COOPERATION AGREEMENT
ON THE PROCESSING OF NATURAL DIAMONDS AND THE
MARKETING OF THE RESULTING POLISHED DIAMONDS BETWEEN
AK ALMAZI ROSSII SAKHA AND XXXXXX XXXXXX INTERNATIONAL INC.,
NEW YORK, USA
Joint Stock Company Almazi Rossii Sakha, hereinafter referred
to as ARS, being a legal entity under the laws of the Russian Federation
(including its United Selling Organization Division and any wholly-owned
subsidiary of ARS), and U.S. company Xxxxxx Xxxxxx International Inc.,
hereinafter referred to as LKI, being a legal entity under the laws of the U.S.
(including any wholly-owned subsidiary thereof), jointly referred to herein as
the Parties, have made this agreement (the "Agreement") on cooperation in the
processing of natural diamonds and marketing of the resulting polished diamonds;
WHEREAS, ARS desires to increase the sphere of its influence
in the world market of "large" (used herein to refer to stones 10.8 carats or
larger) diamonds and the polished diamonds manufactured from them; and
The cutting of large stones, because of their unique value,
must be supervised by a special group of highly professional experts that have
sufficient experience in the processing and valuation of both rough and polished
large diamonds; and
The ultimate goal is to obtain maximum profit from sales of
large diamonds and/or polished diamonds manufactured from them that are prices
individually, which requires special knowledge of the global market and market
tendencies; and
LKI, which has the technology necessary for processing large
diamonds, employs professionals experienced in the manufacturing, valuation and
marketing of such large diamonds and maintains a corresponding marketing
network, has offered ARS mutually profitable cooperation in this area; and
ARS also seeks, in accordance with the terms of the General
Project Incentive Agreement among the Ministry of Finance of the Russian
Federation, the Central Bank of the Russian Federation and The Export-Import
Bank of the United
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* Confidential portions omitted and filed separately with the Commission.
States ("Eximbank") dated December 16, 1993 ("the GPIA"), loan finance
guaranteed by the Eximbank for activities furthering its leadership role in
world rough diamond production (the "Eximbank Project"), and Eximbank has
indicated its willingness to proceed with such financing on the basis of LKI's
participation in the international export and sale of ARS diamonds in assured
volumes sufficient to secure the repayment of the loan (although this Agreement
was originally planned by the Parties wholly apart from the Eximbank Project,
and independently stands on its own merit without in any way being dependent or
contingent upon ARS's proceeding with the Eximbank Project).
1. SUBJECT OF AGREEMENT
1.1. ARS, and LKI as its marketing consultant, will coordinate
their joint activities in the selection and valuation of
diamonds, in planning the most efficient way of cutting them
and then in cutting those diamonds in Moscow, and in the
certification, marketing and joint sales of all of those
resulting polished diamonds in the world market, using the LKI
and ARS sales networks.
2. OBLIGATIONS OF THE PARTIES
2.1. The Parties through their authorized representatives shall
take joint decisions on the following items:
2.1.1. Subject to the Minimum Level specified in Article
3.1.3, on the amount and assortment of diamonds
jointly selected for cutting, the timing of such
selections, the Base Price (denominated in US
Dollars) of each diamond (for sizes from 1.8 to
10.8 carats, for each separate lot) selected, the
cutting of each diamond (for sizes 1.8 to 10.8
carats, for each separate lot) selected, and the
valuation and sale of the resulting diamonds.
2.1.2. On the cutting process technology to be used for
each diamond selected.
2.1.3. By means of written protocols, on the cost of each
rough diamond (for sizes from 1.8 to 10.8 carats,
for each separate lot) selected (hereinafter
referred to as the "Base Price"), on the
reimbursable expenses (of both Parties) related to
the cutting and marketing (both estimated and
actual) of each shipment of polished diamonds, on
the final sales price of such shipment (both
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estimated and actual), and on the net profit
thereon (both estimated and actual).
2.2. The Parties express their intent to conduct this cooperation
in the spirit of mutual trust, openness and confidentiality.
Each Party will keep the other Party fully informed about
every significant decision that must be taken, consult and
agree on such decision, and include the other Party in all
stages related to the fulfillment of this Agreement.
2.3. ARS has the right, and LKI shall provide such an opportunity,
for ARS's representatives to participate in the sales of the
polished diamonds in LKI offices, to recommend purchasers from
its own contacts, and to participate in the presentations of
the diamonds to prospective purchasers, in the sales
negotiations and in signing such papers as may be used to
document final sale.
3. ARS OBLIGATIONS
3.1. In addition to the obligations stated above in Article 2, ARS
accepts the following obligations:
3.1.1. To provide in Moscow the facilities necessary for
cutting the rough diamonds, with premises
sufficient to accommodate the number of machines
and basic personnel required to process the Minimum
Level of rough diamonds, as defined in Article
3.1.3.
