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Sample Business ContractsHome: Sample Business Contracts:
CONFIDENTIAL
[LETTERHEAD LOGO]
July 23, 1997
Mr. William F. McLaughlin
President and Chief Executive Officer
Sweetheart Cup Company Inc.
I0100 Reisterstown Road
Owings Mills, MD 21117
Re: JOINT VENTURE FOR MCDONALD'S CONTAINERS
Dear Bill:
The purpose of this letter is to set forth our current mutual intentions
regarding a proposed business arrangement between Sweetheart Cup Company Inc.
("Sweetheart") and EarthShell Container Corporation ("ECC") with respect to
the utilization by a division of Sweetheart ("JV") of ECC's technology to
manufacture and distribute large hinged sandwich containers to The Perseco
Company ("Perseco") for McDonald's Corporation (the "Product"). The terms
"ECC" and "Sweetheart" shall also refer to their respective parent and
subsidiary corporations. This letter supersedes in its entirety the letter
agreement between the parties dated November 21, 1996.
1. GENERAL STRUCTURE.
a. ECC and Sweetheart have previously entered into a sublicense
agreement dated October 7, 1994 (the "Current License") to utilize ECC's
technology as identified therein (the "Technology") to manufacture and
distribute certain foodservice disposable products within a defined territory
(the "Territory"). Upon entering into the Definitive Agreements (as defined in
Section 15(a) below), the Current License shall be terminated and superseded
by ECC's sublicense of the Technology to JV. Pursuant to the new sublicense
agreement (the "Sublicense Agreement"), ECC shall receive a 20% royalty on
the net sales price ("Net Sales") derived by JV from the sale of the Products
after the Start Date (as defined below), computed in the same manner as under
the Current License. The Sublicense Agreement shall grant JV a non-exclusive
right to manufacture and distribute the Products in the Territory. JV will
conduct the business of manufacturing, marketing and distributing the
Products. Except as otherwise provided, Sweetheart will be in charge of JV's
operations.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 2
b. Subject to the terms below, either party may engage in other
business activities, regardless of whether such activities are competitive
with JV.
c. ECC shall provide JV with lines of manufacturing equipment
("Equipment") on a "turn-key" basis. ECC shall provide JV with all technical
information necessary to commercially manufacture the Product including
material composition, raw materials specifications, process equipment
specifications, processing conditions, output standards and quality assurance
methods. ECC shall warrant for all periods ending on or before the Warranty
Termination Date (as defined in Section 2(a)(iii)) that, by combining the
materials and operating the Equipment in accordance with the technical
information supplied, the Equipment will produce Products that are in
conformity with approved samples and that the Equipment will perform in
accordance with the Model Efficiency Levels set forth in Section 2(a)(i)(B).
The Technology licensed to JV shall be based, in part, on specific patents
(both issued and pending) that shall be listed in the Sublicense Agreement.
d. The parties have, attached hereto as Exhibit A, a redacted
version of the economic model dated July 23, 1997 (the "Economic Model") that
illustrates, on a hypothetical basis, the expected revenue and cost
components for the annual production and sale of approximately 600 million
units of Product. The model assumes that each line of Equipment will be
tooled for and dedicated to only one specific sandwich container.
e. Immediately following the execution of this letter, Sweetheart
shall use commercially reasonable efforts to negotiate and procure a contract
with Perseco relating to the purchase and sale of the Product (the "Perseco
Contract"). Pursuant to such contract, Perseco shall be obligated to
purchase, and JV shall be obligated to sell annually, at least 600 million
units of Product; provided, however, that ECC shall approve any material
terms or conditions that may result in an additional financial or performance
obligation by ECC beyond those set forth in the Economic Model, including
such terms as product specifications, quality requirements and timing of
delivery.
(i) The expected price of the Product is an amount for the
QPC variation of the Product expected to be sold, and is set forth in the
attached Economic Model, and is based upon the size and weight of the
variations of the Product that ECC believes will be introduced by McDonald's
Corp. in its stores in the US and Canada, and certain other assumptions set
forth in the Economic Model. The price estimate is subject to adjustments to
reflect changes in Product specifications and/or processing conditions for
the Product as set forth in the Perseco Contract. The Economic Model shall be
adjusted to reflect any differences between the assumptions made in the
Economic Model and the actual terms of the Perseco Contract, including
changes in Product mix, Product specifications or processing conditions;
provided, however, that the Sweetheart Preliminary Profit Distribution
payable after the Start Date shall not be less than the amount provided in
Exhibit E.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 3
(ii) The parties shall cooperate with one another and use all
commercially reasonable efforts to ensure that JV timely fulfills its
obligations under the Perseco Contract.
f. This business arrangement shall be treated as a partnership for
tax purposes only.
2. CONTRIBUTIONS.
a. ECC'S OBLIGATIONS.
(i) INSTALLATION OF EQUIPMENT.
(A) ECC shall reserve the first four lines of Equipment
for JV subject to the last sentence of this Section 2(a)(i)(A). Following
execution of the Perseco Contract, ECC shall acquire and install, at its
cost, at least four fully integrated lines of Equipment at the Plant Facility
described in Section 2(b)(i) below and lease them, and any mutually agreed
upon additions or improvements thereto, to JV on a triple net lease basis
pursuant to the terms set forth in the Definitive Agreements. ECC shall
acquire and install, on a timely basis, additional lines of Equipment if
Perseco purchases more than 600 million units annually of the Product
pursuant to the Perseco Contract. The Equipment shall be installed at such
times as will reasonably allow JV to satisfy its delivery commitments under
the Perseco Contract. If for any reason JV is unable to obtain the Perseco
Contract within the time period outlined in Section 17 and another ECC
licensee does obtain such a purchase commitment within the same time period
required of Sweetheart and at a price no less than that offered by Sweetheart
to Perseco, JV shall relinquish its priority right to the Equipment.
