Agreement - RCA Records Label and Artist Direct LLC
The following shall constitute the agreement, between THE RCA RECORDS
LABEL, a unit of BMG ENTERTAINMENT ("RCA") and ARTIST DIRECT LLC ("AD"), dated
as of November 15, 1996, with respect to creation of a record label ("Label") to
be managed by AD and funded by RCA as set forth below. The parties hereto agree
to negotiate reasonably, in good faith a more formal agreement consistent with
the terms of this Agreement (the "Formal Agreement"), provided that until the
Formal Agreement is fully executed, this Agreement shall be deemed binding and
fully effective and shall constitute the entire agreement between the parties.
RCA's good faith reasonableness in negotiating the Formal Agreement shall be
judged by reference to RCA's customary business practices relating to comparable
deals.
I. PURPOSE:
A. The Label will identify, secure, and develop recording artists
("Artists").
B. Initially, AD's participation in the proceeds from the
exploitation of master recordings by the Artists will be on a
royalty basis as set forth in paragraph V below (the "Label
Deal"). However, if the provisions of paragraph III.C are
applicable, AD's participation in the proceeds from the
exploitation of master recordings by the Artists shall be
converted into a profit participation (the "Profit Deal").
C. In either event, the Artists' records will be released under the
AD label throughout the world. In the United States, the
Artists' records will be distributed through BMG Distribution,
it being understood and agreed that RCA will not release the
Artists' records in the United States through "independent"
distribution channels without AD's consent. The release of
records through "independent" distribution channels outside of
the United States shall be governed by subparagraph VI.B.2
below.
D. An affiliate of AD ("NT Affiliate") will have the right to
purchase Artist's records from BMG pursuant to its standard
"price card" to customers in the United States. RCA represents
and warrants that the "price card" attached hereto as Exhibit
"A" is in effect as of the date hereof. The NT Affiliate shall
have the benefit of all appropriate discounts on a
product-by-product basis offered by BMG to any of its customers
[for example, discounts based on the purchase of catalog albums
(i.e., records which have been released for more than one (1)
year and are not currently on the sales charts, and discounts to
induce the sale of records by new artists. At such times during
the term of this Agreement that BMG changes its "price cards" to
its regular customers in the United States, the prices set forth
in said Exhibit "A" shall be automatically increased or
decreased accordingly. Subject to paragraph I.E.3 hereof, the NT
Affiliate shall have the right to sell such records through
non-traditional developing distribution channels throughout the
world (e.g., sales over the Internet and other similar networks
and sales at tour locations) (collectively, "Non-Traditional
Channels").
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E. RCA acknowledges that the NT Affiliate will also be in the
business of entering into agreements with recording artists
specifically for the purpose of distributing product through
Non-Traditional Channels ("NT Product"). In this regard, RCA
recognizes that it is the intention of the NT Affiliate that
these agreements will pay the artist small or no advances and a
substantial share of profits and possibly give the artist
reversion rights in the NT Product.
1. If the NT Affiliate acquires the right to distribute the
NT Product through traditional channels of distribution,
it shall first offer such rights to RCA in writing. If,
within fifteen (15) business days after RCA's receipt of
such offer, RCA does not make a written offer to the NT
Affiliate for such rights, then the NT Affiliate shall
have the right to license to any third party such
rights. Alternatively, if RCA makes an offer to the NT
Affiliate as aforesaid, but the parties are unable to
consummate a deal, then the NT Affiliate shall have the
right to license to any third party such rights,
provided the economic terms offered by such third party
for comparable rights are no less favorable to AD than
the economic terms last offered by AD to RCA. If the
economic terms of the third party's offer for comparable
rights are less favorable to AD than the economic terms
contained in AD's last offer to RCA with respect to such
rights, then the NT Affiliate shall notify RCA of such
terms, and RCA shall have the right to match the third
party's offer within ten (10) business days after such
notice.
2. If the NT Affiliate at any time during the Term (as
defined below) desires to enter into an agreement
("Financing Agreement") with a "strategic partner" or
other person or entity to acquire financing for the NT
Affiliate, the NT Affiliate shall first negotiate with
RCA. If the parties are unable to consummate a Financing
Agreement within thirty (30) days, then the NT Affiliate
will have the right to enter into a Financing Agreement
with a third party. RCA will have the right to match the
terms of that agreement if they are equal to or less
favorable to the NT Affiliate than the terms of AD's
last offer. Notwithstanding the foregoing, if the
distribution of audio-only records through
Non-Traditional Channels at the time is a meaningful
alternative to distribution through traditional
distribution channels, RCA shall have the right to match
any third-party offer.
