GVI - ESI ALLIANCE
MEMORANDUM OF UNDERSTANDING
NOVEMBER 5, 2004
PURPOSE:
1. To create an alliance between GVI and ESI whereby ESI exclusively runs
all worldwide retail sales and distribution of consumer security
products and GVI runs sales and services in the professional security
industry exclusive of the retail channel of distribution controlled by
ESI. "Retail Channel" includes all businesses that designate themselves
as retailers, all distributors that sell to retailers, all wholesale
clubs and all direct to consumer sales. GVI is compensated for
providing purchasing and after sales services. ESI receives additional
consideration in the form of stock and warrants in GVI. This structure
will be to the parties' mutual benefit based on leveraging the
competencies of each company. Except as otherwise provided in this
Memorandum, the term of the alliance will be for 3 years; however, the
term of the alliance will be automatically extended for consecutive and
unlimited 1 year periods, provided that ESI does not notify GVI in
writing at least 90 days prior to the end of the then current term or
period of its intention not to renew the term of the alliance.
STRUCTURE:
1. Consummate a Strategic Alliance Agreement (the "Alliance") containing
terms outlined below.
2. Consummate Stock and Warrant Agreements that provide an equity interest
in GVI to ESI.
ESI STRATEGIC ALLIANCE AGREEMENT TERMS:
1. ESI sells all of its licensed and owned brands and other brand names
controlled by GVI (all subject to license agreement and/or distribution
agreement restrictions) of retail security products through the
Alliance.
2. ESI agrees that it cannot directly sell into the professional security
industry anywhere in the world in accordance with the Alliance, and
will use diligent efforts to cause its distributors to only sell in the
Retail Channel (as contrasted with the professional channel).
3. ESI is primarily responsible for the following activities of the
Alliance:
o Exclusive worldwide right of Sales to Retail Channel,
excluding aftermarket sales to ESI retail customers conducted
by GVI in after-sales support of ESI's retail accounts.
o Logistics/Distribution of retail products.
o Accounting.
o Financial support, including issuing transferable/discountable
LC's as appropriate for retail segment of GVI business, in an
amount equal to the Purchase Price of products described in
paragraph 5 below.
o Purchase of new displays (in such numbers and designs as are
determined by ESI and excluding any current display programs)
and Maintenance and stocking of all Displays.
4. ESI shall purchase products from GVI based on the lowest possible cost
from the manufacturers (exclusive of shipping, customs, duties,
warehousing and other incidental costs) ("Base Cost"). ESI will arrange
for and directly pay, or at its option reimburse GVI, for the costs of
shipping, customs, duties, warehousing and other incidental costs. ESI
will interact directly with manufacturers and GVI and will ensure that
the purchase is structured so that it occurs through GVI on GVI
controlled brands (i.e., Samsung, LG) or is reported to GVI on non-GVI
controlled brands (i.e., Akai).
5. ESI will purchase products from GVI for a purchase price equal to 108%
of the Base Cost ("Purchase Price").
o GVI is entitled to only any warranty allowance/rebates
provided under the Distribution or Manufacturing Agreements
with vendors. All such percentages are to be disclosed fully
to ESI.
o GVI will guarantee that, except for amounts for the current
display program (the remaining cost of which GVI will pay and
will be entitled to reimbursement from the Samsung market
development fund from products sold through such current
display program), ESI is reimbursed for the maximum amount
that could be refunded from the market development fund from
Samsung, LG, and others, as the case may be. The minimum
accrual is 2% of the Base Cost in the case of Samsung and 3%
of the Base Cost in the case of LG.
o The purchase price margin of 8% may be adjusted downward if
ESI's Gross Margin from GVI products (defined below and
weighted fully by all sources of revenue from the Alliance)
falls below 30%. The downward adjustment would be effective
upon ESI indicating a Gross Margin lower that 30%. The
downward adjustment in the purchase price margin would be in
proportion to the decrease in ESI's Gross Margin below 30%.