(B) Following installation, the initial four lines of
Equipment must run for at least 14 consecutive days, 24 hours per day, and
produce, on an annualized basis, 600 million units of Product meeting the
product and quality specifications set forth in the Perseco Contract, and
satisfying, on an overall basis, the staffing and raw materials usage and
throughput requirements set forth in the Economic Model (the "Model
Efficiency Level"). The "Start Date" shall be the date by which (i) ECC has
reduced the Direct Conversion Cost Deficit ("DCCD") to zero, which may be
accomplished by paying the DCCD to zero, and (ii)(x) the initial four lines
of Equipment have achieved the Model Efficiency Level, or (y) the initial
four lines of Equipment are producing sufficient Product to satisfy the
Perseco Contract at the quality and service levels required by Perseco and
ECC agrees to assume the economic consequence of not having achieved the
Model Efficiency Level, or (z) Sweetheart agrees that the Start Date has
commenced. The DCCD shall be funded quarterly by ECC and is defined as the
amount by which the sum of JV's Direct Cost of Sales exceed JV's Net Sales
(as such terms are defined in the attached Exhibit D), determined on a
cumulative basis.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 4
(C) It is ECC's obligation that the Equipment meet all
applicable legal and administrative code standards.
(D) ECC shall be responsible for any costs incurred in
procuring, installing and testing the Equipment (including the items set
forth in Exhibit B under the column "ECC Responsibility") that exceed the
total estimated capitalization figure set forth in the Economic Model (the
capitalization figure utilized in the Economic Model is defined herein as
the "Standard Equipment Cost"). These additional capital costs shall be
repaid prior to the Start Date from available cash to the extent provided on
Exhibit D, and after the Start Date, the unpaid capital costs shall be
amortized at the same rate and over the same term utilized to amortize the
Standard Equipment Costs in the Economic Model and shall be credited, to the
extent not paid, to ECC's Deficit Account on a monthly basis. ECC shall
separately pay, without reimbursement by JV, the one time costs to have
Simons Engineering perform the detailed design and engineering of the basic
commercial ECC manufacturing line.
(E) In consideration for providing each line of
Equipment to JV, ECC shall be entitled to receive the ECC Equipment Profit
Participation in the amount and for the term set forth in the Economic Model.
The ECC Equipment Profit Participation shall commence to accrue on the date
the initial four lines of Equipment are installed and operational (the
"Operations Date").
(ii) MANUFACTURING PRE-START DATE OPERATIONS. ECC shall
manage the manufacturing operations of JV on and prior to the Start Date and
shall review and approve all costs of JV contributing to the DCCD. ECC
approval shall not be unreasonably withheld as long as such costs are
consistent with the costs projected in the economic model.
(iii) FAILURES. After the Start Date, ECC shall pay to JV,
as the ECC Performance Guarantee, any incremental costs incurred by JV and
which are attributable to the failure of the Equipment, on an aggregate
basis, to operate at the Model Efficiency Level due to deficiencies in the
Technology, Product design and specifications, or the Equipment (provided
such failures are not the result of Sweetheart's operation or maintenance of
the Equipment). Such costs, to the extent they represent additional capital
expenditures only, shall be credited to ECC's Deficit Account and shall be
amortized at the same rate and over the same term utilized to amortize the
Standard Equipment Costs. Once the initial four lines of Equipment have
operated for a 24 month continuous period at the Model Efficiency Level, ECC
may elect to terminate ECC's Performance Guarantee at any time. SCC, on the
other hand, may elect to terminate ECC's Performance Guarantee at any time.
SCC, on the other hand, may elect to terminate ECC's Performance Guarantee at
any time following the Start Date. The date ECC's Performance Guarantee is
terminated is defined as the "Warranty Termination Date." Following the
Warranty Termination Date: (x) Sweetheart shall receive 100% of all Final
Distributions (as defined in Exhibit E); (y) the Sweetheart and EarthShell
Preliminary Profit Distributions (as defined in Exhibit E) shall cease; and
(z) Sweetheart shall cease to receive distributions of Unfavorable Variance
Costs (as defined in Exhibit E).
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 5
(iv) TECHNOLOGY. Pursuant to the Sublicense Agreement, ECC
shall sublicense to JV the Technology and other intellectual property
relating to the Products.
(v) IMPROVEMENTS. ECC shall provide JV with improvements
to the Technology and Equipment.
b. SWEETHEART'S OBLIGATIONS.
(i) PLANT FACILITY. On or before the date the first Line
of Equipment is to be installed by ECC, Sweetheart shall provide to JV a
portion of its facility in Maryland, with appropriate capacity and utility
hook-ups, to safely house and operate at least four Lines of Equipment, and
to provide suitable supply and inventory space, transportation facilities and
other functions necessary to successfully manufacture and distribute the
Products. If additional Lines of Equipment are added to JV, Sweetheart shall
provide similar facility space. The physical location and specifications of
the plant facilities (referred to herein collectively as the "Plant Facility")
shall be subject to ECC's reasonable approval. ECC personnel or consultants
will be permitted access to the Plant Facility and shall be provided office
space as is reasonably necessary in order for them to fulfill ECC's
obligations or protect its rights under the Definitive Agreements. The Plant
Facility shall meet all applicable legal and administrative code standards.