3. Prior to entering into any agreement with any other
manufacturer or distributor, the NT Affiliate shall
negotiate in good faith with BMG, an agreement for BMG
to manufacture and/or fulfill orders for finished goods
of the NT Product for Non-Traditional Distribution in
audio-only configurations ("Fulfillment Agreement").
(The parties understand and agree that such finished
goods may include product by recording artists in
addition to the Artists signed to the Label.) If the
parties are unable to consummate a Fulfillment Agreement
within thirty (30) days, then the NT Affiliate will have
the right to enter into a Fulfillment Agreement with a
third party. BMG will have the right to match the terms
of that agreement if they are equal to or less favorable
to the NT Affiliate than the terms of AD's last offer.
If AD enters into a Fulfillment Agreement with a third
party, RCA's rights under this paragraph I.E.3. shall be
reinstated upon the expiration of such agreement.
II. TERRITORY: The world.
III. TERM AND PROFIT SHARING CONVERSION:
A. Subject to paragraph III.C below, the term of the Agreement will
be three (3) years commencing upon January 1, 1997. However, if
as set forth in paragraph III.C below, the Label Deal is
converted to the Profit Deal (the "Conversion"), then the term
of Profit Deal shall be equal to six (6) years minus the term of
the Label Deal. All references herein to the "Term" shall mean
the term of the Label Deal and, if applicable, the term of the
Profit Deal.
B. Subject to paragraph III.C below, RCA will have the option to
terminate the Term as of the end of the third year of the Term
("Early Termination Right"). In which event:
1. If the Label has had (i) less than $20,000,000 in net
billings during the term of the Label Deal, or (ii) less
than $5,000,000 in net billings in the 3rd year of the
Label Deal, the assets of the Label will not be divided
between RCA and AD.
2. If the Label has had (i) more than $25,000,000 in net
billings during the Label Term, and (ii) more than
$8,000,000 in net billings during the 3rd year of the
term of the Label Deal, the assets of the Label will be
divided between RCA and AD, with AD having the first
pick of the Artists.
3. If the terms of paragraph III.B.1 and III.B.2 are not
applicable, the assets of the Label will be divided
between RCA and AD, with RCA having the first pick of
the Artists.
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4. The party who has the first pick can elect to transfer
such first pick to other party. The party who has the
second pick pursuant to either paragraphs III.B.2 or
III.B.3 above will pick the next 2 Artists; thereafter,
the parties will alternate by picking 1 Artist until all
of the Artists have been divided.
5. Rights and Royalty Overrides After the Exercise of the
Early Termination Right:
(a) RCA shall retain the ownership to all product
("Pre-Conversion Product") released by RCA prior
to the date (the "Termination Date") of RCA's
exercise of the Early Termination Right.
(b) With respect to all Artists kept by RCA under
any of the above scenarios ("RCA Retained
Artists"), RCA shall have the unilateral right
to exercise all creative decisions thereafter,
subject to good faith consultation with Marc or
Don provided either of them are available. Prior
to the execution of the Formal Agreement, the
parties agree to negotiate in good faith a
procedure which would allow either party to
pick-up an Artist after the Label Term (without
a royalty override or other participation) if
the other party should decide thereafter not to
exercise an option under an Artist Agreement.
(c) RCA shall continue to advance the Artist
advances and recording funds with respect to
records to be recorded by the Artist after the
Termination Date.
(d) RCA will continue to account to AD on a royalty
basis (the "AD Royalty Participation") for all
records subject to an Artist Agreement in
perpetuity. With respect to product recorded by
a RCA Retained Artist prior to the Termination
Date and all product recorded by a RCA Retained
Artist as of the date a RCA Retained Artist
delivers under the applicable Artist Agreement
the second album recorded after the Termination
Date, the AD Royalty Participation shall be the
amount (the "Label Royalty Spread") by which the
royalty payable to AD pursuant to paragraph V
hereof exceeds the "all-in "royalties payable to
the applicable RCA Retained Artist (including
producer royalties) ("Artist Royalties"). With
respect to product recorded after the delivery
of such second album, the AD Royalty
Participation shall be the Label Royalty Spread
less 50% of any increases in the Artist
Royalties agreed to by RCA after the Termination
Date. Notwithstanding the foregoing, in no event
shall the Ad
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Royalty Participation be less than [***] of the
SRLP with respect to 100% (less free goods and
discounts) of top-line net sales of albums
through normal retail channels in the United
States ("USNRC Album Sales"). The AD Royalty
Participation shall be calculated, reduced and
paid in accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings. The payment of the
AD Royalty Participation shall continue to be
subject to the recoupment provisions contained
in paragraph IV.G hereof.
(e) Notwithstanding RCA's exercise of the Early
Termination Right, AD will continue to own the
name of the Label; it being understood and
agreed, however, that all prior and future
product under an Artist Agreement shall be
released under the Label's name.
