Exhibit 10.3
STRATEGIC ALLIANCE AGREEMENT
THIS STRATEGIC ALLIANCE AGREEMENT (this "Agreement"), entered into this
29th day of December, 2000, is by and between Ovation Products Corporation, a
Delaware corporation ("Ovation"), and X. X. Electro Systems, Inc., a Minnesota
corporation ("SJE").
RECITALS
A. Ovation is engaged in the design and development of distillation
technology for use in wastewater treatment, water purification and related
processes.
B. SJE is engaged in the design, development, manufacture, marketing, sale
and distribution of liquid level control devices for the water, sump and
wastewater markets.
C. The parties desire to work together to develop, market, sell and
distribute septic appliances which incorporate Ovation's distiller technology.
D. The parties are entering into contemporaneously with and conditional
upon this Agreement that certain Distribution Agreement as well as a Series A
Preferred Stock Purchase Agreement, First Refusal and Co-Sale Agreement,
Investor Rights Agreement, Promissory Note, Pledge Agreement, Confidentiality
Agreement and Intellectual Property Agreement.
AGREEMENT
NOW, THEREFORE, the parties, intending to be legally bound, hereby agree
as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, each of the terms set forth in this
Article 1 shall have the meaning indicated:
1.1 "Alliance Expenditure" means any expenditure incurred by either
Ovation or SJE which is properly incurred by such party to perform its
responsibilities relating to the Alliance and which is approved by the Committee
including, but not limited to, the detailed itemization of proper expenditures
as set forth in Exhibit 1.1 attached hereto.
1.2 "Alliance Revenues" means all revenues generated by the sale of Septic
Appliances. Alliance Revenues does not include revenues from the sale of SJE
Options.
1.3 "Commencement Date" means the date of this Agreement.
1.4 "Net Profit" means the net Alliance Revenues less Alliance
Expenditures.
1.5 "Profit Sharing Payment" means a payment of Net Profit pursuant to
Section 5.1 (c) of this Agreement.
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1.6 "Septic Appliance" means a wastewater treatment product, designed
primarily for residential use, that is installed between a settling tank and a
water disposal system, and uses Ovation technology to distill the effluent from
the tank prior to disposal. A wastewater treatment product which meets these
criteria but is installed in a commercial or industrial application shall be
considered a Septic Appliance. The Septic Appliance includes the pickup
apparatus for filtering effluent before it enters the distiller and the controls
required for normal operation, monitoring and maintenance.
1.7 "SJE Option" means any product that can be used in conjunction with a
Septic Appliance but is not a part of a Septic Appliance.
ARTICLE 2
THE ALLIANCE
2.1 FORMATION: PURPOSE. Ovation and SJE hereby form an alliance
("Alliance" or "Project") on the Commencement Date through which they agree to
work together to develop, market and sell Septic Appliances pursuant to the
terms of this Agreement.
2.2 RESPONSIBILITIES OF OVATION. Ovation will be responsible for design,
engineering and testing of the distillation technology which is to be used in
the Septic Appliance. Ovation will also be primarily responsible for development
of the remaining components of the Septic Appliance.
2.3 RESPONSIBILITIES OF SJE. SJE will be responsible for external testing
of the Septic Appliances, development and sale of standard control panel(s) for
the Septic Appliance, and developing a marketing, sales, distribution and
service network for the Septic Appliances.
2.4 INDEPENDENT RELATIONSHIP; NO AGENCY. Each party's relationship to the
other under this Agreement is that of an independent contractor. Although the
parties will work closely together and coordinate their activities, each will
perform its role and conduct its activities independently of the other. Subject
to specific obligations set forth in this or other written agreements between
Ovation and SJE, each party will determine, in its sole discretion, the manner
and means by which it will perform its responsibilities under this Agreement.
Nothing in this Agreement shall constitute either party as the agent or legal
representative of the other party for any purpose, and no officer,
representative or employee of either party shall be considered as having
employee status with the other. Neither party is granted the right or authority
to assume or to cease any obligation or responsibility, express or implied, in
the name or on behalf of the other party except as may be specifically
authorized in writing. Each party shall have the sole responsibility for the
satisfaction of any and all claims made by third parties on account of its
conduct or that of its employees or agents in the performance of this Agreement.
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ARTICLE 3
COMMITTEE
3.1 ALLIANCE COMMITTEE. A committee ("Alliance Committee" or "Committee")
shall be formed to meet on a regular basis and to oversee the project. Each of
the parties shall appoint two representatives to the Committee. The Committee
will work together on a regular basis and meet not less than quarterly, to
review progress and status, to review the work done by each of the parties, to
prepare annual and long range plans, with budgets, for cooperation between the
parties, and to serve as the first line of dispute resolution.
3.2 COMMITTEE'S POWERS. The Committee shall generally have a non-decision
making coordinating function but shall have decision making powers with respect
to matters specifically authorized by this Agreement or by other written
agreements of Ovation and SJE. The unanimous agreement of the Committee members
is required for any decisions of the Committee. Duly made decisions of the
Committee shall be binding on Ovation and SJE.
3.3 COMMITTEE RECORDS. The Committee shall kept minutes and other records
summarizing the activities of the Committee. For each meeting of the Committee,
a Committee member shall be appointed as secretary who shall record minutes of
the meeting and distribute the minutes promptly after the meeting.
3.4 ANNUAL BUSINESS PLAN. Approximately three months prior to the end of
each calendar year, the Committee shall finalize an annual business plan of the
Alliance ("Annual Business Plan") for the following calendar year. The Annual
Business Plan shall include, but not be limited to:
(a) Targeted geographic markets for the Septic Appliances;
(b) Product development activities and goals;
(c) Sales objectives;
(d) Planned distribution;
(e) Pricing policies;
(f) Expense budget reflecting expenses of each party that are
properly shared by the Alliance;
(g) Planned financial statements for the Alliance including budgets,
and statements of profit and loss; and
(h) Critical issues and strategies.