For example, if ESI's Gross Margin falls to 25%, the purchase
price margin would be reduced to 6.7% (i.e., 25%/30% times
8%).
o Gross Margin is to be defined as a fraction, the numerator of
which is the excess of Net Sales over Net Cost of Goods Sold
(inclusive of direct expenses such as product purchase price,
shipping, customs, duties, warehousing and other incidental
costs), and the denominator of which is Net Sales, and will be
computed in a manner consistent with the practices (for
salespeople and independent reps) of ESI. As of the date of
this Agreement, this Gross Margin is at an average of 30%.
o ESI will issue a Purchase Order to GVI for the products that
ESI wants to purchase. The PO will be for the amount of the
Purchase Price, which will be at 108% of Base Cost. ESI will
also issue a Letter of Credit, which will be for the amount of
the Base Cost. The difference between the Purchase Price and
the Base Cost is the purchase price margin of 8% which will be
due to GVI after ESI's receipt of the products under terms
that require payment to GVI of the net amount due within 30
days.
6. ESI's obligations under the agreement will cease, at its option
exercisable any time after June 30, 2005, if the Samsung agreement, as
it relates to Sam's, is not renewed for at least one year beyond its
current terms by June 30, 2005 and each year thereafter if not renewed
for at least an additional year, on the same terms and for the same
territory and products as currently exists, and for a term of at least
1 year, and/or if ESI, in its sole discretion, is not satisfied with
the LG products, contract terms or performance. If ESI exercises this
option to terminate, ESI will not sell Samsung or LG for products in
the retail security industry for a period of one year following the
termination, provided that GVI has current contracts with Samsung or
LG, respectively, throughout the one year period. ESI's obligations
under the agreement will also cease, at its option, (a) in the event
that GVI is in bankruptcy proceedings or is insolvent, or (b) GVI does
not provide commercially reasonable after-sales support as required
below or otherwise breaches this Memorandum or related agreements after
written notice of its failure is provided and GVI fails to cure the
failure within 30 days of the notice.
7. ESI may assign this Memorandum and related agreements to any of its
affiliates.
GVI STRATEGIC ALLIANCE AGREEMENT TERMS:
1. GVI and its affiliates exclusively grant to ESI and its affiliates all
of their rights to Samsung, LG and any other brand names for use with
retail security products (all subject to license agreement and/or
distribution agreement restrictions), and grant to ESI and its
affiliates the exclusive worldwide right to sell security products in
the Retail Channel (excluding aftermarket sales to retail customers
conducted by GVI in after-sales support of ESI's retail accounts).
2. GVI and its affiliates exclusively grant to ESI and its affiliates all
of their Retail Channel rights to all agreements relating to Brands and
Suppliers (all subject to license agreement and/or distribution
agreement restrictions),. ESI will receive all rebates on its purchases
as provided herein (such as market development fund and early payment
rebates), except for the limited market development fund reimbursement
to GVI and the warranty allowance/rebate as mentioned above.
3. GVI agrees that all of its direct and indirect sales in the
professional security industry will be in accordance with the Alliance
Agreement. GVI agrees to use its best efforts to enforce this paragraph
and to prevent its customers (including any distributors or
representatives) from selling such products in the Retail Channel.
4. GVI will accept returns from ESI, retailers and consumers and allow
full credit to ESI, consistent with the terms of the Representation
Agreement, dated May 2, 2001, between the parties. Notwithstanding
anything to the contrary contained in this paragraph, ESI's overstocked
and unsold Retail Channel products shall not be returnable to GVI.
5. Except for aftermarket sales to retail customers conducted by GVI in
after-sales support of ESI's retail accounts or sales to distributors
for the sole purpose of re-selling to professional channels, and except
through ESI or its affiliates, neither GVI nor any of its affiliates
can directly or indirectly sell to the worldwide Retail Channel. Terms
restricting solicitation by XXX, both during and after the term of the
agreement, will be incorporated in the Alliance Agreement, identical to
these terms contained in the existing ESI-GVI agreement, except that
the duration of the restriction relating to retailers specified in such
agreement will be for 2 years after the end of the term hereof and the
duration with respect to all other customers will be for 6 months after
the end of the term hereof. Notwithstanding anything to the contrary
contained in this paragraph, GVI shall have the limited right to sale
new or refurbished security products that occur as a result of product
returns to GVI from ESI or its customers, provided, however, that such
sales are subject to GVI granting to ESI a right of first refusal to
purchase the products and/or the right of approval of the sale of such
products to a customer in the Retail Channel, and such approval shall
not be unreasonably withheld.