(f) With respect to each Artist that is picked by
AD, RCA shall be entitled to an override royalty
("RCA Override"). With respect to 100% (less
free goods and discounts) of USNRC Album Sales
sold by AD on a "p&d" and/or profit sharing
basis, the RCA Override shall be the lesser of
(i) [***] of the SRLP, or (ii) the amount by
which [***]* exceeds the royalty rate payable to
the Artist, the applicable record producers and
all other third party royalty participants. In
such event, the RCA Override with respect to
USNRC Album Sales and with respect to all other
exploitations of the applicable master
recordings shall be calculated, reduced and paid
in accordance with the applicable Artist
Agreement. With respect to sales of records
through a third party distribution agreement
where AD is paid a royalty and does not pay or
is charged with the manufacturing costs of the
records, the RCA Override shall be equal to
[***] of the difference between the royalty
rates payable to AD under such agreement and the
"all-in" royalties payable to the Artists,
producers and other third party royalty
participants. The RCA Override shall only be
payable to RCA with respect to master recordings
recorded by each Artist prior to the release of
the second newly-recorded album after the
exercise of the Early Termination Right
(including those master recordings contained on
such second album), but shall not be payable
with respect to product distributed by RCA or
any affiliate controlled by RCA. The RCA
Override shall be payable in respect of each
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applicable LP prospectively after recoupment of
the recording costs and artist advances paid in
connection with the LP concerned. Such
recoupment will be calculated at a royalty rate
of [***] of the SRLP with respect to USNRC Album
Sales, whether AD is paid on a royalty basis or
a profit sharing (or "p&d") basis.
C. The Label Deal will automatically convert to a Profit Deal at
the end of the first 3 years, unless RCA exercises the Early
Termination Right. However, if prior to the end of the first 3
years, the aggregate net billings of the Label exceed either (i)
[***] in Qualified Sales, or (ii) [***] in Aggregate Sales, the
Label Deal will automatically convert to the Profit Deal at the
end of the first semi-annual accounting period during which such
sales are achieved ("Conversion Date"). For purposes of the
above calculation, as used herein:
1. the term "Qualified Sales" shall mean all net sales
other than (A) net billings over [***] from the
master recordings contained on any album by an Artist
signed to a exclusive term recording agreement, and (B)
aggregate net billings from the master recordings
contained on any one-off albums (e.g., soundtrack
albums, albums developed by the NT Affiliate, etc.) in
excess of [***];
2. the term "Aggregate Sales" shall mean all net billings
other than aggregate net billings from the master
recordings contained on all one-off albums in excess of
[***]; and
3. the term "net billings" for purposes of determining
Qualified Sales and Aggregate Sales shall mean:
(a) in the United States, (A) the gross wholesale
receipts to BMG from its customers on all
records shipped less actual returns and a
reasonable reserve for future returns, but
without any other deduction (e.g., any
distribution fees or charges or manufacturing
costs), (B) RCA's receipts the licensing of
master recordings by the Artists, and (C) monies
paid to BMG Distribution by the NT Affiliate;
and
(b) on sales outside of the United States, 100% of
the all-in inter-company "matrix" (as defined
in BMG's Inter-Company License Agreement, such
definition being attached hereto as Exhibit
"B") (the "Matrix") paid or credited to RCA by
its foreign affiliates and all monies paid or
credited by its non-affiliated licensees.
In determining the amount of foreign
income under this subparagraph II.C.3.b. RCA
shall include its good-faith estimate of
so-called "pipeline" royalties in the EEC,
Australia, and Japan.
IV. LABEL FUNDING AND RECOUPMENT UNDER THE LABEL DEAL:
A. Signing Payment: [***], payable on January 2, 1997.
B. Overhead Advances: [***] per year, [***] of which will be
payable at the commencement of each quarter-annual period
(the first installment shall be payable on January 1, 1997).
C. Sales Bonus Overhead Payments: Promptly after the following
events, RCA will pay AD:
1. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
2. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
3. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable, and
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4. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable.
For the avoidance of doubt, each bonus payment will be a
one-time only payment, which shall be paid in respect of the
first album to achieve the applicable threshold during the Label
Term.
D. A&R:
1. AD shall sign at least 3 Artists during each year of the
Label Term. If at the end of any year of the Label Term,
AD has signed less than 3 Artists in such year, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the term
of the Term until such artists are signed. If any such
suspension continues for 12 months, RCA shall have the
right, within 30 days thereafter, to terminate the Term,
and the assets of the Label will not be divided between
RCA and AD.