In consideration for its building out the facility space to accommodate JV's
operations, (including the costs set forth in Exhibit B under the column
"Sweetheart Responsibility") Sweetheart shall receive the Infrastructure
Enhancement Distribution in the amount set forth in the Economic Model (which
assumes a specific capitalization figure for Sweetheart in improving the
Plant Facility and an amortization rate and term over which the
capitalization figure is to be amortized). Any out-of-pocket costs incurred
by Sweetheart in improving the Plant Facility to accommodate JV's operations
that exceed the estimated capitalization figure set forth in the Economic
Model (such capitalization figure being defined herein as the "Standard
Infrastructure Enhancement Cost") shall be capitalized and be repaid prior to
the Start Date from available cash to the extent provided in Exhibit
D, and after the Start Date, the unpaid capital costs shall be amortized at
the same rate and over the same term utilized in the Economic Model, and the
amortization charge, to the extent not paid, shall be credited monthly to
Sweetheart's Deficit Account. In addition, in consideration for furnishing
the Plant Facility, Sweetheart shall receive the Plant Facility Rental in
the amount set forth in the Economic Model. The Infrastructure Enhancement
Distribution and the Plant Facility Rental shall commence accruing on the
Operations Date.
(ii) WORKING CAPITAL. Sweetheart shall contribute all of
the working capital required to operate JV, inclusive of its manufacturing,
marketing and distribution functions, but exclusive of the capital ECC is
required to contribute.
(iii) EMPLOYEES. Sweetheart shall provide JV, at
Sweetheart's cost, with the employees necessary to staff and operate the
Equipment and to otherwise attend to the administration, supervisory,
marketing, sales and distribution functions of JV, all as set forth in the
Economic Model.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 6
(iv) MATERIALS. Sweetheart shall purchase the raw materials
and, except for Equipment to be provided by ECC, provide material handling
and storage, including for raw materials, work-in-process and finished goods,
all in accordance with the attached Exhibit B.
(v) INSURANCE. Sweetheart shall provide or obtain
replacement cost insurance for the Plant Facility and Equipment.
(vi) TECHNICAL. Sweetheart shall provide technical support
to JV for the production of the Products.
(vii) PERSECO CONTRACT. Sweetheart shall manage the Perseco
and McDonald's relationships.
3. LICENSE TERMS/TECHNICAL SERVICES.
a. SUBLICENSE AGREEMENT. An outline of the proposed Sublicense
Agreement is attached as Exhibit C.
b. TECHNICAL SERVICES. In the event that JV elects to contract
with ECC for technical services that it is not obligated to perform under the
terms of the Definitive Agreements, JV will be charged at a rate equal to
ECC's cost for such technical services. Likewise, any such services provided
by Sweetheart will be charged to JV at Sweetheart's cost for such services.
4. DISTRIBUTIONS BY JV.
a. PRE-START DATE. See Distribution Schedule attached as
Exhibit D.
b. POST-START DATE. See Distribution Schedule attached as
Exhibit E.
5. MANAGEMENT.
a. OPERATIONS. JV's day to day manufacturing operations shall be
managed by ECC representatives prior to the Start Date and by Sweetheart
representatives on and after the Start Date. All other JV operations,
including the administration of the Perseco Contract, warehousing, raw
material purchases, labor procurement and supervision, shipping and
receiving shall be managed by Sweetheart both prior to and after the Start
Date.
b. BOARD OR POLICY CONTROL.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 7
(i) JV's fundamental business strategies shall be governed by
a Board of Managers comprised of four individuals--two appointed by ECC and
two appointed by Sweetheart.
(ii) Decisions of the Board shall be made by a majority of the
Managers, and Board approval shall be required for such critical issues as
(A) annual and capital budgets, including, standard material costs and labor
rates, intercompany allocations of fixed or variable overhead or pricing for
services which are inconsistent with the Economic Model, distribution
policies or any material deviations therefrom, (B) modifications to the
Equipment beyond those minor modifications that do not detrimentally affect
efficiency levels or materially impair its value, (C) modifications to the
composition and process "specifications" for the Product, (D) the entering
into, or material amendment of, or early termination of the Perseco Contract,
(E) any transaction that would materially increase the obligations of either
party beyond those contemplated in the Definitive Agreements, and (F) any
sale or disposition by ECC or Sweetheart of their interest in JV or its
assets, excluding a disposition to an affiliate (provided the transferring
party remains liable for its obligations with respect to JV or the other
party), or a disposition to a non-affiliate pursuant to a merger or sale or
disposition of all or substantially all of the party's assets (provided the
non-affiliate assumes liability for the obligations of the transferring party
with respect to JV or the other party).
(iii) The Board shall take all commercially reasonable steps to
ensure that JV makes cash distributions to the parties in amounts necessary
to timely discharge their federal and state income tax liabilities associated
with the taxable income generated by JV.
(iv) The Board shall meet quarterly for the first two years
after the Effective Date and periodically as agreed upon by Sweetheart and
ECC thereafter. The location of the meetings shall alternate between
Sweetheart and ECC, unless otherwise established by the Board.
6. MCDONALD'S PRIORITY. JV will conform to the McDonald's Priority
Agreement.
7. TERM. The term of JV shall be ten years commencing on the
Operations Date.
8. TERMINATION. At anytime during the term of JV, the parties may
mutually agree to terminate the Definitive Agreements and to determine the
effect of such termination. Either party may unilaterally terminate the
Definitive Agreements during the term of JV only under the following
conditions:
a. PRE-START DATE. Either party may terminate the Definitive
Agreements in the event the Start Date is delayed more than 18 months beyond
the date the first line of Equipment is installed. If ECC elects to
terminate, Sweetheart shall have the right to purchase the Equipment pursuant
to Section 9(b) (the "Purchase Right"). If Sweetheart elects to terminate, it
shall have no Purchase Right.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 8
b. POST START DATE. During the initial term of the Perseco
Contract (expected to be three years), neither party shall have the right to
terminate the Definitive Agreements following the Start Date. After the
initial term of the Perseco Contract:
(i) ECC may terminate the Definitive Agreements upon (A)
six month's written notice to Sweetheart (provided, however, such termination
shall not be effective prior to the end of any extended term of the Perseco
Contract), (B) Sweetheart's material breach of the Definitive Agreements and
failure to cure within a reasonable period following notice, or (C)
Sweetheart's bankruptcy; and
(ii) Sweetheart may terminate the Definitive Agreements upon
(A) written notice to ECC (provided, however such termination shall not be
effective prior to the end of any extended term of the Perseco Contract), (B)
ECC's material breach of the Definitive Agreements and failure to cure within
a reasonable period following notice, or (C) ECC's bankruptcy.