3.1.2. To provide initially at its own expense but for
reimbursement out of sales proceeds, the agreed
upon number of ARS professionals for all states of
joint work.
3.1.3. To provide (not less than once a month) rough
diamonds, in sizes and qualities suitable for
efficient processing and sale at enhanced prices,
and in such volume and assortment and for such Base
Price as maybe jointly selected and agreed upon by
the Parties, provided that during each successive
six month period diamonds of sufficient and
suitable quality are made available by ARS for such
joint selection and pricing in sufficient
quantities and sizes to assure the selection,
processing, export (at regular intervals) and sales
pursuant to this Agreement to (a) large diamonds
with an aggregate Base Price of no less than
* and (b) diamonds of other sizes from 1.8 to
10.8 carats (distributed by carat size
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within those size groups in the assortment agreed
upon by the Parties) with an aggregate Base Price
of no less than * (collectively the "Minimum
Level").
3.1.4. To provide LKI representatives with all required
documents and information, at all states of
selection and operation on those diamonds which
will be the subject of the joint operations
specified in Article 1.1 necessary for the
fulfillment of this Agreement.
3.1.5. To assist LKI experts, who are temporarily in
Russia to work under the Agreement, in getting
visas, work permits and residency permits.
3.1.6. To arrange for all necessary Russian government
decisions, export and other permits, licenses,
quotas and solutions of related issues arising in
connection with this Agreement.
3.1.7. To make the necessary arrangements including export
licenses, for the shipping, not less than once a
month, to LKI outside Russia, for marketing and
sale outside Russia, of all polished diamonds,
manufactured under this Agreement.
4. LKI OBLIGATIONS
4.1. In addition to the obligations stated above in Article 2, LKI
accepts the following obligations in return for the right to
earn a fee on the marketing of the polished diamonds outside
of Russia:
4.1.1. To provide to the joint operation initially at its
own expense but for reimbursement out of sales
proceeds, the technical consultants required to
supervise or train those engage din the valuation
and cutting of rough and polished diamonds, and to
facilitate the participation of experts of both
Parties in the joint cutting process.
4.1.2. To provide, initially at its own expense but for
reimbursement out of sales proceeds, the required
equipment, tools and materials, including a
preagreed color and clarity master set of diamonds
certified by GIA (collectively the "Equipment") in
the amounts, required by the expected volume of
work and workers. If and to the extent that this
Agreement expires or otherwise terminates, prior to
the completion of such reimbursement, either LKI
will be
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compensated by ARS for the value of the
reimbursement, either LKI will be compensated by
ARS for the value of the above-mentioned Equipment
left behind by LKI, taken into account its useful
life and physical weariness, or such Equipment will
be returned to LKI.
4.1.3. To provide, initially at its own expense but for
reimbursement out of sales proceeds, to ARS prior
to receiving each shipment of polished diamonds, an
insurance policy for the amount of the Base Price
(listing ARS as beneficiary prior to its receiving
form LKI the Base Price) covering `all risks' of
the processed diamonds during the period of their
transportation, storage and delivery to the buyer
up to the time of final sale.
4.1.4. *
4.1.5. To certify or obtain GIA certification for polished
diamonds when necessary.
4.1.6. To organize and perform, drawing upon ARS
representatives and their knowledge of the ARS
marketing network but retaining at LKI at all times
active physical possession and control of the
diamonds, the sorting, valuation and marketing of
all diamonds polished and delivered to LKI outside
Russia under this Agreement, utilizing its
marketing expertise, analyses, facilities, network
and contacts in Antwerp, New York, Tokyo and
worldwide, using such advertisements, promotion and
marketing methods, including the timing thereof, as
may be determined by the Parties to realize the
maximum price obtainable, and the sale of the
polished diamonds at such price. At all stages of
sale of the polished diamonds, ARS has the right to
introduce, in order to conclude the purchase, their
customers who offer a higher price than other
customers known to LKI.
4.1.7. To purchase (for an agreed upon market price) any
polished diamonds that it has received outside of
Russia from the joint cutting operation that remain
unsold within the 90 days sales period, or such
extension as the Parties may agree upon. However,
whenever the Parties cannot agree, with respect to
polished diamonds that remain unsold at the end of
such period,
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on the price to be paid by LKI, then LKI shall by
these diamonds at the Base Price plus ARS's and
LKI's reimbursable expenses.
4.1.8. To provide ARS in accordance with its needs the
fullest information and documents available on the
performance, costs, and results of marketing
activities, including copies of necessary
certificates and other documents.
4.1.9. To help arrange for visas, reception and residence
for Russian experts during their joint work outside
the Russian Federation.