2. If at the end of the second year of the Term, less than
[***] albums have been delivered by the Artists, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the Term
until such albums are delivered. Further, if at the end
of the third year of the Term and each year thereafter,
less than [***] albums have been delivered by the
Artists in such year, RCA shall have the right, by
written notice to AD, to suspend its obligations to AD
(other than the payment of Artist and producer advances
and royalties) and the Term. If any such suspension
continues for 6 months, RCA shall have the right within
30 days thereafter to terminate the Term, and the assets
of the Label will not be divided between RCA and AD.
3. Initial Product Commitment: Subject to paragraph IV.D.3
hereof, RCA will make available to AD [***] ("Maximum
A&R Funding") in each year of the Label Deal to be spent
on Artist advances and recording costs (including
producer advances) for the initial product commitment
for each Artist. As used herein, the "initial product
commitment" means all product intended to be recorded
under an Artist Agreement prior to the exercise of an
option under the applicable Artist Agreement. The Artist
advances and recording funds for the initial product
commitment will be subject to the mutual approval of AD
and RCA, provided that if RCA does not
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consent to the Artist advances and/or recording funds
for an initial product commitment, neither RCA nor any
company controlled by RCA shall sign the Artist directly
(unless RCA has knowledge of such Artist independently
from AD), and AD may elect to either take the Artist
(each a "Rejected Artist") to another record company
(subject to subparagraph 3(d) below) or, notwithstanding
RCA's non-consent, AD may enter into the Artist
Agreement with the applicable Artists ("AD Selected
Artists") so long as:
(a) the Artist advances and recording fund for a 1
album firm deal do not exceed [***] for the
first album, and the Artist advances and
recording funds for a 2 album firm deal do not
exceed an aggregate of [***] for the first 2
albums:
(b) the aggregate of all Artist advances and
recording funds for the initial product
commitment for all of the AD Selected Artists in
any 1 year of the Term ("Annual A&R Commitment")
do not exceed [***];
(c) with respect to AD Selected Artists after the
first one in each of the second and third years
of the Label Term, the signing of an AD Selected
Artist in the second or third year of the Label
Term would not cause AD to exceed the "Aggregate
Maximum." The Aggregate Maximum would occur in
the second or subsequent year of the Label Term
whenever the "Outstanding Amount" equals or is
more than [***] in the applicable year of the
Term. As used herein, the term "Outstanding
Amount" shall mean the amount, if any, by which
(i) the aggregate of unrecouped and expensed (in
accordance with GAAP) Artist advances and
recording costs for all AD Selected Artists
previously signed to the Label (but excluding
any other charges recoupable from AD or the
Selected Artists) exceeds (ii) all royalties
therefore credited to accounts of all of the AD
Selected Artists previously signed to the Label
and all royalties credited to AD's account with
respect to AD Selected Artists previously
signed to the Label. For purposes of this
calculation; (i) AD may require RCA, up to a
maximum of two (2) times in any calendar year of
the Term, to include in its calculation of
royalties a good-faith estimate of so-called
"pipeline" royalties in the EEC, Australia, and
Japan; and (ii) all royalties credited to AD's
account with respect to the AD Selected Artists
shall first be applied to recoup such artists'
advances and recording costs, prior to the
recoupment of other recoupable charges; and
(d) Notwithstanding anything to the contrary set
forth herein, AD shall not have the right to
sign more than [***] Rejected Artists to another
record company during any Contract Year of the
Term; provided, however, that AD shall not sign
any Artist to another record company on terms
less favorable than the terms last offered to
RCA by AD unless AD first offers to enter into
an agreement on the same terms.
4. Unused A&R Funds: If AD spends less than the Maximum A&R
Funding for initial product commitment in any one year,
then AD can use the lesser of [***] of the difference or
[***] to increase the Maximum A&R Funding for the
next year of the Label Deal.
5. Optional Product: RCA will advance all Artist advances
and recording funds payable with respect to all product
after the initial product commitment, provided that the
Label will not exercise an option under an Artist
Agreement without RCA's consent, not to be
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unreasonably withheld. Prior to the execution of the
Formal Agreement, the parties agree to negotiate in good
faith a procedure which would allow AD to pick-up an
Artist (without a royalty override or other
participation to RCA) if RCA should decide not to
exercise an option under an Artist Agreement.
6. Creative Control: AD will meaningfully and fully consult
with RCA on all creative matters. With respect to each
album, AD will regularly furnish copies of recordings
made during the recording process so that RCA may take
advantage of its consultation right, and so that RCA can
begin to make plans regarding the marketing of the album
concerned.
E. RCA's Marketing and Promotion: RCA will commit to spend at least
[***] to market each album released in the United States. Those
amounts will be spent in accordance with RCA's marketing plan.
RCA will fully consult with AD regarding each marketing plan.