(iii) Sweetheart may terminate the Operating and Lease
Agreements, but continue the Sublicense and purchase the Equipment pursuant
to the Purchase Right set forth in Section 9(b) upon 90 days written notice
to ECC, provided that such termination shall not be effective prior to the
Warranty Termination Date.
(iv) In the event the Definitive Agreements are terminated
by ECC pursuant to Section 8(b)(i)(A) or by Sweetheart pursuant to Section
8(b)(ii)(B) or (C), or in the event Sweetheart terminates the Operating
Agreement pursuant to Section 8(b)(iii), Sweetheart shall have the Purchase
Right set forth in Section 9(b).
9. EFFECT OF TERMINATION.
a. TERMINATION. Except as provided in Sections 9(b) and 9(c)
below, upon the effective date of termination of the Definitive Agreements
pursuant to Section 8 above, the ECC Equipment Profit Distribution and the
Sweetheart Plant Facility Lease and Infrastructure Enhancement Distribution
shall cease to accrue, ownership of the Technology shall be allocated
pursuant to the Sublicense Agreement, any cash proceeds available upon or
following JV's termination, including any proceeds from the collection of
receivables or the sale of assets (other than the Equipment and the Plant
Facility) shall be applied to discharge all of JV's debts and obligations,
reserves for contingent liabilities shall be created and the balance of JV's
cash (including any funds ultimately released from reserves) shall be
distributed to the parties in the manner and in the priority set forth in
Section 4.
b. RIGHT TO PURCHASE. If Sweetheart has a Purchase Right upon
termination of the Operating and and Lease Agreements pursuant to Sections
8(a) or 8(b)(iii) or (iv), above, Sweetheart shall have the right to purchase
the Equipment on an "as is" basis for ECC's actual
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 9
unrecovered cost basis in the Equipment (which shall include any amount in
its Deficit Account) plus applicable sales taxes, if any, and continue the
Sublicense Agreement. Such option must be exercised within 90 days following
Sweetheart's notification of the event leading to the termination of the
Definitive Agreements.
(i) Following the Sweetheart's purchase of the Equipment,
ECC shall be granted a right of first offer to purchase the Equipment (or any
material component thereof) prior to Sweetheart's offer of same to a
non-affiliate purchaser, such right to exist for a period of ten years
following Sweetheart's purchase of the Equipment from ECC. ECC must exercise
such right within thirty days of being given written notice of the terms and
conditions of the offer (which offer, at a minimum, shall contain a cash
purchase price). If ECC does not timely elect to purchase the Equipment (or
component thereof) within said 30 day time period, Sweetheart shall be free
for a six month period thereafter to sell the Equipment (or component
thereof) to a non-affiliated purchaser on terms and conditions that are
comparable in all material respects to those offered to ECC. If Sweetheart is
unable to sell the Equipment (or component thereof) on comparable terms and
conditions within said six month period, the Equipment (or remaining
components thereof) shall again be subject to the right of first offer.
Following the end of the ten year period, Sweetheart shall have no obligation
to sell the equipment to ECC subject to subparagraph (ii) below.
(ii) ECC shall have the option, exercisable within 60 days
following termination of the Sublicense Agreement, to purchase all, but not
less than all, of the Equipment then owned by Sweetheart or its affiliates
for such Equipment's fair market value on the date the Sublicense Agreement
is terminated, as determined by Sweetheart and ECC or, in the event they
disagree, by any independent, qualified appraiser mutually selected by
Sweetheart and ECC (or by an arbitrator in the event either party invokes the
arbitration provisions set forth in the Definitive Agreements to determine
the purchase price). Unless the parties agree otherwise, if ECC timely elects
the purchase option, (i) ECC shall be required to purchase the Equipment
subject to the option "as is" and for a cash price payable within 60 days
after the fair market value of the Equipment is finally determined, and (ii)
assuming the purchase transaction closes, Sweetheart shall transfer good and
marketable title to the Equipment to ECC free of all liens and encumbrances.
If ECC does not timely elect to purchase the Equipment following termination
of the Sublicense Agreement, Sweetheart shall be free to dispose of the
Equipment in any manner it chooses.
(iii) ECC shall be responsible for all applicable sales taxes
on the sale of any Equipment to ECC pursuant to Subparagraph (i) and (ii)
above, and Sweetheart shall allow ECC representatives reasonable access to
inspect the Equipment for purposes of determining whether ECC desires to
exercise its rights under this Section. Subparagraphs (i) and (ii) shall not
apply to any sale or transfer by Sweetheart of the Equipment pursuant to a
sale or transfer of all or substantially all of its assets to another entity
(whether by transfer of assets, by merger of Sweetheart or pursuant to any
reorganization in which Sweetheart is not the surviving entity), provided
that the transferee assumes Sweetheart's rights and obligations under this
Section.
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 10
c. SWEETHEART EARLY TERMINATION. In the event Sweetheart terminates
the Definitive Agreements upon notice less than twelve months prior to the
effective date of such termination, Sweetheart shall pay to ECC the
EarthShell Equipment Profit Participation for the twelve month period
following termination.
10. CONFIDENTIALITY. Both parties shall be bound by a standard
Non-Disclosure Agreement relating to proprietary and confidential information
(including business terms) only, which agreement shall impose upon the
parties a mutually acceptable standard of reasonable care with respect to the
protection of the proprietary and confidential information.