6. GVI is primarily responsible, at its sole cost, for the following
activities of the Alliance:
a. Warranty and Repair services.
b. Aftermarket service and support.
c. Technical Support.
d. Handling returns and replacements.
e. The cost for Displays for the current display programs.
7. ESI, at its option, may hire Xxxxx Xxxxxxx, an employee of GVI. If ESI
elects to do so, XXX agrees to immediately pay Xxxxx all compensation
(including commissions) and benefits accrued to him as of the date of
hiring by ESI.
GVI EQUITY TO ESI:
1. GVI provides to ESI a total of 6,000,000 shares of ownership in GVI
(comprised of shares and warrants). GVI represents and warrants to ESI
that it will not have more than 60,000,000 shares on a fully-diluted
basis prior to December 31, 2005, provided that this representation
will be extinguished if, prior to that date, GVI raises at least $10
million in cash from the issuance of shares in a private placement
conducted through Xxxxxxxxxxx, Xxxxxxxxx or any other sources and the
private placement by Xxxxxxxxxxx and/or Unterberg has been concluded.
This equity share will be granted to ESI in the following form:
a. 3,000,000 shares granted to ESI at the earlier of signing the
Alliance Agreement or November 30, 2004.
b. 3,000,000 shares granted to ESI in the form of warrants. The
exercise price of these warrants will be equal to the lowest
offering price of the shares in the private placement, if any,
conducted through Xxxxxxxxxxx and/or Unterberg or conducted
directly by GVI between the date hereof and December 31, 2004;
provided that if GVI does not raise at least $10 million in
cash from the issuance of shares during this period, then the
exercise price will be $1.50. These warrants will be issued to
ESI at the earlier of signing the Alliance Agreement or
November 30, 2004.
2. GVI will use its best efforts to cause registration of the shares and
the shares issuable upon exercise of the warrants as soon as possible
after the date hereof. GVI will guarantee ESI that all such
registration will occur, at GVI's sole cost, no later than 120 days
from the date hereof.
3. All of the warrants will immediately vest and will be exercisable at
any time. The warrants will be exercisable in whole or in parts, with
respect to such number of shares as is determined by ESI from time to
time. Similarly, GVI warrants that there will be no restrictions by GVI
or, after registration as required by Paragraph 2 above, under
securities laws with respect to ESI's ability to exercise the warrants
or sell the shares issued pursuant to the exercise of these warrants,
other than restrictions outside the control of GVI that restricts in an
identical manner all of the shares of GVI.
4. 25% of the initial 3,000,000 shares granted to ESI will be vested on
January 2, 2006. Additional vesting will occur on January 2, 2006 and
thereafter at the rate of 25% for every $15 million of security
products purchased by ESI from GVI after the date hereof. Vesting will
not occur with respect to unvested shares that exist on the date that
ESI terminates its agreement with GVI. For example, if ESI purchases
$45 million of security products from GVI between the date hereof and
January 2, 2006, and ESI has not terminated the agreement with GVI as
of January 2, 2006, then 100% of the initial 3,000,000 shares will
fully vest on January 2, 2006 and will be legally available for sale at
that time.
This Memorandum is intended to summarize the terms of the agreement between the
parties, is binding on the parties, and is effective immediately. The parties
agree to promptly proceed in good faith to enter into the final agreements
described under the heading "Structure" above, reflecting the terms set forth in
this Memorandum.
GVI Security, Inc. E&S International Enterprises, Inc.
By: ___________________________ By: _____________________________
Name/Title: Name/Title:
