Terms and Conditions Letter - EarthShell Container Corp. and McDonald's Corp.
[LOGO]
August 22, 1997
Mr. Simon K. Hodson
EarthShell Container Corporation
800 Miramonte Drive
Santa Barbara, CA 93109-1419
Finally we have reached a point where most of the problems and issues
surrounding your development -- and our introduction -- of EarthShell
packaging are behind us. To summarize where we are in simple terms, and to
avoid as much legalese as possible, I'd like to confirm the following: As
soon as price can be agreed upon, I will recommend to the McDonald's Senior
Management that we authorize the purchase of EarthShell sandwich containers
(the "Containers") for a single menu item for all McDonald's restaurants in
the United States for at least a three-year period.
The responsibility to accept and pay for product thereafter, or to continue
to accept and pay for product, however, shall be expressly subject to the
following terms and conditions:(1)
TERMS AND CONDITIONS
1. The Containers will meet and maintain all product specifications
established by McDonald's which specifications may be amended from time
to time by McDonald's in its reasonable discretion. (Initial
specifications are attached to this letter as Exhibit A which are subject
to Paragraph 9 hereof.) Where a change in specifications requires or
justifies an adjustment in the price of the containers, either upwards or
downward, all parties will use their best efforts to negotiate or
facilitate such an adjustment directly through their agents, licensees,
converters, or affiliates.
2. McDonald's shall receive such assurances and documentation as is
reasonably required in order to ensure that the use of EarthShell
Containers shall not violate or infringe the patent or other intellectual
or proprietary rights of others.
3. EarthShell and/or its licensed converters supplying McDonald's with
EarthShell Containers ("licensed converters") shall demonstrate their
ability to manufacture and have ready for use an adequate ongoing supply
of the Containers in order to meet the quantity and quality requirements
of the intended purchase order.
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(1) Even though we are very encouraged by the product we have tested, these
terms and conditions are necessitated by the fact that the product has not
yet actually been manufactured on the same equipment that would be needed to
meet our quantity requirements.
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4. Any environmental claims made from time to time by EarthShell, its
subsidiaries, affiliates and licensed converters shall be appropriate,
properly supported, and in compliance with all applicable guidelines as
respects the Containers.
5. The price of EarthShell Containers sold to the McDonald's system shall
not exceed the price charges to any third party by EarthShell or any
of its licensed converters for a comparable EarthShell Container taking
into account product specifications, quantities ordered, delivery terms,
etc.
6. The Containers are favorably received and continue to be favorably
received by McDonald's franchisees and McDonald's restaurant customers
as determined in McDonald's reasonable discretion.
7. EarthShell, its officers, directors, employees and affiliates shall not
engage in any act, or the Containers shall not have any environmental or
other characteristics, (whether actual or perceived) which, in McDonald's
reasonable discretion, could adversely affect the McDonald's brand or
McDonald's System.
8. Neither EarthShell nor its licensed converters shall be in default of any
contractual obligations to Perseco or any other McDonald's supplier in
connection with the Containers which are the subject of this letter.
9. In the event that any term or condition contained in this letter is not
met, EarthShell or its licensed converter shall have a reasonable time
to cure the problem or otherwise restore the product to compliance with
the terms and conditions, subject to the following:
A. If the terms and conditions are not met within 24 months of the
date of this letter, neither McDonald's nor Perseco shall have further
obligations to purchase or authorize purchase of the Containers, and
B. Once Containers are in use in McDonald's restaurants, a failure in
any terms or conditions may require that existing inventories be
discarded and replaced with alternative packaging provided by third
parties. (In other words, the restaurants cannot be expected to use
defective or otherwise non-compliant Containers.)
10. EarthShell and its licensed converters acknowledge and agree that
McDonald's continuously investigates ways to improve its operations, that
McDonald's is generally engaged in a wide variety of research and
investment opportunities in a broad array of areas, and that McDonald's
may be working with, investigating or reviewing other or similar products,
concepts and/or technologies with other entities. EarthShell and its
licensed converters expressly acknowledge and agree that such activities
on the part of McDonald's do not breach the terms and conditions set out
in this letter and that McDonald's has no obligation to disclose its
involvement in such activities to EarthShell. Furthermore, EarthShell and
its licensed converters acknowledge and agree that McDonald's will at all
times, be free to investigate and utilize alternate sources of sandwich
containers.
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11. EarthShell and its licensed converters will continuously improve upon
the environmental impacts of the Containers provided to Perseco with a
long-term goal of reducing the key environmental loadings by 40% from
the April 18, 1997 LCI submitted by Franklin Associates for the QPC
sandwich container.
12. EarthShell's licensed converters agree that if they believe that the
production and sale of Containers in accordance with any McDonald's
specifications will result in such Containers not being in compliance
with all applicable laws, rules, regulations, and local codes, or that
the Containers will infringe any patent or other proprietary right of a
third party, then EarthShell's licensed converters will immediately
notify McDonald's and provide to McDonald's all relevant information
concerning such belief. EarthShell and its licensed converters
acknowledge and agree that McDonald's is looking to EarthShell and its
licensed converters to advise it of the aspects of the McDonald's
specifications that should be changed and of EarthShell and/or its
licensed converters recommended changes so that the Containers will be
in compliance with such codes, regulations and laws and not infringe any
patent or other proprietary right of a third party. McDonald's, in its
sole discretion, shall determine whether or not to accept the
specification changes recommended by EarthShell and/or its licensed
converters.