The initial Annual Business Plan shall be developed by the parties and reduced
to writing no later than February 1, 2001.
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3.5 THREE-YEAR PLAN. Approximately three months prior to the end of each
fiscal year, the Committee shall finalize a three-year plan for the three-year
period commencing with the next calendar year ("Three-Year Plan"). The
Three-Year Plan shall be prepared to include each item specified for the Annual
Business Plan for the next three calendar years of the Alliance. The initial
Three-Year Plan shall be developed by the parties and reduced to writing no
later than February 1, 2001.
ARTICLE 4
BOOKS AND RECORDS
The parties agree on the following operating policies for the Alliance:
4.1 BOOKS AND RECORDS. Each party will keep full, true and accurate
records showing all revenues and expenditures made relating to its participation
in the Alliance. Each item shall be entered in its books in accordance with
generally accepted accounting principles, consistently applied.
4.2 ALLIANCE BOOKS AND RECORDS. A separate set of books of account shall
be kept which includes all items of revenue and expenditures which are allocable
to the Alliance under the terms of this Agreement. These books shall be kept for
the purpose of determining profitability of the Alliance, the amount of Alliance
Expenditures of each party which are properly reimbursable from Alliance
Revenues, and to assist the parties in planning the activities of the Alliance.
4.3 ACCESS TO BOOKS AND RECORDS. Each party, at its own expense, shall be
given full and complete access, through an accountant or other agent of its
choice, to the books, records and facilities of the other party relating to any
revenue, expenditure or activity of the Alliance, said access to be given during
normal business hours for the purpose of inspection, making copies or any other
purpose.
4.4 PERIODIC REPORTS. So that the parties continuously can be informed
about the progress of the Alliance, monthly reports setting forth Alliance
Revenues, itemizing Alliance Expenditures and showing the computation of Net
Profit shall be prepared by the Committee and furnished to each party.
ARTICLE 5
ACCOUNTING AND PROFIT SHARING
5.1 REIMBURSEMENT OF ALLIANCE EXPENDITURES. Each party shall receive
reimbursement for all Alliance Expenditures which are incurred by it as follows:
(a) No expenditure of a party incurred prior to the signing of this
Agreement shall be reimbursed from Alliance Revenues.
(b) During the period from the signing of this Agreement until the
end of the quarter which is immediately prior to the first quarter in
which the Alliance realizes a Net
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Profit, each party shall bear all Alliance Expenditures incurred by it
except that the Alliance Expenditures incurred by it shall be reimbursed
by a proportion of Alliance Revenues equal to the total Alliance
Expenditures incurred by it divided by the total Alliance Expenditures
incurred by both parties.
(c) For each quarter beginning with the first calendar quarter in
which Alliance Revenues exceed Alliance Expenditures, each party shall be
paid 50% of the Net Profit for such quarter.
(d) All expenditures and revenues of the Alliance shall be credited
on an accrual basis. Cash received with respect to Alliance Revenues shall
be paid on a monthly basis to a party in proportion that the amount of its
credited but unpaid reimbursement entitlement bears to the total credited
but unpaid reimbursement entitlement of both parties. SJE shall compute
the amounts to be paid within fifteen (15) days after the end of each
month and pay Ovation the amount it is entitled to be reimbursed within
twenty (20) days after the end of each month. Any errors made in
determining or paying amounts due in a given month shall be corrected in
the next succeeding monthly computations and payments.
ARTICLE 6
GRANT OF EXCLUSIVE DISTRIBUTION RIGHTS
Ovation agrees to grant to SJE the exclusive right to market, sell and
distribute Septic Appliances and certain other products pursuant to the terms
and conditions of the Distribution Agreement attached hereto as Exhibit 6.
ARTICLE 7
SECRECY
Each party agrees to comply with the terms of the Confidentiality
Agreement attached hereto as Exhibit 7.
ARTICLE 8
INTELLECTUAL PROPERTY
Each party agrees to comply with and be bound by the terms and conditions
relating to intellectual property attached hereto as Exhibit 8.
ARTICLE 9
TERM; TERMINATION
9.1 TERM. Unless earlier terminated in accordance with the terms of this
Agreement, this Agreement will terminate upon the earlier of: (a) the expiration
of the Exclusive Term as defined in Section 2.1 of the Distribution Agreement
entered into between the parties of even
5
date herewith or (b) the termination of the Distribution Agreement. This
Agreement will be renewed only upon the written mutual agreement of the parties.
9.2 EFFECT. Any termination of this Agreement shall not relieve either
party from any obligations accrued prior to termination (including but not
limited to the obligations set forth in Article 9 of this Agreement) or relieve
a party in default from liability for any breach of this Agreement.
9.3 DEFAULT. This Agreement may be terminated by either party in the event
of a material breach or default by the other party under this Agreement or the
Distribution Agreement, or a payment default under the Promissory Note on the
part of SJE.
9.4 CHANGE IN CONTROL. In the event that through one or a series of
transactions a person who, prior to the first such transaction owned one percent
(1%) or less of the voting stock of SJE, acquires more than fifty percent (50%)
of such voting stock ("Change in Control") during the term of this Agreement,
Ovation shall have the right to terminate this Agreement with the new owner of
SJE in the event that sales of Products in each semi-annual period beginning
immediately after the Change in Control do not equal at least fifty percent
(50%) of the sales of the Products during the six-month period immediately prior
to the Change in Control; provided, however, that if the Change in Control
occurs before at least one full year of Product sales, and if Product sales
during the initial one year period after the Change in Control are not equal to
at least fifty percent (50%) of the Product sales projected for that period in
the current Three-Year Plan, then Ovation shall have the right to terminate this
Agreement with the new owners of SJE.
9.5 LICENSE AGREEMENT. So long as this Agreement and the Distribution
Agreement have not been terminated: (a) SJE shall have no right under the
License Agreement attached as Exhibit 5.4 to the Distribution Agreement to: (i)
manufacture Products or (ii) utilize intellectual property of Ovation for any
purposes other than those contemplated in the Distribution Agreement and the
Strategic Alliance Agreement; and (b) SJE shall not be obligated to make the
payments under the License Agreement.
