Document:

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                                                                    EXHIBIT 10.3

NOTE: CERTAIN MATERIAL HAS BEEN OMITTED FROM THIS AGREEMENT PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2. THE LOCATIONS OF THESE
OMISSIONS ARE INDICATED THROUGHOUT THE AGREEMENT BY THE FOLLOWING MARKINGS:
[ * * * ].

                                LICENSE AGREEMENT

            THIS AGREEMENT made as of this 21st day of June, 2001, by and
between MSO IP HOLDINGS, INC., a California corporation, with its principal
place of business at 11100 Santa Monica Boulevard, Suite 600, Los Angeles,
California 90025 ("MSO") and KMART CORPORATION, a Michigan corporation, with its
principal place of business at 3100 West Big Beaver Road, Troy, Michigan 48084
("Kmart").

            WHEREAS, MSO and Kmart have previously entered into an agreement,
dated January 28, 1997 (the "Bed and Bath Agreement"), pursuant to which Kmart
and MSO, among other things, merchandise and develop certain home products;

            WHEREAS, MSO and Kmart have previously entered into an agreement,
dated June 1, 1998 (the "Garden Agreement"), pursuant to which Kmart and MSO,
among other things, merchandise and develop certain garden products;

            WHEREAS, MSO and Kmart have previously entered into an agreement,
dated April 21, 1999 (the "Housewares Agreement," and together with the Bed and
Bath Agreement and the Garden Agreement, the "Prior Agreements"), pursuant to
which Kmart and MSO, among other things, merchandise and develop certain
housewares products;

            WHEREAS, Kmart and MSO have determined to terminate the Prior
Agreements and enter into this Agreement, which shall set forth revised terms
and conditions governing the relationship between the parties and shall, as of
August 1, 2001, supersede the Prior Agreements in every way (except for
obligations relating to payment of royalties for periods prior to August 1,
2001);

            NOW, THEREFORE, for good and valuable consideration the sufficiency
of which is hereby acknowledged by the parties hereto, the parties hereto hereby
agree as follows:

      I.    Grant. Subject to the terms and conditions of this Agreement, MSO
licenses to Kmart the limited right in the Territory (as defined below) to
utilize the trademark MARTHA STEWART EVERYDAY(TM) and variations and stylized
forms thereof designated by MSO (the "Trademark"), together with the name,
likeness, voice and signature of Martha Stewart (in each case solely in
connection with the Trademark) (the "Stewart Property"), and the designs and
other intellectual property incorporated in the Licensed Products (as defined
below) (the "Product Designs," and together with the Stewart Property and the
Trademark, the "Licensed Property"), all of which shall be approved by MSO in
the manner set forth herein, solely in connection with (i) the manufacture of
Licensed Products, (ii) the distribution of Licensed Products to, and retail
sale of Licensed Products by, Kmart's Kmart stores in the Territory, and (iii)
the manufacture and exploitation of the Materials (as defined in Section VI(1))
in connection with Kmart's sales of Licensed Products through its Kmart stores.
Any sale or other exploitation
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of the Licensed Products or use of the Licensed Property in a manner not
explicitly permitted hereunder shall be deemed a material breach of this
Agreement. "Licensed Products" shall mean the Home Products (as defined below),
the Garden Products (as defined below), the Housewares Products (as defined
below), the Seasonal Products (as defined below) and the Additional Products (as
defined in Section XVII). The "Home Products" shall mean those products
developed and merchandised by Kmart and MSO pursuant to the terms of this
Agreement and/or the Bed and Bath Agreement in the product categories set forth
on Schedule I(a) hereto. The "Garden Products" shall mean those products
developed and merchandised by Kmart and MSO pursuant to the terms of this
Agreement and/or the Garden Agreement in the product categories set forth on
Schedule I(b) hereto. The "Housewares Products" shall mean those products
developed and merchandised by Kmart and MSO pursuant to the terms of this
Agreement and/or the Housewares Agreement in the product categories set forth on
Schedule I(c) hereto. The "Seasonal Products" shall mean those products
developed and merchandised by Kmart and MSO pursuant to the terms of this
Agreement in the product categories set forth on Schedule I(d) hereto. "Product
Category" shall mean a broad category of Licensed Product (1) comprising
narrower categories of product associated by a common theme, and (2) which Kmart
and MSO consider a cohesive program (e.g. Home Products, Garden Products, etc.).
"Initial Products" shall mean the Home Products, the Garden Products, the
Housewares Products and the Seasonal Products. "Territory" shall mean the United
States of America and its territories, including, Puerto Rico, Guam, and the
U.S. Virgin Islands, and the Caribbean. Additionally, if Kmart opens Kmart
stores in additional small countries it may request of MSO for such country to
be added to the definition of the Territory, which request MSO shall generally
approve so long as (x) MSO (or its affiliate) is not already actively marketing
(either directly or through third parties) products and/or services in such
country, (y) MSO (or its affiliate) does not have plans to begin to market
(either directly or through third parties) products and/or services in such
country in the foreseeable future, and (z) MSO has no other compelling reason
why adding such country to the Territory would be detrimental to MSO's (or its
affiliate's) business.