13. EarthShell and its licensed converters acknowledge that McDonald's does
not directly operate any McDonald's restaurants and will not purchase
any Containers from EarthShell and its licensed converters. EarthShell
and its licensed converters acknowledge and agree that orders for
Containers will come only from Perseco or the approved independent
distribution centers and that Containers will be used only by McDonald's
restaurants owned by independent franchisees or McDonald's subsidiary
corporations, referred to as McOpCo's, and other approved parties
ordering directly from EarthShell's licensed converters. EarthShell and
its licensed converters acknowledge and agree that McDonald's is not
making any promises, commitments or guarantees of sales.
14. EarthShell and its licensed converters acknowledge and agree that the
only contractual obligations involved in this contemplated business
relationship for the purchase of Containers arise from orders placed by
McDonald's independent distribution centers (through Perseco) and
approved by McDonald's for sale to McDonald's restaurants. These parties
decide whether to order from EarthShell's licensed converters and their
obligations are limited to payment for items delivered in conformity
with their orders. McDonald's is not responsible for and does not
guarantee payment of any invoices or accounts (whether past due,
delinquent or otherwise) from anyone ordering from EarthShell's licensed
converters and those parties ordering from EarthShell's licensed
converters are solely responsible for payment.
15. EarthShell and its licensed converters agree to indemnify McDonald's
its subsidiaries, suppliers and franchisees from any and all claims,
damages, expenses and lawsuits caused by the Containers which are not
attributable to McDonald's, its affiliates, subsidiaries, suppliers or
franchisees, including, without limitation, infringement of any patent
or any other proprietary right or trade secret misappropriation or
unfair competition claims. EarthShell and its licensed converters
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agree to maintain comprehensive general liability insurance in an amount
and with a carrier having a financial rating approved by McDonald's to list
McDonald's as an additional named insured, as its interests may appear,
and to provide McDonald's upon request with proof of such insurance.
Liability under this paragraph however, shall not be limited by the
amount of insurance carried. The parties will use their best efforts to
minimize and negotiate such claims to the extent possible.
16. EarthShell and its licensed converters' authority to use any McDonald's
trademark is limited to the usage designated by McDonald's in writing
and is subject to termination by McDonald's with or without cause at any
time. In addition, EarthShell and its licensed converters are prohibited
from adding the "Mc" or "Mac" prefixes to any items unless EarthShell
and its licensed converters secure McDonald's prior written approval.
17. Except as required by law, EarthShell and its licensed converters are
not authorized to make any public announcements that it or they are an
approved McDonald's supplier or that the Containers are approved by
McDonald's unless EarthShell and its licensed converters first receive
express written permission from McDonald's to make that disclosure.
18. The EarthShell logo and/or other identifying marks shall not be
displayed on the Containers except in a manner to which McDonald's
agrees, which agreement shall not be unreasonably withheld.
19. This letter sets forth the understanding of the parties regarding
McDonald's approval of the purchase of Containers and to the extent
inconsistent therewith supersedes all prior written and oral agreements
and understandings regarding the same.
20. This letter is not intended to be an enforceable agreement and is subject
to the negotiation of definitive documentation in accordance with the
terms and conditions set forth above.
If the above conforms with your understanding, please let me know so that I
can make my final recommendation to Senior Management.
Very truly yours,
/s/ Shelby Yastrow
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Shelby Yastrow
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EXHIBIT A
PACKAGING CRITERIA FOR SUCCESS
I. STORE OPERATIONS:
A. Package product breakage and operational failure rate must meet
allowable target limits:
1. Breakage is defined as:
a) Damage to the outer case of the container that raises concern
about the sanitary and quality nature of the package held
within.
b) Damage to the actual package that renders the package
non-functional, such as closure or hinge damage.
c) Aesthetic damage to the actual package that renders the
package non-usable as determined solely by the McDonald's
restaurant.
2. Allowable and target rates:
a) Not to exceed 1% in the McDonald's System;
b) Target of 0% to be approached with incremental improvements
in subsequent years of use in the McDonald's System.
3. Breakage/failure measurement to include a sum of, but not
exclusive to the following:
a) Transportation and related distribution handling
b) Crew operations and handling
B. Package must be functional in all potential
McDonald's preparation methods:
C. Package must be the appropriate size to contain the specified
sandwich while maintaining sandwich integrity and appearance
acceptable to McDonald's. The package size must consider the
changing operational and product environments at McDonald's.
D. Package must be fast and easy to close.
E. Package must stay closed, when in the bin for example.
F. Package should not be confusing to the crew to use - easy to train
the crew.
G. Package should perform well in all styles of transfer bins; slide,
shelf, stack.