ARTICLE 10
SETTLEMENT OF DISPUTES
10.1 BASIC DISPUTE RESOLUTION PROCEDURES. Any dispute between the parties
either with respect to the interpretation of any provision of this Agreement or
with respect to the performance of either party will be resolved as specified in
this Article 10.
(a) Upon the written request of either party, each of the parties
will appoint a designated representative who does not devote substantially
all of his or her time to performance under this Agreement, whose task it
will be to meet for the purpose of endeavoring to resolve such dispute.
(b) The designated representatives will meet as often as necessary
during a fifteen (15) day period (or such other time as the parties may
agree) to gather and furnish
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to the other all information with respect to the matter in issue which is
appropriate and germane in connection with its resolution.
(c) Such representatives will discuss the problem and negotiate in
good faith in an effort to resolve the dispute without the necessity of
any formal proceeding relating thereto.
(d) During the course of such negotiation, all reasonable requests
made by one party to the other for nonprivileged information reasonably
related to this Agreement, will be honored in order that each of the
parties may be fully advised of the other's position.
(e) The specific format for such discussions will be left to the
discretion of the designated representatives, but may include the
preparation of agreed upon statements of fact or written statements of
position furnished to the other party.
10.2 ARBITRATION. If the designated representatives cannot resolve the
dispute, then the dispute will be resolved by arbitration, provided that
resolution of disagreements on business issues shall be beyond the scope of the
arbitrator's authority. Formal arbitration proceedings for the resolution of any
arbitrable dispute may be commenced upon the earlier of:
(a) The designated representatives concluding in good faith that
amicable resolution through continued negotiation of the matter in issue
does not appear likely; or
(b) Sixty (60) days after the initial request to negotiate such
dispute (unless preliminary or temporary relief of an emergency nature is
sought by one of the parties).
10.3 ARBITRATION PROCEDURES. Any arbitrable disputes between the parties
will be settled by arbitration under the then-prevailing Commercial Arbitration
Rules of the American Arbitration Association, to be conducted in Chicago,
Illinois. There will be one (1) arbitrator chosen by mutual agreement of the
parties or, in the event the parties cannot agree within thirty (30) calendar
days of issuance of a written demand for arbitration by either party, by the
American Arbitration Association. All proceedings by the arbitrator will be
conducted in accordance with the rules of the American Arbitration Association,
except to the extent the provisions of such rules are modified by this Agreement
or the mutual agreement of the parties. Either party will have the right to
discovery of evidence, but by the following methods only: (a) requests for
production of documents and (b) depositions of no more than three (3)
individuals. The arbitrator will supervise discovery and may, at the request of
either party, award expenses of discovery (including reasonable attorneys' fees)
to the requesting party for good cause shown. All discovery will be completed,
and the arbitration hearing will commence, within forty-five (45) days after
appointment of the arbitrator. The arbitration hearing will conclude within
thirty (30) days after it commences. The award rendered in arbitration will be
in writing and will be final and binding, and may be enforced in any court of
competent jurisdiction. The fees and expenses of the arbitrator will be paid by
the non-prevailing party.
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ARTICLE 11
MISCELLANEOUS
11.1 ASSIGNMENT. This Agreement, and all rights and obligations hereunder,
are personal as to the parties hereto and shall not be assigned without the
prior written consent by the other party except as otherwise specifically
permitted hereunder.
11.2 NOTICES. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be considered given on the
day sent when given in one of the following ways with simultaneous transmission
by e-mail to the e-mail address shown:
(a) delivered personally;
(b) sent by facsimile, telegram, telex or cable; or
(c) by registered or certified mail, return receipt requested;
to the parties at the following addresses (or at such other address as a party
may specify by written notice to the other):
If to Ovation: Xx. Xxxxx Xxxxxx
Ovation Products Corporation 000
Xxxxxxxxx Xxxx Xxxxxx, XX 00000
Email: a_ xxxxxx@xxxxxxxxxxxxxxx.xxx
If to SJE: Xx. Xxxxxx Felting
X. X. Electro Systems, Inc.
00000 Xxxxxx Xxxxxxx 0
X.X. Xxx 0000
Xxxxxxx Xxxxx, XX 00000
Email: xxxxxxx@xxxxxxxxxx.xxx
11.3 SURVIVAL OF OBLIGATIONS. Termination of this Agreement for any cause
shall not release either party hereto from any liability which at the time of
termination has already accrued to the other party hereto or which thereafter
may accrue in respect of any act or omissions prior to such termination or
expiration, nor shall any such termination hereof affect in any way the survival
of any right, duty or obligation of the party hereto which is expressly stated
elsewhere in this Agreement to survive termination or expiration hereof.
11.4 AMENDMENTS. Amendments to this Agreement must be made in writing and
signed by both parties hereto.
11.5 ENTIRE AGREEMENT. This Agreement (including its Exhibits as of the
date hereof), the agreements contemplated by this Agreement as well as the
Distribution Agreement, the Series A Preferred Stock Purchase Agreement, the
First Refusal and Co-Sale Agreement, the Investor Rights Agreement, the
Promissory Note, the Pledge Agreement, the Confidentiality
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Agreement and the Intellectual Property Agreement (collectively, the "Related
Agreements"), constitute the entire agreement and understanding between the
parties with respect to the subject matter and all other previous or currently
existing agreements and understandings or other arrangements of any kind with
respect to the said subject matter shall be canceled and superseded completely
by the Related Agreements.
11.6 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions of this Agreement.
11.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota (without regard to principles
of conflicts of laws).
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the day and year first above written.
OVATION PRODUCTS CORPORATION
By: /s/ Xxxxx X. Xxxxxx
------------------------------------
Its: CEO
X.X. ELECTRO SYSTEMS, INC.