F. AD's Marketing and Promotion:
1. In addition to RCA's committed marketing expenditures,
RCA will spend at least [***] as directed by AD for each
album released in the United States. AD will allocate
these amounts for traditional record marketing purposes
(e.g., independent promotion and marketing, tour
support, etc.) in the United States. AD will have the
right to use the lesser of [***] of any unused portion
of this $100,000 marketing fund or [***] per album
for the marketing and promotion of other albums in full
consultation with RCA.
2. In addition, during the Label Term, RCA will make
available to AD a minimum of [***] in the aggregate for
use in non-traditional marketing in full consultation
with RCA.
G. Recoupment:
1. Artist Advances. Artist advances including [***] of
recording costs, [***] of video costs up to [***] in
video costs for a single video and [***] of video costs
for a single video in excess of [***] , [***] of
independent promotion marketing costs, and [***] of tour
support will be recoupable by RCA from [***] of the
royalties set forth in paragraph V below with respect to
the applicable Artist. There will be no
cross-collateralization between Artists' accounts.
2. Signing Advance, Overhead Advances, and Sales Bonus
Overhead Payments. [***] of the Signing Advance and the
Overhead Advances and the recoupable portion of the
Sales Bonus Overhead Payments (as set forth in paragraph
IV.C hereof) shall be
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recoupable from the aggregate of [***] of the royalties
set forth in paragraph V below from all Artists from the
first record sold.
V. ALL-IN ROYALTY RATES UNDER THE LABEL DEAL:
A. RCA will pay AD a royalty of [***] (the "Base Rate") of the SRLP
with respect to [***] of USNRC Album Sales. The Base Rate will
escalate prospectively to [***] with respect to any album by an
Artist which sells more than [***] USNRC units. If any album by
an Artist sells more than [***] USNRC units, the Base Rate for
all subsequently released albums by that Artist will be [***].
RCA will pay AD a royalty of [***] of the SRLP with respect to
[***] of top-line singles sold through normal retail channels in
the United States.
B. The royalty for compact discs will be [***] of the otherwise
applicable royalty rate. However, if an album in all
configurations has USNRC Album Sales in excess of [***], then
the royalty rate for units of that album sold through USNRC in
excess of [***] will be [***] of the otherwise applicable rate,
and the rate for all compact discs of an album by the applicable
Artist released thereafter shall be [***] of the otherwise
applicable rate.
C. If an Artist's record is released on another type of audiophile
record, then, until such time as particular type of audiophile
record equals [***] of the aggregate of industry-wide sales of
all other configurations, the royalty rate for that record and
all other records by that Artist released in that particular
audiophile configuration during such period will be [***] of the
otherwise applicable royalty rate. Thereafter, the parties will
negotiate a royalty rate for the applicable audiophile record.
D. The foregoing royalty rates assume a standard free goods
allowance of [***] for albums sold in the United States in the
cassette configuration, [***] for albums sold in the United
States in the compact disc configuration and [***] for singles,
and standard packaging deductions of [***] for vinyl, [***] for
analog tape, and [***] for compact discs.
E. On sales through normal trade channels outside the United
States, RCA will pay AD a royalty calculated as a percentage of
the otherwise applicable rate as follows: Canada - [***]; the UK
(including Eire) and Japan - [***]; the rest of the EEC
Countries, Switzerland, Australia and New Zealand - [***]; and
R.O.W. - [***].
F. The other royalty terms will be subject to negotiation prior to
execution of the Formal Agreement.
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VI. VARIOUS PROVISIONS APPLICABLE TO BOTH THE LABEL DEAL AND THE PROFIT
DEAL:
A. Artist Agreements: The terms of the Artist Agreements will be
mutually approved as to total product, royalty rates, etc.
However, RCA will pre-approve certain terms so that AD will not
have to obtain RCA's approval as to the pre-approved terms. With
regard to mechanicals, AD will use its best efforts to secure a
[***] controlled composition rate in its Artist Agreements with
a [***] times cap on albums ([***] times cap on CDs) and subject
to an allowance for [***] covers per album at the full minimum
statutory rate.
B. Release Commitment:
1. RCA will be obligated to release each album delivered by
an Artist in satisfaction of its recording commitment in
the United States.