4.1.10. To transfer to such account as ARS may instruct in
writing:
(a) as the first part of the payment under the
Sale-and-Purchase Contract covering each shipment
of polished diamonds, no later than * , a sum equal
to the total * of the rough diamonds from which
that shipment's polished diamonds case;
(b) as the second part of such payment, no later than *
days after the date of that shipment, the remaining
amount of the agreed upon estimated sales price of
the polished diamonds contained in that shipment;
and
(c) as the final part of such payment, based on the
results of the * of the polished diamonds, not
later than * days after the date of that shipment,
the remaining amount due to ARS after calculating
the mutually agreed upon reimbursement of the
expenses of each Party related to this shipment and
that part of the net profit due to ARS.
4.1.11 In the event that ARS proceed with the Eximbank
Project, (a) to take all necessary actions within
its control at each stage to assure that the value
of diamonds selected, processed, exported and sold
pursuant to this Agreement within each successive 6
month period, meet the Minimum Level of $22.5
million; and (b) to fully cooperate with ARS and
the Eximbank in the formulation and implementation
of such arrangements in connection with this
Agreement as may facilitate ARS' proceeding with
the Eximbank Project.
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5. PAYMENT
5.1. ARS and LKI shall jointly define the value of each diamond
(for sizes form 1.8 to 10.8 carats, for each separate lot)
selected for processing (the "Base Price"), and confirm it by
an appropriate protocol. If the Parties cannot agree on the
Base Price of a diamond (or, for sizes from 1.8 to 10.8
carats, on the Base Price of a separate lot of diamonds) and
such failure to agree jeopardizes either Party's ability to
fulfill its obligations under this Agreement (or the
obligations of ARS pursuant to the Eximbank Project
agreements) - specifically, if, in any * month period such
cumulative failures to agree on the Base Price have caused the
volume of rough diamonds selected by the Parties for
processing under this Agreement to be less than * of the
Minimum Level by the end of month * less than * by the end of
month * less than * by the end of month * or less than * by
the end of month * then, without in any way diminishing the
obligations of the Parties under Articles 3.1.3 and 4.1.11 of
this Agreement, (i) each Party shall in good faith propose its
best, most reasonable estimate of such Base Price, (ii) the
Parties together shall proceed to polish and market such
diamond (or separate lot of diamonds) in accordance with this
Agreement, (iii) the Base Price to be paid by LKI pursuant to
Article 4.1.10 shall be the Base Price proposed by LKI, and
(iv) upon the sale of such diamond (or separate lot of
diamonds), ARS's share of the profits shall be calculated in
accordance with the following formula, the application of
which is illustrated in Appendix A, which Appendix shall be
deemed an integral part of this Agreement:
(a) If the average of the two proposed Base Prices is *
of the LKI proposed Base Price, or if the final
sales price received (less both Parties'
reimbursable expenses) is no greater than that
average, then ARS's share shall be * .
(b) If the average of the two proposed Base Prices is *
of the LKI proposed Base Price, and the final sales
price received (less both Parties' reimbursable
expenses) is * than that average, but no * than the
ARS proposed Base Price, then ARS's share of the
incremental proceeds received from that portion of
the price that exceeds the average shall be * .
(c) If the final sales price * the ARS proposed Base
Price, then ARS's share of the profits from those
further incremental proceeds shall be * ; provided,
however, that if that price
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is such that ARS's share of the proceeds under this
formula reaches the * of this proposed Base Price,
then any further proceeds derived from this final
increment shall be divided * between the Parties.
5.2. The Parties agree, that (other than as described in Article
5.1) the "net profits" from sales of resulting diamonds, as
defined in Paragraph 5.3, were distributed as follows: to ARS,
* ; to LKI, as its fee for marketing the polished diamonds in
the United States and other non-Russian markets, * .
5.3. The Parties agree that `net profits' means the amount realized
from polished diamond sales excluding the cost of rough (the
Base Price) and all ARS and LKI agreed upon expenses related
to cutting, valuation, processing, export from Russia,
transportation, certification, insurance and marketing in
accordance with this Agreement, including all compensation and
related payments (such as international travel and living
expenses) paid to Russian and non-Russian professionals and
the cost of the Equipment. All costs will be jointly and
timely agreed upon and confirmed by appropriate protocols.
5.4. No later than * days after LKI has received from ARS the
polished diamonds for selling (unless the Parties agree to an
extension of such period), LKI will be obligated to transfer,
to such account as ARS may instruct in writing, from the
proceeds received from the sold polished diamonds (after
offsetting the amount already paid by LKI pursuant to Article
4.1.10(a) and (b)), a sum equal to the total of ARS's
reimbursable expenses and * of the net profit.
5.5. Notwithstanding any other provision of this Agreement, during
the term of the Eximbank Project repayment period, ARS (in the
event that it proceeds with the Eximbank Project) hereby
irrevocably instructs LKI, and LKI agrees to pay all amounts
due to ARS under this Agreement on the day due by same day
wire transfer into the Collateral Account established pursuant
to the Eximbank Project agreement.
6. THE TERM OF THE AGREEMENT AND SETTLEMENT OF DISPUTES
6.1. This Agreement is valid from the moment of signing and will be
valid for 10 years and may be prolonged thereafter by mutual
consent of the Parties.
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6.2. If the external situation makes it impossible in full or in
part for one of the Parties to fulfill any of its obligations
under this Agreement due to unforeseen circumstances (force
majeure) such as fire, natural disasters, war, military
operations of any kind, blockades, or other situations beyond
the control of the Parties, the time of fulfillment of such
obligation will be delayed for a period equal to the duration
of the force majeure circumstances. If such circumstances
persist for more than three months either Party may terminate
the fulfillment of its obligations. The compensation for any
Party suffering losses as a result of such termination will be
decided by the Parties when the decision to terminate this
Agreement is taken. Force majeure does not apply to payment
obligations.
6.2.1. The Party that cannot fulfill its obligations due
to force majeure circumstances must make clear to
the other Party the nature of the circumstances
that prevent the fulfillment of the obligations.
Proof of existence of such force majeure
circumstances and their duration will be based upon
information from the Chamber of Trade and Commerce
of Russia or the United States, whichever is the
country in which the existence of such
circumstances of force majeure is claimed to have
occurred.
6.3. All disagreements and disputes resulting from or in relation
to this Agreement will be resolved in a friendly manner by
negotiations. Disputes unresolved by consultations and
negotiations will be decided by the International Commercial
Arbitration Court at the Chamber of Trade and Industry of the
Russian Federation in accordance with its regulations.
6.4. Each Party stresses that this Agreement is not an agreement to
create a joint venture, partnership, sales or trade agreement
or technology transfer agreement. Except as required by law,
each Party agrees to keep secret this Agreement and any
business, financial, technical or other information received
about the other Party relevant to this Agreement, and further
agrees not to undertake any steps that could undermine the
effectiveness of this Agreement without obtaining the written
consent of the other Party.
7. TRANSFER OF RIGHTS OR OBLIGATIONS; FULL AGREEMENT
7.1. No Party can transfer its rights or obligations under this
Agreement to any other person without the written consent of
the other Party and (until the close of the Eximbank Project
repayment period) by Eximbank. LKI
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hereby authorizes ARS to make such pledge or assignment of its
revenues under this Agreement as ARS agrees with Eximbank to
make.
7.2. This Agreement reflects the full mutual understanding of the
Parties and any modification therein must be mutually agreed
upon by the Parties and (until the close of the Eximbank
Project repayment period) by Eximbank in writing.
8. LEGAL ADDRESSES
Almazi Rossii Sakha Xxxxxx Xxxxxx International Inc.
678170 Mirny Xx. Xxxxxx 0 000 0xx Xxxxxx
Teletype: 135818 Xxxxx Xxx Xxxx, XX 00000, X.X.X.
Telex: 135113 Xxxxx XX Tel: 000 000-0000
Telefax: (000) 00-000-00 Fax: 000 000-0000
109017 Xxxxxx 0 Xxxxxxx per. 10/12
Teletype: 113258 Vilyui
Telex: 414199 Xxxxx RU
Telefax: (095) 230 6631
This Agreement is signed in Moscow on July 15, 1996 in four
copies, two each in English and Russian, each of which has equal legal and
binding force. In separate letters to be delivered by the Parties' legal
counsel, the English and Russian texts of this Agreement shall be certified to
be identical.
On behalf of Almazy Rossii Sakha On behalf of Xxxxxx Xxxxxx International
/s/ L.A. Salohav /s/ X. Xxxxxxxxxx
________________________________ ________________________________________
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Appendix A
Example A
-If-
(i) LKI proposed Base Price = *
ARS proposed Base Price = * and therefore
average proposed Base Price = * and
final sales price is either greater or less than *
-Or-
(ii) LKI proposed Base Price = *
ARS proposed Base Price = * and therefore
average proposed Based Price = * but
final sales price is not greater than *
-Then-
ARS share = * and LKI share = *
Example B
-If-
LKI proposed Base Price = *
ARS proposed Base Price = * and therefore
average proposed Base Price = * and
final sales price is either greater than * but less than * ("X")
-Then-
with respect to the incremental proceeds of * only, the ARS share shall be *
and the LKI share shall be *
Example C
-If-
LKI proposed Base Price = *
ARS proposed Base Price = * and therefore
average proposed Base Price = * and
final sales price is greater than * ("Y")
-Then-
with respect to the incremental proceeds of * the ARS share continues to be *
and the LKI share * provided that ARS's total proceeds are no greater than * .
Once ARS's total proceeds reach * , then any further incremental profits of *
shall be divided * (i.e., each of the ARS and LKI share of such further
incremental profits shall be * .
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