By: /s/ Xxxxxx Xxxxxxxxxxx
------------------------------------
Its: CEO
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EXHIBIT 1.1
ALLIANCE EXPENDITURES
2001 2002 2003 2004 2005 2006
1 Septic Appliance
Statement
2. Unit Sales-SJE's
Estimate 50 500 1,400 4,500 9,000 17,000
3. Unit Sales-Ovation
Estimate with SJE 100 1,500 3,000 8,000 15,000 25,000
4. Unit Sales-Ovation
Estimate with other 25 300 3,000 6,000 16,000 30,000
5.
6. Unit Selling Price $ 2,764 $ 3,200 $ 3,200 $ 3,200 $ 3,000 $ 3,000
7.
8. Unit Cost (per
Ovation) $ 1,864 $ 925 $ 1,275 $ 1,083 $ 811 $ 710
9. Additional unit
cost adder $ 450 $ 1,075 $ 600 $ 600 $ 600 $ 600
10. Panel costing $ 250 $ 250 $ 240 $ 230 $ 220 $ 210
11. Shipping/handling
cost $ 200 $ 200 $ 190 $ 180 $ 170 $ 160
12. Total septic
alliance cost $ 2,764 $ 2,450 $ 2,305 $ 2,093 $ 1,801 $ 1,680
13.
14. Septic Appliance
Sales $ 276,400 $ 4,800,000 $ 9,600,000 $ 25,600,000 $ 45,000,000 $ 75,000,000
15. Septic Appl Cost of
Goods Sold $ 276,400 $ 3,675,000 $ 6,915,000 $ 16,744,000 $ 27,015,000 $ 42,000,000
16.
17. Septic Gross Profit $ -- $ 1,125,000 $ 2,685,000 $ 8,856,000 $ 17,985,000 $ 33,000,000
18. GP% 23% 28% 35% 40% 44%
19.
20. SJE Operating
Expenses
21. Marketing - 8% $ 40,000 $ 250,000 $ 768,000 $ 2,048,000 $ 3,600,000 $ 6,000,000
22. Engineering - 1% $ 130,000 $ 200,000 $ 96,000 $ 256,000 $ 450,000 $ 750,000
23. Admin - 4% $ 130,000 $ 250,000 $ 384,000 $ 1,024,000 $ 1,800,000 $ 3,000,000
2007 2008
1 Septic Appliance
Statement
2. Unit Sales-SJE's
Estimate 25,000 37,500
3. Unit Sales-Ovation
Estimate with SJE 35,000 45,000
4. Unit Sales-Ovation
Estimate with other 45,000 55,000
5.
6. Unit Selling Price $ 3,000 $ 2,750
7.
8. Unit Cost (per
Ovation) $ 625 $ 574
9. Additional unit
cost adder $ 600 $ 600
10. Panel costing $ 200 $ 190
11. Shipping/handling
cost $ 150 $ 140
12. Total septic
alliance cost $ 1,575 $ 1,504
13.
14. Septic Appliance
Sales $105,000,000 $123,750,000
15. Septic Appl Cost of
Goods Sold $ 55,125,000 $ 67,680,000
16.
17. Septic Gross Profit $ 49,875,000 $ 56,070,000
18. GP% 48% 45%
19.
20. SJE Operating
Expenses
21. Marketing - 8% $ 8,400,000 $ 9,900,000
22. Engineering - 1% $ 1,050,000 $ 1,237,500
23. Admin - 4% $ 4,200,000 $ 4,950,000
2001 2002 2003 2004 2005 2006
24. Total Operating
SJE $ 300,000 $ 700,000 $ 1,248,000 $ 3,328,000 $ 5,850,000 $ 9,750,000
25. 15% 13% 13% 13% 13%
26. All Ovation
Operating Expenses
27. Warranty accrual $ 39,000 $ 333,000 $ 765,000 $ 909,000 $ 1,508,000 $ 2,344,000
28. Engineering $ 936,000 $ 1,123,000 $ 1,530,000 $ 3,031,000 $ 5,028,000 $ 7,812,000
29. Sales and Marketing $ 13,000 $ 95,000 $ 945,000 $ 1,665,000 $ 3,600,000 $ 5,400,000
30. G&A Overhead $ 482,000 $ 723,000 $ 1,530,000 $ 3,031,000 $ 5,028,000 $ 7,812,000
31. Total Operating
Ovation $ 1,470,000 $ 2,274,000 $ 4,770,000 $ 8,636,000 $ 15,164,000 $ 23,368,000
32.
33. Allocated Ovation
Operating Expenses
34. Warranty accrual -
1.4% $ 39,000 $ 277,500 $ 382,500 $ 519,429 $ 729,677 $ 1,065,455
35. Engineering - 4.7% $ 936,000 $ 935,833 $ 765,000 $ 1,732,000 $ 2,432,903 $ 3,550,909
36. Sales and Marketing $ -- $ -- $ -- $ -- $ -- $ --
37. G&A Overhead - 4% $ 482,000 $ 602,500 $ 765,000 $ 1,732,000 $ 2,432,903 $ 3,550,909
38. Total Operating
Ovation $ 1,457,000 $ 1,815,833 $ 1,912,500 $ 3,983,429 $ 5,595,484 $ 8,167,273
39. 38% 20% 16% 12% 11%
40.
41.
42. Septic Appl Net
Income (Loss) $ (1,757,000) $ (1,390,833) $ (475,500) $ 1,544,571 $ 6,539,516 $ 15,082,727
43. % to Sales -29% -5% 6% 15% 20%
44. Accum Net (Loss)
Income $ (1,757,000) $ (3,147,833) $ (3,623,333) $ (2,078,762) $ 4,460,754 $ 19,543,481
45. Split of Net
Income (Loss) $ (878,500) $ (695,417) $ (237,750) $ 772,286 $ 3,269,758 $ 7,541,364
2007 2008
24. Total Operating
SJE $ 13,650,000 $ 16,087,500
25. 13% 13%
26. All Ovation
Operating Expenses
27. Warranty accrual $ -- $ --
28. Engineering $ -- $ --
29. Sales and Marketing $ -- $ --
30. G&A Overhead $ -- $ --
31. Total Operating
Ovation $ -- $ --
32.
33. Allocated Ovation
Operating Expenses
34. Warranty accrual -
1.4% $ 1,470,000 $ 1,732,500
35. Engineering - 4.7% $ 4,935,000 $ 5,816,250
36. Sales and Marketing $ -- $ --
37. G&A Overhead - 4% $ 4,200,000 $ 4,950,000
38. Total Operating
Ovation $ 10,605,000 $ 12,498,750
39. 19% 10%
40.
41.
42. Septic Appl Net
Income (Loss) $ 25,620,000 $ 27,483,750
43. % to Sales 24% 22%
44. Accum Net (Loss)
Income $ 45,163,481 $ 72,647,231
45. Split of Net
Income (Loss) $ 12,810,000 $ 13,741,875
Assumptions Made
Line
2 Unit sales- SJE's estimate SJE's projections of the septic appliance used for comparison purposes only
3 Unit sales-Ovation Estimate with SJE Ovation estimate of unit sales with SJE used for computing total sales and COGS
4 Unit sales-Ovation estimate with other Ovation estimate of unit sales with others used in computing allocation of total
Ovation operating expenses
6 Unit selling price Year 2001 used the cost of the product to show no gross profit made on first units
Years 2002 - 20011 used SJE's projected selling price
8 Unit cost Based on Ovation's projections of all units divided into COGS
9 Additional unit cost adder Additional cost added to unit cost to be able to meet 500 gallons/day and cost
conservative adder
10 Panel costing Based on SJE's estimate of $250 declining $10 per year
11 Shipping/handling cost Used $200 per unit decreasing annually by $10 - averages between 4-6% of selling price
Compared to SJE manufacturing of 10.6% of sales
12 Total septic cost Addition of unit cost, unit cost adder, panel cost and shipping/handling
14 Septic Appliance Sales Multiplied unit sales-ovation estimate with SJE times unit selling price
15 Septic Appl Cost of Goods Sold Multiplied unit sales-ovation estimate with SJE times total septic cost
17 Septic Gross Profit Septic appliance sales less septic appl cost of goods sold
18 GP % Septic appliance gross profit divided by septic appliance sales
21 Marketing - 8% SJE's Marketing expenses projected at 8% of sales for years 2003-2011, planned for 2001
and 2002
22 Engineering - 1% SJE's Engineering expenses projected at 1% of sales for years 2003-2011, planned for
2001 and 2002
23 Admin - 4% SJE's Admin expenses projected at 4% of sales for years 2003-2011, planned for 2001 and
2003
24 Total Operating SJE Total marketing, engineering and admin expenses for SJE
26 All Ovation Operating Expenses Section for all Ovations forecasted operating expenses for years 2001-2006
27 Warranty accrual Ovation projected total warranty expense for years 2001-2006
28 Engineering Ovation projected total engineering expense for years 2001-2006
29 Sales and Marketing Ovation projected total sales and marketing expenses for years 2001-2006
30 G&A Overhead Ovation projected total G&A overhead expense for years 2001-2006
31 Total Operating Ovation Total Ovation warranty, engineering, sales & marketing, and G&A overhead for years
2001-2006
33 Allocated Ovation Operating Expense Section for allocated Ovation forecasted operating expenses
34 Warranty accrual - 1.4% Allocated warranty expenses based on unit sales to SJE to total Ovation unit sales for
years 2001-2006, years 2007-2011 is computed at 1.4%
35 Engineering - 4.7% Allocated engineering expense based on unit sales to SJE to total Ovation unit sales
for years 2001-2006, years 2007-2011 is computed at 4.7%
36 Sales and Marketing No sales and marketing expenses allocated as these costs for Ovation are a result of
other sales
37 G&A Overhead - 4% Allocated G&A expenses based on unit sales to SJE to total Ovation unit sales for years
2001-2006, years 2007-2011 is computed at 4% to sale
38 Total Operating Ovation Total allocated Ovation warranty, engineering, and G&A expenses
42 Septic Appl Net Income (Loss) Septic Gross Profit less SJE's operating expenses - Ovations allocated operating
expense
43 % to Sales Septic appl net income divided by septic appliance sales
44 Accum Net (Loss) Income Accumulated net (loss) income
47 Split of Net Income (Loss) Split of Septic appliance net income (loss)
2001 2002 2003 2004 2005 2006
Septic Appliance
Statement
Unit Sales-SJE's
Estimate 50 500 1,400 4,500 9,000 17,000
Unit
Sales-Ovation
Estimate with SJE 100 1,500 3,000 8,000 15,000 25,000
Unit
Sales-Ovation
Estimate with
other 25 300 3,000 6,000 16,000 30,000
Unit Selling
Price $ 3,200 $ 3,200 $ 3,200 $ 3,000 $ 3,000
Unit Cost $ 1,864 $ 1,500 $ 1,275 $ 1,083 $ 811 $ 710
Septic Appliance
Sales $ 4,800,000 $ 9,600,000 $ 25,600,000 $ 45,000,000 $ 75,000,000
Septic Appl Cost
of Goods Sold $ 128,200 $ 3,300,000 $ 5,925,000 $ 14,264,000 $ 22,665,000 $ 35,250,000
Septic Gross
Profit $ (128,200) $ 1,500,000 $ 3,675,000 $ 11,336,000 $ 22,335,000 $ 39,750,000
GP% 31% 38% 44% 50% 53%
SJE Operating
Expenses
Marketing - 8% $ 40,000 $ 250,000 $ 768,000 $ 2,048,000 $ 3,600,000 $ 6,000,000
Engineering - 1% $ 130,000 $ 200,000 $ 96,000 $ 256,000 $ 450,000 $ 750,000
Admin - 4% $ 130,000 $ 250,000 $ 384,000 $ 1,024,000 $ 1,800,000 $ 3,000,000
Total
Operating SJE $ 300,000 $ 700,000 $ 1,248,000 $ 3,328,000 $ 5,850,000 $ 9,750,000
15% 13% 13% 13% 13%
All Ovation
Operating
Expenses
Warranty accrual $ 39,000 $ 333,000 $ 765,000 $ 909,000 $ 1,508,000 $ 2,344,000
Engineering $ 936,000 $ 1,123,000 $ 1,530,000 $ 3,031,000 $ 5,028,000 $ 7,812,000
Sales and
Marketing $ 13,000 $ 95,000 $ 945,000 $ 1,665,000 $ 3,600,000 $ 5,400,000
G&A Overhead $ 482,000 $ 723,000 $ 1,530,000 $ 3,031,000 $ 5,028,000 $ 7,812,000
Total
Operating
Ovation $ 1,470,000 $ 2,274,000 $ 4,770,000 $ 8,636,000 $ 15,164,000 $ 23,368,000
2007 2008 2009 2010 2011
Septic Appliance
Statement
Unit Sales-SJE's
Estimate 25,000 37,500 50,000 62,500 75,000
Unit
Sales-Ovation
Estimate with SJE 35,000 45,000 55,000 65,000 75,000
Unit
Sales-Ovation
Estimate with
other 45,000 55,000 65,000 75,000 85,000
Unit Selling
Price $ 3,000 $ 2,750 $ 2,600 $ 2,600 $ 2,600
Unit Cost $ 625 $ 574 $ 550 $ 525 $ 500
Septic Appliance
Sales $105,000,000 $123,750,000 $143,000,000 $169,000,000 $195,000,000
Septic Appl Cost
of Goods Sold $ 46,375,000 $ 57,330,000 $ 68,750,000 $ 79,625,000 $ 90,000,000
Septic Gross
Profit $ 58,625,000 $ 66,420,000 $ 74,250,000 $ 89,375,000 $105,000,000
GP% 56% 54% 52% 53% 54%
SJE Operating
Expenses
Marketing - 8% $ 8,400,000 $ 9,900,000 $ 11,440,000 $ 13,520,000 $ 15,600,000
Engineering - 1% $ 1,050,000 $ 1,237,500 $ 1,430,000 $ 1,690,000 $ 1,950,000
Admin - 4% $ 4,200,000 $ 4,950,000 $ 5,720,000 $ 6,760,000 $ 7,800,000
Total
Operating SJE $ 13,650,000 $ 16,087,500 $ 18,590,000 $ 21,970,000 $ 23,350,000
13% 13% 13% 13% 13%
All Ovation
Operating
Expenses
Warranty accrual $ -- $ -- $ -- $ -- $ --
Engineering $ -- $ -- $ -- $ -- $ --
Sales and
Marketing $ -- $ -- $ -- $ -- $ --
G&A Overhead $ -- $ -- $ -- $ -- $ --
Total
Operating
Ovation $ -- $ -- $ -- $ -- $ --
2001 2002 2003 2004 2005 2006
Allocated
Ovation
Operating
Expenses
Warranty accrual
- 1.4% $ 39,000 $ 277,500 $ 382,500 $ 519,429 $ 729,677 $ 1,065,455
Engineering -
4.7% $ 936,000 $ 935,833 $ 765,000 $ 1,732,000 $ 2,432,903 $ 3,550,909
Sales and
Marketing $ -- $ -- $ -- $ -- $ -- $ --
G&A Overhead - 4% $ 482,000 $ 602,500 $ 765,000 $ 1,732,000 $ 2,432,903 $ 3,550,909
Total
Operating
Ovation $ 1,457,000 $ 1,815,833 $ 1,912,500 $ 3,983,429 $ 5,595,484 $ 8,167,273
38% 20% 16% 12% 11%
Septic Appl Net
Income (Loss) $ (1,885,200) $ (1,015,833) $ 514,500 $ 4,024,571 $ 10,889,516 $ 21,832,727
% to Sales -21% 5% 16% 24% 29%
Accum Net
(Loss) Income $ (1,885,200) $ (2,901,033) $ (2,386,533) $ 1,638,038 $ 12,527,554 $ 34,360,281
Split of Net
Income (Loss) $ (942,600) $ (507,917) $ 257,250 $ 2,012,286 $ 5,444,758 $ 10,916,364
2007 2008 2009 2010 2011
Allocated
Ovation
Operating
Expenses
Warranty accrual
- 1.4% $ 1,470,000 $ 1,732,500 $ 2,002,000 $ 2,366,000 $ 2,730,000
Engineering -
4.7% $ 4,935,000 $ 5,816,250 $ 6,721,000 $ 7,943,000 $ 9,165,000
Sales and
Marketing $ -- $ -- $ -- $ -- $ --
G&A Overhead - 4 $ 4,200,000 $ 4,950,000 $ 5,720,000 $ 6,760,000 $ 7,800,000
Total
Operating
Ovation $ 10,605,000 $ 12,498,750 $ 14,443,000 $ 17,069,000 $ 19,695,000
10% 10% 10% 10% 10%
Septic Appl Net
Income (Loss) $ 34,370,000 $ 37,833,750 $ 41,217,000 $ 50,336,000 $ 59,955,000
% to Sales 33% 31% 29% 30% 31%
Accum Net
(Loss) Income $ 68,730,281 $106,564,031 $147,781,031 $198,117,031 $258,072,031
Split of Net
Income (Loss) $ 17,185,000 $ 18,916,875 $ 20,608,500 $ 25,168,000 $ 29,977,500
2001 2002 2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------------------------------------------
SJE Products
Statement
SJE Product Sales $24,143,000 $27,609,000 $32,074,000 $35,252,000 $38,283,000 $41,728,470 $45,066,748
Cost of Goods
Sold $15,285,000 $17,620,002 $20,533,872 $22,855,007 $23,985,792 $27,540,790 $29,744,053
SJE GP $ 8,858,000 $ 9,988,998 $11,540,128 $12,396,993 $14,297,208 $14,187,680 $15,322,694
36.7% 36.2% 36.0% 35.2% 37.3% 34.0% 34%
Operating
Expenses $ 7,058,000 $ 7,541,660 $ 7,876,721 $ 9,237,312 $10,400,287 $10,432,118 $11,266,687
27% 25% 26% 27% 25% 25%
SJE Net Income $ 1,800,000 $ 2,447,338 $ 3,663,407 $ 3,159,681 $ 3,896,921 $ 3,755,562 $ 4,056,007
Net Income % to
Sales 7% 9% 11% 9% 10% 9% 9%
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Septic Appliance
Statement
Septic Appliance 500 1,400 4,500 9,000 17,000 25,000
Sales
Unit Selling
Price $ 3,200.00 $ 3,200.00 $ 3,200.00 $ 3,000.00 $ 3,000.00 $ 3,000.00
Septic Appliance
Sales $ 1,600,000 $ 4,480,000 $ 14,400,000 $ 27,000,000 $ 51,000,000 $ 75,000,000
Septic Appl Cost
of Goods Sold $ 1,200,000 $ 3,360,000 $ 10,800,000 $ 21,600,000 $ 40,800,000 $ 59,375,000
Septic Gross
Profit $ 400,000 $ 1,120,000 $ 3,600,000 $ 5,400,000 $ 10,200,000 $ 15,625,000
GP% 25% 25% 25% 20% 20% 21%
--------------------------------------------------------------------------------------------------------------------------------
2008 2009 2010 2011
-----------------------------------------------------------------------------------
SJE Products
Statement
SJE Product Sales 48,672,087 $ 52,079,134 55,724,672.87 $ 59,068,153
Cost of Goods
Sold $ 32,123,578 $ 34,372,228 $ 36,778,284 $ 38,984,981
SJE GP $ 16,548,510 $ 17,706,905 $ 18,946,389 $ 20,083,172
34% 34% 34% 34%
Operating
Expenses $ 12,168,022 $ 13,019,883 $ 13,931,168 $ 14,767,038
25% 25% 25% 25%
SJE Net Income $ 4,380,488 $ 4,687,122 $ 5,015,221 $ 5,316,134
Net Income % to
Sales 9% 9% 9% 9%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Septic Appliance
Statement
Septic Appliance 37,500 50,000 62,500 75,000
Sales
Unit Selling
Price $ 2,750.00 $ 2,600.00 $ 2,600.00 $ 2,600.00
Septic Appliance
Sales $103,125,000 $130,000,000 $ 162,500,000 $195,000,000
Septic Appl Cost
of Goods Sold $ 80,625,000 $100,000,000 $ 121,875,000 $142,500,000
Septic Gross
Profit $ 22,500,000 $ 30,000,000 $ 40,625,000 $ 52,500,000
GP% 22% 23% 25% 27%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Septic Operating
Expenses
Marketing $ 40,000 $ 250,000 $ 450,000 $ 1,152,000 $ 2,160,000 $ 4,080,000
Engineering $ 130,000 $ 200,000 $ 200,000 $ 200,000 $ 270,000 $ 510,000
Admin $ 10,000 $ 20,000 $ 179,200 $ 576,000 $ 1,080,000 $ 3,060,000
Total
Operating
Ovation $ 180,000 $ 470,000 $ 829,200 $ 1,928,000 $ 3,510,000 $ 7,650,000
13% 13% 15%
Septic Appl Net
Income (Loss) $ (180,000) $ (70,000) $ 290,800 $ 1,672,000 $ 1,890,000 $ 2,550,000
% to Sales 6% 12% 7% 5%
Accum Net (Loss)
Income $ (180,000) $ (250,000) $ 40,800 $ 1,712,800 $ 3,602,800 $ 6,152,800
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Combined
Statement
Sales $ 24,143,000 $ 29,209,000 $ 36,554,000 $ 49,652,000 $ 65,283,000 $ 92,728,470
Cost of Goods
Sold $ 15,285,000 $ 18,820,002 $ 23,893,872 $ 33,655,007 $ 45,585,792 $ 68,340,790
Gross Profit $ 8,858,000 $ 10,388,998 $ 12,660,128 $ 15,996,993 $ 19,697,208 $ 24,387,680
GP% 37% 36% 35% 32% 30% 26%
Operating
Expenses $ 7,238,000 $ 8,011,660 $ 8,705,921 $ 11,165,312 $ 13,910,287 $ 18,082,118
% to Sales 30% 27% 24% 22% 21% 20%
Operating Income $ 1,620,000 $ 2,377,338 $ 3,954,207 $ 4,831,681 $ 5,786,921 $ 6,305,562
% to Sales 7% 8% 11% 10% 9% 7%
-----------------------------------------------------------------------------------------------------------------------
0.31 0.42
------------------------------------------------------------------------------------------------------
Septic Operating
Expenses
Marketing $ 6,000,000 $ 8,250,000 $ 10,400,000 $ 13,000,000 $ 15,600,000
Engineering $ 750,000 $ 1,031,250 $ 1,300,000 $ 1,625,000 $ 1,950,000
Admin $ 4,500,000 $ 6,187,500 $ 7,800,000 $ 9,750,000 $ 11,700,000
Total
Operating
Ovation $ 11,250,000 $ 15,468,750 $ 19,500,000 $ 24,375,000 $ 29,250,000
15% 15% 15% 15% 15%
Septic Appl Net
Income (Loss) $ 4,375,000 $ 7,031,250 $ 10,500,000 $ 16,250,000 $ 23,250,000
% to Sales 6% 7% 8% 10% 12%
Accum Net (Loss)
Income $ 10,527,800 $ 17,559,050 $ 28,059,050 $ 44,309,050 $ 67,559,050
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Combined
Statement
Sales $120,066,748 $151,797,087 $182,079,134 $218,224,673 $254,068,153
Cost of Goods
Sold $ 89,119,053 $112,748,578 $134,372,228 $158,653,284 $181,484,981
Gross Profit $ 30,947,694 $ 39,048,510 $ 47,706,905 $ 59,571,389 $ 72,583,172
GP% 26% 26% 26% 27% 29%
Operating
Expenses $ 22,516,687 $ 27,636,772 $ 32,519,783 $ 38,306,168 $ 44,017,038
% to Sales 19% 18% 18% 18% 17%
Operating Income $ 8,431,007 $ 11,411,738 $ 15,187,122 $ 21,265,221 $ 28,566,134
% to Sales 7% 8% 8% 10% 11%
------------------------------------------------------------------------------------------------------
29% 0.26 0.20 0.20 0.16
EXHIBIT 6
DISTRIBUTION AGREEMENT
(SEE TAB 8)
EXHIBIT 7
CONFIDENTIALITY AGREEMENT
MUTUAL CONFIDENTIAL DISCLOSURE AGREEMENT
Agreement between Ovation Products Corporation ("Ovation"), a Delaware
Corporation, and SJE-Rhombus ("SJE"), a Minnesota Corporation, regarding the
provision or exchange of confidential information:
1. The Parties recognize that they will exchange a wide variety of
information during the strategic alliance (the "Project") in the
development, marketing and sale of wastewater treatment systems. The
Parties recognize that, during the lifetime of the Project, it may be
beneficial for one or the other of the Parties to disclose business
information to third parties or for general public notification.