11. INDEMNIFICATION.
a. By Sweetheart. Sweetheart shall indemnify ECC for claims other
than claims arising out of ECC negligent or intentional acts or failure to meet
the Model Efficiency Level relating to:
(i) Third party claims for personal injury or property damage
involving product produced after the Start Date;
(ii) Claims made by Sweetheart employees;
(iii) Raw material purchases by Sweetheart;
(iv) Operation and maintenance of the Plant Facility and
Equipment (except to the extent ECC is obligated therefore); and
(v) Intellectual property infringement or misappropriation for
improvements licensed by Sweetheart ECC.
b. By ECC. ECC shall indemnify Sweetheart for claims other than
claims arising out of Sweetheart negligent or intentional acts relating to:
(i) Safety of Equipment through the Warranty Termination Date,
including, but not limited to, OSHA compliance;
(ii) FDA compliance of Product that meets specification;
(iii) Intellectual property infringement or misappropriation for
Technology or Improvements licensed by ECC to Sweetheart;
(iv) Failure of ECC to meet its funding obligations pursuant
to the Definitive Agreements (including the Performance Guarantee); and
(v) Claims made by ECC employees.
c. JV shall carry product liability insurance (which shall be
considered a component of variable overhead) covering Sweetheart and ECC to
insure them against claims of personal injury or property damage made with
respect to Product that meets specifications (other than for claims covered
by a specific indemnification obligation under Sections 11(a) and (b) above).
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 11
12. AUDITS AND REPORTS. ECC shall have the right to review the books
and records relating to JV upon reasonable notice. JV shall provide the
parties with monthly balance sheets, P&L and such other management and
financial reports as shall be identified in the operating agreement.
13. DISPUTE RESOLUTION. Unless the parties mutually agree to a more
expedited process, in the event any controversy arises under the Definitive
Agreements, the parties shall first attempt to resolve it by informal
negotiations. The controversy shall next be referred to the executives of the
parties, then mediation and then binding arbitration.
14. GENERAL PROVISIONS. The Definitive Agreements shall contain the
following additional provisions:
a. Further Assurances -- agreements to cooperate
b. Amendments -- must be in writing
c. Notices -- method, timing and addresses
d. Entire Agreement -- the entire and exclusive agreement of the
parties relating to the subject matter
e. Severability -- terms are severable
f. Counterparts -- may be signed in counterparts
g. Governing Law -- Delaware
h. Successors -- binding on successors and assigns
i. Third Party Beneficiaries -- no third parties beneficiaries
j. Specific Performance -- parties entitled to specific performance
k. Waivers -- failure to enforce provision does not constitute waiver
l. Cumulative Remedies -- rights and remedies are cumulative
m. Expenses -- each party responsible for its own expenses
15. DEFINITIVE AGREEMENTS.
a. While the foregoing represents our current understanding, it is
agreed that this letter does not create any binding obligation, expressed or
implied, on the part of ECC or Sweetheart with respect to the matters
referred to herein, except as set forth in Sections 15(b) or 16 below.
Promptly after the execution of this letter, (i) Sweetheart shall take the
lead in negotiating and procuring the Perseco Contract, and (ii) the parties
shall negotiate and execute a definitive JV operating agreement, Sublicense
Agreement, lease agreement with respect to the Equipment and any other
agreements appropriate to the arrangements contemplated herein (collectively,
the "Definitive Agreements"), in form and substance mutually satisfactory to
the parties and containing terms, conditions, covenants and representations
customary to transactions of the type outlined above, including, without
limitation, the terms and conditions described herein. The parties may make
non-material modifications to the foregoing terms and conditions to satisfy
any tax or liability concerns, provided the economic substance of the
transactions described
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Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 12
herein is not altered in any material way. Until the Definitive Agreements
are entered into, the parties shall continue to be bound by any other written
agreements that may exist between them (including the Current License and any
confidentiality restrictions or other obligations of non-disclosure). Such
agreements shall terminate upon the due execution and delivery of the
Definitive Agreements. In addition, the parties shall negotiate and execute
agreements covering the production and sale of products other than the
Products to customers other than McDonald's, including an operating
agreement, sublicense agreement, equipment lease agreement and such other
agreements as may be desirable (the "Additional Agreements"). It is
anticipated that the Definitive Agreements and Additional Agreements shall be
executed prior to, and shall become effective upon, the execution of the
Perseco Contract.
b. Until the earlier of (i) November 21, 1997, or (ii) the Start
Date, ECC shall not enter into a sublicense agreement with a new sublicensee
(other than Prairie Packaging, Inc. or any additional sublicensee required by
Perseco as a condition for entering into the Perseco Contract) to utilize the
Technology to manufacture and distribute the ECC products specified in the
Current License within North America, provided, however, that this
restriction shall lapse if Sweetheart is unable to procure the Perseco
Contract (or an equivalent contract from another major customer) within the
time period set forth in Section 17.
16. EXPENSES. Each party shall bear its own legal and professional
expenses, as well as any finder's or similar fees, in connection with the
negotiation and execution of this letter and the Definitive Agreements.
17. TERMINATION. The parties will use reasonable efforts to complete
and enter into the Definitive Agreements within 60 days of the date hereof.
If the Definitive Agreements have not been entered into within 60 days
following the date of this letter, or if the Perseco Contract has not been
entered into within 90 days following the date of this letter, either party
may terminate this agreement by notifying the other in writing. Such
termination shall not affect the rights and obligations of the parties under
Sections 15(b) and 16 of this letter and any existing agreement between them
as of the date of termination, including the Current License and any
obligations of non-disclosure.
18. GOVERNING LAW. The terms of this letter shall be governed by and
construed in accordance with the laws of the State of Delaware without
reference to principles of conflicts of laws.
<PAGE>
Mr. William McLaughlin CONFIDENTIAL
July 23, 1997
Page 13
If the foregoing accurately reflects the agreement in principle between us,
please so indicate by executing this letter in the space provided below and
returning a copy to ECC.
EARTHSHELL CONTAINER CORPORATION
By: /s/ Simon Hodson
----------------------------------------
Simon Hodson, Vice Chairman of the Board
and Chief Executive Officer
Accepted and Agreed to this
25th day of July 1997
--
SWEETHEART CUP COMPANY INC.
By: /s/ William McLaughlin
---------------------------------
William McLaughlin, President and
Chief Executive Officer
<PAGE>
EXHIBIT B
EARTHSHELL PROJECT ENGINEERING/CAPITAL RESPONSIBILITIES
-------------------------------------------------------
<CAPTION>
ECC
SWEETHEART RESPON-
ITEM RESPONSIBILITY SIBILITY
--------------------------------------------------- --------------------------- ----------
1. Electrical X To Motor Control Centers X
2. Water X To Manufacturing Area
3. Gas X To Manufacturing Area
4. Sewer (Employee Services) X
5. Sewer Treatment X
6. Sewer Process Drains X
7. HV - Oven room X
8. HVAC - Packaging Area X
9. Lighting (to a level for Food Grade Processing) X
10. Compressed Air X Source X (Dist.)
11. Vacuum X
12. Steam X
13. Environmental Conditioning Discharge: X (Penetration Hood, Stub)
A. Ovens X
B. Coatings X
C. Dust X
D. Noise X
14. Chilled/Processed Water X
15. Pretreatment of Air, Water for Process X
16. Structures for Manufacturing Support X
(restrooms, breakroom, offices, fire protection,
QC lab)
17. Control Room X Structure
18. Ingredient Supply/Equipment Systems/Material X
Handling Services
19. Scrap Handling Systems/Recycle X
20. Scrap Disposal X
21. Phones/Communication X
22. Security X
23. Fire Protection X
24. QC Test In-Line Process X
25. QC Equipment X
26. Demising Walls X
<PAGE>
EXHIBIT C
OUTLINE OF SUBLICENSE AGREEMENT -- ECC/SWEETHEART CUP
I. GENERAL RECITALS AND DEFINITIONS
A. PURPOSE OF THE SUBLICENSE -- To authorize the contractual
joint venture formed by Sweetheart Cup Company Inc. and EarthShell Container
Corporation (the "JV") to use certain licensed technology as defined in the
Sublicense in the manufacture of large hinged sandwich containers for sale to
McDonald's Corporation (the "Products").
B. REFERENCE TO UNDERLYING OPERATING AGREEMENT -- ECC and
Sweetheart have entered in an Operating Agreement which defines their business
relationship and joint intention to commercialize ECC's technology relating to
the Products. This Sublicense covers the intention to commercialize ECC's
technology relating to the Products. This Sublicense covers the transfer of the
technology to be used by the IV in accordance with the Operating Agreement.
C. SCOPE OF THE TECHNOLOGY UNDER THE SUBLICENSE -- The
technology covered by the Sublicense falls into two general categories: (1)
ECC's current technology in the form of issued patents, pending patent
applications, trademarks and know-how/trade secret information, and (2) future
improvements to the licensed technology developed by ECC, Sweetheart, the JV or
third parties. ECC and Sweetheart are currently operating under an existing
License Agreement dated October 7, 1994 which will terminate upon execution of
the Sublicense.
DEFINITIONS
"TERRITORY" means the United States and Canada.
"PRODUCTS" means large hinged sandwich containers for McDonald's
Corporation manufactured by Sweetheart using the licensed
technology.
"FIELD OF USE" means any product, composition, apparatus or
process used in the manufacture of Products using the licensed
technology.
"PATENTS" means all issued U.S. and Canadian patents owned by or
licensed to ECC which are currently in force, as well as all
pending U.S. and Canadian ECC patent applications.
"LICENSED MARKS" means all federally registered and common law
trademarks and service marks owned by ECC.
"KNOW-HOW/TRADE SECRETS" means proprietary confidential
information relating to the licensed technology which is owned by
ECC.
II. SUBLICENSE GRANT
C-1
<PAGE>
A. GENERAL TECHNOLOGY GRANT -- ECC grants the JV a non-exclusive
right to utilize all of the technology defined below for purposes of
manufacturing and distributing licensed Products with the Territory.
B. SCIENTIFIC TECHNOLOGIES -- The licensed technology includes the
following three basic categories.
1. PATENT
a. ECC grants the JV a non-exclusive license to make,
use, and sell all Products and related processes covered be ECC's United States
and Canadian patents, as well as all pending U.S. and Canadian patent
applications covering the ECC technology. The existing patents and pending
applications are listed in Exhibit "A" to the Sublicense.
b. The above license grant to the JV will be limited
to the Field of Use within the defined Territory.
c. ECC will be solely responsible for maintaining any
issued patents covered by the Sublicense in full force, including the timely and
proper payment of PTO maintenance fees.
d. Sweetheart will have the right to review any
pending patent applications relating to the licensed technology on a
confidential basis prior to execution of the Sublicense.
2. TRADEMARKS
a. ECC grants a non-exclusive license to the JV to
use the Licensed Marks in the Territory in connection with the distribution and
sale of the Products (including product packaging). The Licensed Marks include
the federal registrations and common law trademarks owned by or licensed to ECC
as shown in Exhibit "B".
b. Sweetheart will have the right to use the Licensed
Marks in connection with the licensed Products in the manner prescribed by ECC.
However, Sweetheart will not be required to use the marks under circumstances
where the use conflicts with the packaging or labeling requirements or trademark
rights of McDonald's.
c. Sweetheart acknowledges the validity of the
Licensed Marks, the "good will" associated with the marks and ECC's right and
obligation to exorcize quality control over the use of such marks.
3. CONFIDENTIAL KNOW-HOW/TRADE SECRETS
a. The parties acknowledge that ECC has developed
certain proprietary confidential know-how and trade secret information relating
to the compositions,
C-2
<PAGE>
equipment design and methods of manufacturing Products covered by the
Sublicense. The general descriptions of such know-how/trade secret information
will be summarized in the sublicense (the "ECC Trade Secrets").
b. ECC grants Sweetheart a non-exclusive license to
use the ECC Trade Secrets for the purpose of manufacturing Products covered by
the Sublicense in the Field of Use.
c. Sweetheart agrees to maintain the confidentiality
of any ECC Trade Secrets and other ECC proprietary and confidential information.
III. ROYALTY PAYMENTS
A. ECC shall receive a royalty of 20% of the net revenue derived
from sale by the JV of licensed Products.
B. The "net revenue" for sales shall be calculated based on gross
sales less cash discounts, freight and other discounts and allowances.
C. Royalty payments shall be paid by Sweetheart to ECC on a monthly
basis and shall become due following payment to the JV for products shipped and
delivered.
D. MOST FAVORED NATIONS PROVISION. ECC shall agree that it will not
enter into a business arrangement with another sublicensee who has, or who
proposes to enter into, a contract to sell Products to Perseco or McDonald's
Corporation, that, when considered in the context of the overall financial
arrangement (including consideration of such items as royalty rate, equipment
lease payments or profit participations, share in operating profits or losses,
and equipment warranties and guarantees), is more favorable to the sublicensee
is determined to be more favorable than the arrangement with Sweetheart, ECC at
Sweetheart's election, shall modify the definitive Agreements in any reasonable
manner so that the disparity is eliminated to Sweetheart's reasonable
satisfaction.
IV. OWNERSHIP OF TECHNOLOGICAL IMPROVEMENTS -- All Product, Process, and
Design Improvements as such terms are defined in the Current License) to the
Technology (collectively, the "Improvements") developed by ECC, Sweetheart, JV
or a third party will be owned and licensed as follows:
A. ECC IMPROVEMENTS: ECC will own all Improvements developed by or
for ECC directly (and not by any of its licensees), and subject to ECC's rights
to do so, shall be licensed to JV without further royalty or other obligation
pursuant to the terms of the Sublicense Agreement.
C-3
<PAGE>
B. SWEETHEART IMPROVEMENTS: Sweetheart will own all Improvements
developed by or for Sweetheart on behalf of JV; provided that, subject to
Sweetheart's right to do so, Sweetheart will license such Improvements to ECC
with ECC having the right to sublicense such Improvements to others. Such
license will be limited to sue of such Improvements solely in connection with
the production and distribution of ECC products, and in the d\case of an ECC
sublicensee, shall provide for royalty payments to Sweetheart, reasonably
calculated in relation to the incremental economic value of such royalties by
ECC's sublicensees to Sweetheart), provided, however, that the annual royalty
rate shall not exceed 10% of such incremental economic value.
C. JOINTLY DEVELOPED IMPROVEMENTS: Improvements to the Technology
jointly developed be ECC and Sweetheart for JV shall be owned by ECC, but shall
be cross licensed to Sweetheart pursuant to the terms of the Sublicense
Agreement. Additionally, Sweetheart shall be irrevocably licensed under such
Improvements within Sweetheart's traditional field of use. ECC will not license
the Improvements to any third party who seeks to utilize such Improvements to
manufacture and distribute non-ECC products within Sweetheart's traditional
field of use. Neither ECC nor Sweetheart shall have any additional royalty or
other obligation under such license. ECC shall have the right to sublicense such
Improvements, in which case the ECC sublicensee shall pay to ECC and Sweetheart
a royalty reasonably calculated in relation to each party's contribution to the
incremental economic value of such Improvements, provided, however, that the
annual royalty rate shall not exceed 10% of such incremental economic value. If
commercially reasonable to do so, ECC commits at its sole expense to diligently
pursue on a commercially reasonable basis, the application, prosecution and
maintenance of patents within the Territory with respect to the Improvements
covered by this subparagraph.
D. THIRD PARTY IMPROVEMENTS: Any Improvements developed by or for a
third party (including an ECC licensee) and licensed to ECC shall, if adopted by
JV and subject to ECC's right to do so, be sublicensed to JV pursuant to the
terms of the Sublicense Agreement at the royalty rate charged to ECC.
E. NOTICE: Each party agrees to provide prompt notice to the other
of any Improvements which are developed, and agree to cooperate in the
preparation and filing of any patent applications covering such improvements.
V. WARRANTIES LIABILITIES AND INDEMNIFICATION
A. ECC WARRANTIES -- ECC warrants (1) that it has the right and
authority to enter into the Sublicense; and 2) that the licensed technology does
not infringe any existing U.S. or Canadian patent, trademark, trade name,
copyright or other intellectual property, including know-how/trade secret
information, belonging to a third party.
B. SWEETHEART WARRANTIES -- Sweetheart warrants (1) that it has the
right and authority to enter into the Sublicense and to perform its obligations
under the agreement; and (2) that it has not entered into any assignments,
licenses or other agreements which conflict with the terms of the Sublicense.
C-4
<PAGE>
C. INFRINGEMENT AND INDEMNIFICATION
1. ECC agrees to indemnify and hold Sweetheart harmless for any
alleged infringement of patents, trademarks or know-how/trade secrets owned
by third parties relating to the Technology or Products covered by the
Sublicense.
2. Sweetheart agrees to indemnify and hold ECC harmless with
respect to any liability for actions taken by Sweetheart on matters outside
the licensed Technology.
3. If ECC or Sweetheart learn of any infringement of any
intellectual property rights covered by the licensed Technology, ECC may, at
its own expense, bring suit to enjoin such infringement. If ECC elects not to
file suit, Sweetheart may file suit on behalf of ECC if it appears that the
infringement may have substantial and adverse consequences on Sweetheart's
business interests.
VI. TERM OF THE AGREEMENT AND TERMINATION
A. The term of the Sublicense shall begin upon execution by the
parties and will remain in effect until expiration of the last United States
or Canadian patent covering the technology.
B. The Sublicense will also terminate in accordance with
termination provisions of the Operating Agreement.
C-5
<PAGE>
EXHIBIT D
PRE-START DATE DISTRIBUTION SCHEDULE
--------------------------------------------------------------------------------
PRE-START DATE(1)
QUARTERLY DISTRIBUTION PRIORITY
<CAPTION>
---------------------------------------------------------------------------------------------------
Gross Sales Net Sales
- less Returns and Allowances
---------------------------------------------------------------------------------------------------
- Standard material cost Standard Cost of Sales(2)
- Standard labor cost
---------------------------------------------------------------------------------------------------
- Non-allocated overhead costs attributable to ES ops Actual Overhead(3)
- 10% interest on avg. raw materials inventory
---------------------------------------------------------------------------------------------------
- Material production variance Production Variances(4)
- Labor production variance
---------------------------------------------------------------------------------------------------
If Net Sales less than Standard Cost of Sales, Actual Overhead, and Direct conversion cost deficit
Production Variances (DCCD) to be funded quarterly
by ECC
---------------------------------------------------------------------------------------------------
If Net Sales greater than Standard Cost of Sales, Actual Overhead, Cumulative DCCD returned to
and Production Variances ECC
---------------------------------------------------------------------------------------------------
- Other overhead allocations Distributions for non-cash
- SGA of 2% of Net Sales cost allowances
---------------------------------------------------------------------------------------------------
- Interest on actual cost of capital equipment - ECC Accrued interest on invested
- Interest on actual cost of facility improvements - SCC capital (10%)
(int. accrual ends when Returns on Invested Capital begin)
---------------------------------------------------------------------------------------------------
- Displaced Finished Goods - SCC actual costs up to $110,000 Other reimbursements for cash
annually until completion of new SCC distribution center costs
---------------------------------------------------------------------------------------------------
- Plant Facility Rental (sq. ft. charge) to SCC Return on invested capital
- Infrastructure Enhancement Distribution to SCC
- Equipment Profit Participation to ECC
---------------------------------------------------------------------------------------------------
- Facility capital improvements in excess of model Reimburse capital costs in
- Capital equipment costs in excess of model excess of economic model
---------------------------------------------------------------------------------------------------
20% SCC/80% ECC until ECC receives 20% of Net Sales Initial Profit Split
---------------------------------------------------------------------------------------------
80% SCC/20% ECC Final Distribution
---------------------------------------------------------------------------------------------
--------------------------
(1) Start Date occurs when:
a) MEL is reached and DCCD is zero, or
b) at SCC election to accept the equipment on an economic Start Date
basis, or
c) at ECC election if Perseco contract production is being met and ECC
guarantees MEL economics
(2) The sum of these cost items is defined as the "Direct Cost of Sales"
(3) The sum of these cost items is defined as the "Direct Cost of Sales"
(4) The sum of these cost items is defined as the "Direct Cost of Sales"
D-1
<PAGE>
EXHIBIT E
POST-START DATE DISTRIBUTION SCHEDULE
-------------------------------------------------------------------------------
POST-START DATE
QUARTERLY DISTRIBUTION PRIORITY
<CAPTION>
--------------------------------------------------------------------------------------------------
Gross Sales - less Returns and Allowances Net Sales
--------------------------------------------------------------------------------------------------
20% of Net Sales to ECC Royalty(1)
--------------------------------------------------------------------------------------------------
- Standard material cost Standard Cost of Sales
- Standard labor cost
- Standard variable overhead
--------------------------------------------------------------------------------------------------
Unfavorable production variances (payable to Sweetheart Unfavorable Production
prior to the Warranty Termination Date)(2) Variances
--------------------------------------------------------------------------------------------------
- Fixed overhead(3) Manufacturing & Sales Support
- SGA of 2% of Net Sales
--------------------------------------------------------------------------------------------------
$289,500 to SCC Sweetheart Preliminary
Profit Distribution(4)
--------------------------------------------------------------------------------------------------
- Plant Facility Rental (sq. ft. charge) to SCC Return on invested capital
- Infrastructure Enhancement Distribution SCC
- Equipment Profit Participation to ECC
--------------------------------------------------------------------------------------------------
$72,375 to ECC EarthShell Preliminary Profit
Distribution(5)
--------------------------------------------------------------------------------------------------
Accrued but unpaid post start date amounts to Sweetheart including: Deficit Accounts
- Plant Facility Rental & Infrastructure Enhancement Distribution
- unreimbursed rate variances
- amortized payments on capital expenditures for facility
improvements in excess of the model
- interest on the above unpaid amounts at 10%
- displaced finished goods
- any other post Start Date amounts to be paid to SCC
Accrued but unpaid post start date amounts to ECC including:
- Equipment Profit Participation
- amortized payments on capital expenditures for equipment in
excess of Standard Equipment Costs, including capitalized
expenditures made pursuant to the ECC Performance Guarantee
- interest on the above unpaid amounts at 10%
- any other post Start Date amounts to be paid to ECC
--------------------------------------------------------------------------------------------------
80% SCC & 20% ECC Distribution until Warranty
Termination Date
--------------------------------------------------------------------------------------------------
Then 100% to SCC Final Distribution
--------------------------------------------------------------------------------------------------
--------------------------
(1) Royalty payments to be made monthly
(2) Unfavorable material usage, labor efficiency, and overhead efficiency
variances due to less than MEL operations (Performance Guaranties) will be
paid quarterly by ECC directly to SCC until Warranty Termination Date
(3) Excludes depreciation, equipment participation & facility rents
(4) PPD's cease upon Warranty Termination Date
(5) PPD's cease upon Warranty Termination Date
E-1
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