2. Each time an Artist delivers an album, AD shall provide
a pre-release copy of the album to BMG. BMG shall notify
AD within 60 days thereafter whether it will release
such album. If BMG notifies AD that it will release the
album, BMG will release the album in Canada, the EEC,
Japan, and Australia ( the "Release Territories") within
120 days after the initial release of such album in the
United States. Notwithstanding the foregoing, if the
album concerned is submitted to BMG less than 60 days
prior to its initial release date in the United States,
such 120-day period will be extended by the number of
days by which 60 days exceeds the number of days the
album is submitted prior to the initial release date in
the United States. If BMG does not release the album in
any Release Territory within such time period, AD shall
have the right to enter into a licensing agreement in
such Territory, provided that, without the approval of
RCA, (i) the foreign licensee shall not have the right
to release more than the applicable album (such licensee
shall also have the right to release singles derived
from such album), and (ii) the foreign licensee shall
not be affiliated with [***] (or any company affiliated
with [***] or [***]. If BMG notifies AD that it will not
release the album, AD shall have the right to cause a
licensing agreement to be entered into with respect to
territories outside of the United States on the terms
and conditions set forth above, provided that the
parties will negotiate at the time whether such license
will be granted by BMG or directly by AD. Under the
Label Deal, each foreign licensee not controlled by RCA
shall pay [***] of
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all monies to RCA. After paying the applicable Artist
royalty, RCA will take [***] of the proceeds for its own
account and will apply the remaining [***] of the
proceeds to AD's account. Notwithstanding the foregoing,
at AD's election, up to [***] of such proceeds may be
used for international tour support. During the Profit
Deal, the revenues from AD's foreign licensees shall be
deemed income in computing net profits.
C. Finished Goods Purchases: AD and the NT affiliate will be
entitled to purchase finished goods from BMG (at prices to be
mutually agreed upon prior to the execution of the Label Deal)
for the NT Affiliate's exploitation and distribution over the
internet or other networks, at tour locations and other
non-traditional distribution channels.
D. Record Clubs: No record will be sold through a record club in
the United States earlier than 9 months after its initial
release.
VII. DON'S AND MARC'S ENGAGEMENT:
A. Exclusivity: During the Term, neither Don, nor Marc, nor AD nor
any other company owned by either or both of them will have the
right to enter into any agreement with any other company which
involves the sale of records through traditional record
distribution channels. (If RCA becomes a "strategic partner" in
the NT Affiliate, then the exclusivity shall include all
exploitations of master recordings.) Don and Marc will be free
to pursue any other business, including, without limitation, a
talent agency, music publishing, internet website, and the
production, acquisition and/or exploitation of goods and
services, including audio and audiovisual product, over the
internet or other networks and at tour locations, and
merchandising; provided such activities do not interfere with
their material obligations hereunder.
B. Talent Agents: Neither Don nor Marc shall be required under the
Label Deal or the Profit Deal to breach their fiduciary or other
legal obligations to any of their talent agency clients.
VIII. PROFIT DEAL:
A. Management: Promptly after the Conversion Date, AD and RCA shall
negotiate in good faith an operating agreement, which shall
govern the operation of the New Entity. This agreement will
provide, among other matters, that the business of the New
Entity shall be generally run by a Board of Managers comprised
of Don, Marc, and 2 people designated by RCA, one of whom shall
always be a senior executive of RCA. However, the day-to-day
management decisions of the New Entity shall be made by Don and
Marc. In other words, AD shall have sole and absolute discretion
to run the day-to-day operation of the business of the New
Entity through Marc and Don, subject to the New Entity's
business plan which shall be reasonably agreed upon annually by
the Board of Managers.
B. Ownership and Net Profits: AD and RCA will each own 50% of the
New Entity. AD will be entitled to 50% of the net profits under
the Profit Deal, which will be paid within 90 days after each
year of the Profit Deal. Except for possible minimum annual
distributions to cover each party's tax
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obligations with respect to income subject to the Profit Deal,
no net profits will be distributed until RCA has been reimbursed
for all Chargeable Expenses. Net Profits would mean all revenues
to the Label calculated in accordance with GAAP, as consistently
applied to the financial statements of BMG less Chargeable
Expenses. Revenues from sales of records outside the United
States would mean the Matrix paid or credited to RCA by its
foreign affiliates and all monies paid or credited by its
non-affiliated licensees. As used herein, "Chargeable Expenses"
means the Working Capital Advance described below, all third
party, out-of-pocket manufacturing, marketing, promotional and
exploitation costs incurred by RCA in connection with records
initially released after the Conversion Date and certain
pre-Conversion Date costs as set forth in paragraph VIII.E.2
below.
C. Conversion Payment: If the Label Deal converts to a Profit Deal
as a result of AD achieving the automatic conversion target set
forth in paragraph III.C above (the "Automatic Conversion"), RCA
will pay, upon the Conversion Date, a [***] profit advance to
AD. If the Label Deal converts to a Profit Deal as a result of
RCA exercising its option to extend the Term beyond the initial
3 years (the "Optional Conversion"), RCA will pay, upon the
Conversion Date, a [***] profit advance to AD.
D. Working Capital Advance: Operating funds would be made available
by RCA pursuant to mutually approved annual plans on a
non-interest bearing basis. If AD and RCA are unable to agree
upon an annual business plan for any year, the working capital
advance provided for such non-plan year will be an amount equal
to the following amounts based on the assumption that the New
Entity will sign 5 new Artist during such year: (i) A&R funding
equal to [***] for the initial product commitment; (ii) a
minimum of [***] per album release in marketing and promotion
funds, and (iii) overhead payments equal to [***] in the event
of an Automatic Conversion or [***] in the event of an Optional
Conversion. RCA agrees that all or any portion of the overhead
payments may, at AD's election, be paid to Don and Marc as
salary, perquisites and benefits other distributions.
E. Transition Issues:
1. With respect to all sales and other exploitations of
Pre-Conversion Product prior to the Conversation Date,
RCA will account to AD on a royalty basis.
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2. All sales and other exploitations after the Conversions
Date will be subject to the Profit Deal; subject to the
following:
(a) RCA shall license to the New Entity all rights
to exploit and otherwise use the Pre-Conversion
Product throughout the world during the term of
the Profit Deal (i.e., such license shall end at
the end of the Term). In consideration for such
license, the New Entity shall pay RCA a royalty.
Such royalty shall be at the rate of [***] of
the SRLP with respect to [***] (less free goods
and discounts) of USNRC Album Sales. Such
royalty shall be calculated, reduced and paid in
accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings.
(b) The New Entity shall pay RCA all artist
royalties payable for all sales and
exploitations of the Pre-Conversion Product by
the New Entity until such time as all advances
and other recoupable charges incurred by RCA
prior to the Conversion Date have been recouped.
Thereafter and during the rest of the Term, the
Label shall account to the applicable Artists
with respect to such artist royalties. The New
Entity will also pay RCA for: (i) all
Pre-Conversion inventory; and (ii) all
Pre-Conversion marketing expenses incurred in
connection with product to be initially released
after the Conversion Date.
3. Except as set forth in paragraph VIII.E.2 above, no
other expenditures by RCA under the Label Deal will be
deemed Chargeable Expenses in computing net profits or
will be used to reduce the Working Capital Advance.
F. Domestic Distribution: Net profits shall be calculated [***].
RCA agrees that, prior to the execution of this Agreement, it
has supplied AD with a true and correct written statement of
calculation of such [***].
G. Domestic Manufacturing: Net profits shall be calculated using
the applicable manufacturing and packaging prices paid by RCA
for its own product as set forth in Exhibit "C" hereof.
H. Foreign Revenues: The revenue from foreign sales by an affiliate
of RCA will be calculated using the Matrix paid to RCA by its
foreign affiliates for
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RCA's other product and all monies paid by licensees of RCA and
of the New Entity.
I. Additional Services: RCA shall provide the New Entity with
promotion, marketing, creative services, including video, art,
artist relations, publicity, promotional merchandise, sales,
distribution, general financial, royalty accounting and
administrative services with respect to the New Entity's
product. In consideration of the foregoing services, RCA shall
be entitled to the following fees: (i) [***] of RCA's wholesale
receipts in the United States paid or credited to the New Entity
in the applicable year until such fees equal [***], (ii) [***]
of such receipts between of in the applicable year until such
fees equal [***], and (iii) [***] of such receipts until such
fees equal [***] in the applicable year. Notwithstanding the
foregoing, the fees payable in any one(1) year shall not be in
excess of [***]. Further, if RCA does not perform all of the
foregoing services, the parties shall negotiate in good faith a
reduction in the maximum fees payable in each year, provided
that RCA shall continue to be paid the fees as set forth herein
during the period of such negotiations.
J. Buy-Out:
1. If RCA does not exercise its Early Termination Right, AD
shall have the right, at any time after the date 6
months prior to the end of the 6th year of the Term, to
offer ("Buy-Out Offer") to sell AD's interest in the New
Entity to RCA as of the last day of the Term for a
purchase price equal to the Buy-Out Offer price. If AD
has not made a Buy-Out Offer as of the end of the Term,
RCA shall have the right thereafter to require AD to
make a Buy-Out Offer by notifying AD to such effect. If
AD does not make a Buy-Out Offer within 60 days after
such notice, then RCA shall have the right to suspend
its obligation to make any further payments to AD until
AD makes a Buy-Out Offer.
2. RCA shall either accept the Buy-Out Offer or offer to
sell its interest in the New Entity to AD for the
Buy-Out Offer price, within 30 days after RCA's receipt
of the Buy-Out Offer.
