of priority:
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(1) To us, in payment of any expense reimbursements due us under
subparagraph 3(a) and not previously paid to us.
(2) To you, to the extent of the direct expenses deductible in
computing Net Profits under subparagraph 5(a).
(3) In ratable shares paid simultaneously as follows: (i) To us in
payment of our participation in Net Profits under this paragraph 5; and
(ii) to you as your property to the extent of the balance of those Net
Profits.
(e) You will compute and pay all amounts due us, accompanied by
accounting statements reflecting sales, expenses, and Net Profits, within sixty
(60) days after the end of each calendar quarter for the preceding calendar
quarter. Each of us will furnish the other with documentation of all expenses
deducted in computing Net Profits or to be reimbursed.
(f) We may, at our expense, examine your books and records relating to
the sales of Custom CD's and the computation of Net Profits under this
agreement, during your regular business hours and at the place where you
regularly keep them, for the purpose of verifying the accuracy of the statements
furnished to us under subparagraph 5(e). You will keep an accurate and auditable
account of your sales, expenses and payments, and Net Profits under this
agreement and will retain all records concerning those sales, expenses and
payments, and Net Profits.
7. As additional consideration for our execution of this agreement, you
are entering into a Warrant Agreement with us granting us warrants to purchase
shares of your capital stock on the terms prescribed in the Warrant Agreement.
8. (a) "Confidential Information", below, means: (1) All information
regarding either party or its business, acquired by the other party in
connection with this agreement or any activities conducted under it; and (2) the
terms of this agreement.
(b) Neither party will disclose to any other person any Confidential
Information of the other party, except to its employees and advisors with a need
to know it
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in the course of their duties or for the purposes of performing the obligations
of the party concerned under this agreement. "Confidential Information" shall
not include information already lawfully known to or independently developed by
the receiving party, disclosed in published materials, generally known to the
public, lawfully obtained from any third party, or required to be disclosed by
law. If any such disclosure may be required by law, the party from whom it is
sought will notify the other party promptly and will cooperate with the latter
as it reasonably requests to oppose the requirement. The parties acknowledge
that money damages would not constitute adequate compensation for a breach of
this paragraph; either party will be entitled to injunctive relief to restrain
any such threatened breach in addition to any other relief to which it may be
entitled.
9. You will at all times indemnify and hold us harmless from and against
any and all claims, damages, liabilities, cost and expenses, including legal
expenses and reasonable counsel fees, arising out of any violation of law or the
rights of any person by reason of anything contained in the Custom CD's sold to
our customers or their packaging, advertising, or marketing, or otherwise
arising out of or related to your activities under this agreement.
10. All notices under this agreement will be in writing and given by
courier or other personal delivery or registered or certified mail at the
appropriate address indicated above or at a substitute address designated by
notice by the party concerned. Each notice to us will be addressed for the
attention of our Senior Vice President, Electronic Media, and a copy of each
notice sent to us will be sent simultaneously to our Senior Vice President and
General Counsel. Notices shall be deemed given when delivered to the courier,
personally delivered, or mailed, except that a notice of change of address will
be effective only from the date of its receipt.
11. The parties are independent contractors. Neither party will be
authorized or purport to act as an agent of the other, or to make any
commitments on behalf of the other.
12. Neither party will mention the other in advertising or promotional
literature, or issue or authorize any publicity about the other party or the
subject matter of
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this agreement, without the prior written approval of the other party in each
instance.
13. (a) This agreement contains the entire understanding of the parties
relating to its subject matter and cannot be changed orally. A waiver of any
provision of this agreement in any instance will not be deemed to waive it for
the future.
(b) THIS AGREEMENT HAS BEEN ENTERED INTO IN THE STATE OF NEW YORK,
AND ITS VALIDITY, INTERPRETATION AND LEGAL EFFECT WILL BE GOVERNED BY THE LAWS
OF THAT STATE APPLICABLE TO CONTRACTS ENTERED INTO AND ENTIRELY PERFORMED THERE.
THE NEW YORK COURTS (STATE AND FEDERAL), ONLY, WILL HAVE JURISDICTION OF ANY
CONTROVERSIES REGARDING THIS AGREEMENT; ANY ACTION OR OTHER PROCEEDING WHICH
INVOLVES SUCH A CONTROVERSY WILL BE BROUGHT IN THOSE COURTS, IN NEW YORK COUNTY,
AND NOT ELSEWHERE. ANY PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY, AMONG OTHER
METHODS, BE SERVED BY DELIVERING IT OR MAILING IT, BY REGISTERED OR CERTIFIED
MAIL, DIRECTED TO THE APPLICABLE ADDRESS ABOVE OR SUCH OTHER ADDRESS AS THE
PARTY CONCERNED MAY DESIGNATE PURSUANT TO PARAGRAPH 16. ANY SUCH DELIVERY OR
MAIL SERVICE WILL HAVE THE SAME EFFECT AS PERSONAL SERVICE WITHIN THE STATE OF
NEW YORK.
(c) The invalidity or unenforceability of any provision of this
agreement shall in no way affect the validity or enforceability of any other
provision of this agreement.
(d) Neither party shall be entitled to recover damages or to
terminate the Term by reason of any breach of this agreement by the other party,
unless the latter party has failed to remedy the breach concerned within twenty-
one (21) days after notice.
Very truly yours,
THE COLUMBIA HOUSE COMPANY
By: /s/ The Columbia House Company
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Sr. V.P.
AGREED:
THE MUSIC CONNECTION CORPORATION
By: /s/ Xxxxxxxxx Xxxxxxxxxx
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President & COO
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