H. Package should stack easily in carry-out bags.
I. Package must be functional in storage and handling.
1. Case size must be appropriate for storage
2. Case weight must be appropriate for crew handling (under 40 lbs
maximum)
3. May need inner sleeves to facilitate crew transportation and
storage
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II. CUSTOMER SATISFACTION:
Marketability of the package to be used in the McDonald's restaurants
needs to perform at least equivalently to the F-flute container (or
current incumbent package) for parameters below:
A. McDonald's Marketing perspective - meets standards and requirements
of appropriate McDonald's Marketing Management. Including such
parameters as:
1. Base colors
2. Ink colors
3. Print areas
4. Overall appearance of the container
5. Promotional vehicle to carry coupons or game pieces
6. Graphics changes/printability
7. Label application for games
8. The graphics need to facilitate, and not limit, the crew's
ability to distinctively identify the package for different
menu items, including:
a) In the grill area when preparing the food
b) In the bin when selecting product to present to the
customer
B. The package must meet the requirements of McDonald's consumers as
measured by and in accordance with McDonald's Market Research group,
in areas such as:
1. Improvement in food taste ratings, including
a) temperature
b) moistness
c) sensory evaluation
2. Overall ease of use
a) In-store
b) Drive-thru
3. Food product appearances
4. Package attractiveness
5. Ease of differentiating one sandwich package from another
6. Perceived environmental impact
7. Intent to buy more McDonald's products
C. The package must be meet the standards and requirements of
McDonald's Test Kitchen, in areas such as:
1. Food taste
2. Food appearance
3. Food temperature
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III. ENVIRONMENTAL IMPACT:
The environmental impact of the any alternative package needs to be, at
a minimum, comparable to the environmental impact of the incumbent
package. The overall goal of McDonald's and Perseco is to continuously
improve the environmental impact of the packaging used in the McDonald's
System. Environmental impacts are measured by, but not limited to, life
cycle inventories and assessments, expert environmental and scientific
input and review, public opinion, media coverage, and McDonald's and
Perseco's own assessment.
IV. PRICE AND AVAILABILITY:
The delivered price of the alternative package must give McDonald's a
competitive value gap against their competition, with the value gap
determined solely by McDonald's. The delivered price to include FOB
(exworks), freight delivered to the restaurant level and breakage
allowances.
A. Delivered cost:
1. FOB
2. Freight from supplier to DC
3. Freight from DC to restaurant
4. Breakage allowance
B. The competitive value gap must apply against other competitive new
packaging introductions that may occur prior to or during the
introduction of the subject alternative package, and thereafter.
C. The competitive value gap must be sustained throughout any product
changes inherent in the McDonald's system, such as, but not limited
to:
1. New food preparation procedures
2. New menu item formulations, such as bun sizes
3. New packaging performance expectations
D. The alternative package must meet all applicable FDA guidelines for
food safety. The package must be safe to use for its intended purpose
with the consumer in mind.
E. As the alternative package is introduced to the market, it is
McDonald's and Perseco's expectation that the McDonald's System has
assured supply. Assured supply means that all orders by the
McDonald's distribution centers are filled on time and in full,
unless previously agreed upon contingency plans are agreed upon.
F. As the alternative package manufacturing base needs expansion,
McDonald's will make the final decision on which converter and
converter location(s) will get additional production volumes. The
converter selection is not limited by the initial converter or
technology licenser.
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V. OTHER BUSINESS PARAMETERS:
A. The alternative package manufacturer and/or licenser of technology
shall provide McDonald's with First Right to Refusal:
1. The option to purchase the First commercial production available
for any Quick Service Restaurant (QSR) package developed, by any
converter.
2. Sustaining volumes for McDonald's demand for any QSR package prior
to sale of said package to other companies/organizations.
B. If for any reason the converter fails to meet any of the criteria for
success items in this document, McDonald's and Perseco reserves the
right to make null and void any and all agreements to purchase
subject package, and all liabilities will be the responsibility of
the converter(s).
C. If during the course of commercialization or on-going business the
McDonald's food preparation systems or menu item recipes change,
McDonald's or Perseco will not be held responsible for any tooling or
other production equipment or facilities thereby made obsolete.
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[LOGO]
August 22, 1997
Shelby Yastrow, Esq.
General Counsel & Executive Vice President
McDonald's Corporation
One Kroc Drive
Oak Brook, IL 60521
Dear Shelby:
Thank you for your letter of August 22, 1997 specifying the terms and
conditions upon which you will recommend to McDonald's Senior Management that
they approve the purchase of an EarthShell sandwich container for use in all
of McDonald's domestic restaurants. This letter confirms our acceptance of
those terms and conditions.
If her schedule permits, I would like to arrange for Claire Babrowski to
visit our facilities next week in Santa Barbara and to review our products
and recent technological improvements. Please have her call me at her
earliest convenience to discuss the scheduling of her visit.
Shelby, this is the most significant event in the Company's history and I am
very grateful for your past patience, encouragement and support. This
milestone could not have been achieved without your significant involvement,
and the support of McDonald's Senior Management. You have my commitment, as
well as that of the entire EarthShell team, to ensure that EarthShell
packaging contributes to McDonald's well deserved reputation and success.
Sincerely,
/s/ Simon K. Hodson
Simon K. Hodson
Chief Executive Officer
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