3. If, on the one hand, RCA accepts the Buy-Out Offer, then
RCA shall promptly purchase AD's interest in the New
Entity for the Buy-Out Offer price. If, on the other
hand, RCA offers to sell its interest in the New Entity
to AD, then AD shall notify RCA, within 30 days
thereafter, whether AD is electing to purchase RCA's
interest in the New Entity at the Buy-Out Offer or is
rejecting RCA's offer to sell.
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4. In the event AD rejects RCA's offer to sell RCA's
interest in the New Entity, AD shall be deemed to have
offered to sell to RCA AD's interest in the New Entity
for [***] of the original Buy-Out Offer price. RCA shall
either accept the [***] Buy-Out Offer or offer to sell
its interest in the New Entity to AD for the [***]
Buy-Out Offer or offer to sell its interest in the New
Entity to AD for the [***] Buy-Out Offer price, within
30 days after such notice. If, on the one hand, RCA
accepts the [***] Buy-Out Offer, then RCA shall promptly
purchase AD's interest in the New Entity for the [***]
Buy-Out Offer price. If, on the other hand, RCA offers
to sell its interest in the New Entity to AD, then AD
shall notify RCA, within 30 days thereafter, whether AD
is electing to purchase RCA's interest in the New Entity
at the [***] Buy-Out Offer or is rejecting RCA's offer
to sell.
5. The foregoing procedure will continue with reductions
equal to [***] of the initial Buy-Out Offer price at
each level until one of the parties agrees to purchase
the other party's interest in the New Entity.
6. For the avoidance of doubt, the Pre-Conversion Product
shall not be deemed assets of the New Entity and,
accordingly, shall not be subject to the foregoing
provisions of this paragraph VIII.J.
7. It is understood and agreed that if AD purchases RCA's
interest in the New Entity, [***] of the New Entity's
net losses shall be added to AD's purchase price.
K. Consultants: If RCA purchases AD's interest in the New Entity,
Marc and Don, at RCA's election at the time of RCA's purchase
(provided that RCA will not be able to engage one without the
other), will act as consultants to the Label for one (1) year.
During this period, Marc and Don will not be involved in the
record industry (insofar as traditional record distribution is
concerned) with anyone other than RCA. The salary paid to Marc
and Don during this consultancy will be the same amount as the
salary paid to them during the last year of the Profit Deal. The
other terms related to this consultancy shall be negotiated by
the parties in good faith prior to the execution of the Formal
Agreement.
IX. ANCILLARY RIGHTS: In the event that AD or the Label (or any other entity
owned or controlled, directly or indirectly, by the Marc and Don)
obtains music publishing or merchandising rights with respect to any
artist, RCA or its affiliates will be given the first opportunity to
exploit such rights on reasonable business terms. "Reasonableness" in
the preceding sentence will be judged by references
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to ordinary course, arms-length negotiations conducted in good faith. If
the parties are unable to reach agreement with respect to ancillary
rights in any case, AD and its affiliates will not do a deal with any
third party on terms less favorable than the terms offered to RCA or its
affiliate without first offering such terms to RCA or its affiliate.
X. KEY MAN: During the Term, both Don and Marc will be deemed to be "key
men." Accordingly, if either of them cease to perform or becomes unable
to perform their respective obligations during the Term, RCA will have
the option to terminate the Term.
XI. LEGAL FEES: RCA will not be responsible for any legal or consultancy
fees incurred in connection with the negotiation of this transaction.
XII. WARRANTIES: Each of the parties hereto represents and warrants that: (i)
it has the full right and authority to enter into and fully perform this
agreement; (ii) entering into this agreement will not violate or
infringe upon the rights of any third party: and (iii) it is under no
disability, restriction, or prohibition with respect to its rights to
enter into, and fulfill, all of its obligations under this agreement.
XIII. MISCELLANEOUS: All reference to "this Agreement," "hereof," "herein,"
"hereunder," and words of similar connotation include all exhibits
attached hereto, unless specified otherwise. This Agreement cannot be
canceled, modified, amended or waived, in part or in full, in any manner
except by an instrument in writing signed by the party to be charged. No
waiver by any party to this Agreement, whether expressed or implied, of
any provision of this Agreement or default hereunder shall affect such
party's right to thereafter enforce such provision or to exercise the
right or remedy set forth in this Agreement in the event of any other
default, whether or not similar. Whenever examples are used in this
Agreement with the words "including," "for example," "e.g.," "such as,"
"etc." or any derivation thereof, such examples are intended to be
illustrative and not in limitation thereof.
RCA RECORDS, INC. ARTIST DIRECT, LLC
By: /s/ Jeff Walker By: /s/ Marc Geiger
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Jeff Walker Marc Geiger
Senior Vice President
Business & Legal Affairs
By: /s/ Marc Geiger
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Marc Geiger
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