2. Confidential Information includes the following, by way of example but not
exclusively:
2.1 Technology information
2.2 Test data and test reports
2.3 Market forecasts or estimates
2.4 Financial information, including such information as costs of good,
revenues, margins, warranty allowances, or transfer prices
2.5 Plans or intentions regarding the release or pricing of upcoming
products or product enhancements
2.6 Patentable ideas
2.7 The existence and terms of the Strategic Alliance Agreement
3. Receiving Party agrees to take all reasonable steps to assure the
continued confidentiality of the Confidential Information, and to protect
this Confidential Information at least as well as it protects its own
confidential information. Either party may reproduce, copy or otherwise
record Confidential Information as necessary in the ordinary course of its
business, taking reasonable steps to assure its continued confidentiality.
4. Each party agrees to keep confidential any trade secrets developed jointly
or solely by each party.
5. Either party may disclose the following types of information to financial
institutions (or similar institutions) which have an industry ethic of
confidentiality:
5.1 Financial information
5.2 Market forecasts or estimates
5.3 The existence and/or terms or the Strategic Alliance Agreement
6. Ovation is free to disclose technology information without prior
consultation with SJE.
7. SJE is free to disclose plans or intentions regarding the release and
pricing of upcoming products or product enhancements without prior
consultation with Ovation. The disclosure of trade secrets, patentable
ideas, test data and test reports require mutual agreement between both
parties.
8. The Parties agree to a mutual public disclosure to the press of the
existence of the Project at a mutually-agreed time and manner.
9. The obligations provided for in Sections 2 through 6 above shall continue
for the longest of:
9.1 period of three years from the date the Strategic Alliance Agreement
is fully executed
9.2 a period of three years from the cancellation the Strategic Alliance
Agreement
10. The obligations provided for above shall not apply to Confidential
Information which:
10.1 was, at the time of disclosure, in the public domain by publication
or otherwise; or
10.2 enters the public domain through no fault of receiving Party or its
agents after receipt from disclosing Party; or
10.3 is ordered disclosed pursuant to a judicial or other lawful
government action, but only to the extent required by such action,
and only after giving disclosing Party a minimum of five days' prior
written notice of its intent to disclose such information.
11. Nothing in this Agreement shall be construed to grant to receiving Party
any license or other right except for limited rights specifically provided
for in this Agreement; and nothing herein shall be construed to limit or
in any other way restrict any patent, copyright, trademark, or other
intellectual property right which disclosing Party may have with respect
to the Confidential Information.
12. This Agreement shall be governed by the same general terms as the
Strategic Alliance Agreement. In the case of conflict, the Strategic
Alliance Agreement shall govern.
13. This Agreement represents the complete agreement between the Parties on
the subject matter hereof, and supersedes all prior agreements of
understandings between the Parties relating thereto. This Agreement may
not be altered or amended except by a document in writing signed by
authorized representatives of both Parties.
EXHIBIT 8
INTELLECTUAL PROPERTY AGREEMENT
OVATION PRODUCTS CORPORATION
INTELLECTUAL PROPERTY
Intellectual Property Agreement (the "Agreement") between Ovation Products
Corporation ("Ovation"), a Delaware corporation, and X.X. Electro Systems, Inc.
("SJE"), a Minnesota corporation, regarding intellectual property rights:
PATENTABLE INVENTIONS
An invention developed solely by one party is the property of that party and may
be patented by that party. Jointly developed patentable inventions will be the
property of Ovation if the invention relates to the operation of the Distiller.
Jointly developed inventions relating to the system that are not an integral
part of the distiller are the property of SJE. Each party will notify the other
of patentable inventions. If the party entitled to a given invention chooses not
to secure patent protection, the other party shall have the right to file for
patent protection.
Patent rights from jointly developed patentable inventions include:
1. Ovation has a royalty-free license to use the jointly developed
patents owned by SJE, including the right to sublicense
subcontractors, transfer to successors, etc., for use in any
distiller-base products. Ovation has no license to use the jointly
developed patents owned by SJE for non-distiller-based products.
2. SJE has a royalty-free license to use the joint IP owned by Ovation,
including the right to sublicense subcontractors, transfer to
successors, etc., for use in any on-site products. SJE has no
license to use the joint IP owned by Ovation for distiller
applications other than on-site applications.
3. The owner of the patents has the exclusive right to license
unrelated third parties
4. In the case of infringement, the party who owns the patent has the
exclusive right to go after infringers, and keeps any profits from
the prosecution. The other party agrees to always give reasonable
efforts to support the case.
TRADEMARKS
Ovation has the right to develop and use trademarks to identify the distiller
and/or components of the distiller. SJE has the right to create and use
trademarks that identify other parts of the System or the Systems as a whole.