      II. Exclusivity. (1) MSO warrants and agrees that the license of the
Licensed Property contained herein is exclusive to Kmart in Exclusive Stores (as
hereafter defined) in the Territory during the Term in connection with the
promotion, advertising, manufacture, distribution and sale of any products which
are Licensed Products. "Exclusive Stores" shall mean (i) the retail store
outlets in the discount store channel of distribution which includes only
Wal-Mart, Sam's Club, Target, J.C. Penney, Montgomery Ward, Venture, Bradlees,
Kohl's, Mervyn's, Meijer, Fred Meyer, Shopko, Costco and Hill's and similar
national or regional discount stores which are not in business as of the date
hereof but which may come into existence in the future during the Term, provided
that Kmart provides MSO with written notice of its desire to include such
newly-existing stores within the definition of Exclusive Stores within 60 days
of the initial opening of any such store and MSO reasonably agrees that such
store should be so included, and (ii) the retail store outlets of Sears, Lowe's,
Home Depot, HQ, Builder's Square and Hechinger's.

      (2) MSO may use or permit others to use the Licensed Property on products
which are of the same product type as Licensed Products and which are of a
higher quality and intended by MSO to be sold at a higher price point than the
Licensed Products sold by Kmart provided, however, that such products are sold
by such licensee other than through Exclusive Stores.

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      (3) In the event MSO wishes to develop, merchandise, and sell products in
cooperation with Kmart in Product Categories other than those of the Initial
Products, MSO shall provide Kmart written notice describing such category and
MSO's desire to work with Kmart in connection therewith. Promptly thereafter,
representatives of Kmart and MSO shall cooperate in good faith to agree upon
appropriate Sales projections for such Product Category, a schedule for
development and launch of the Licensed Products relating thereto, and other
pertinent factors relating to the Program. Upon reaching agreement on these
elements, MSO and Kmart shall enter into an addendum to this Agreement relating
to such Product Category and setting forth all relevant information necessary to
incorporate such Product Category into this Agreement. Royalty rates for such
Product Categories shall be the same as royalty rates otherwise applicable
hereunder and Minimum Royalty Amounts shall be [ * * * ] of agreed upon
projections for Sales of such Licensed Products. MSO may not enter into any
agreement with any Exclusive Store for the sale of Martha Stewart branded
products in any of the Product Categories set forth on Schedule II(3) hereto
unless agreement has not been reached with respect to projections, development
and launch schedule for the Licensed Products in such Product Category within 90
days of the giving of notice by MSO hereunder, provided that if Kmart is still
cooperating with MSO in good faith to come to such agreement this period will be
extended for an additional 30 days. Any Licensed Products developed pursuant to
this Section II(3) shall be "Additional Products." Notwithstanding the
foregoing, in no event shall MSO enter into any agreements with Target,
Wal-mart, Kohl's, J.C. Penny's, and Sears in connection with the manufacture,
distribution or sale at such stores of products in the categories of apparel,
electronics, sporting goods, automotive care, cameras or jewelry.

      III. Restrictions on Use. Kmart agrees that all use of the Licensed
Property by Kmart shall be in the form and manner as is approved by MSO, which
approval shall not be unreasonably withheld or delayed, and there will appear on
all Licensed Products and their tags, labels, containers, packaging and the
like, such legends, markings and notices as may be reasonably deemed necessary
by MSO for protection under trademark, copyright or other applicable laws.

      IV.  Royalties. Kmart shall pay to MSO in the manner described in Section
V below royalties based on Sales (as defined below) at the royalty rates set
forth on Schedule IV hereto. "Sales" for a particular period shall mean the
aggregate retail sale prices charged by Kmart for Licensed Products sold during
such period, net any amounts actually refunded by Kmart to customers on account
of returns of Licensed Products during such period.

      V.   Payments. (1) Kmart shall deliver royalty reports to MSO within
thirty (30) days following the end of each Kmart fiscal quarter (the "Quarterly
Reports"). Each Quarterly Report shall be certified as accurate by an authorized
Kmart officer and shall set forth the Sales during such quarter by Product
Category and SKU, as well as the amount of royalties payable with respect
thereto. In addition to the Quarterly Reports, Kmart shall deliver non-binding
(but based on Kmart's then current knowledge), interim reports containing the
same sales information on a monthly basis, consistent with Kmart's practice
under the Prior Agreements since 1998. Additionally, Kmart shall continue to
work to provide MSO with electronic access to current financial information
relating to Sales via the workbench system, any successor system and any
supplemental systems necessary to provide MSO such access.

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      (2) When Kmart delivers the Quarterly Reports to MSO, Kmart shall also pay
to MSO the royalties due and owing for the corresponding quarter. These payments
shall be made by wire transfer to a bank account designated by MSO unless it is
not practicable for Kmart to utilize such method, in which event payment shall
be made by check to MSO. Additionally, Schedule V(2) hereto sets forth certain
guaranteed royalty amounts as of each January 31 of the Term commencing on
January 31, 2002 ("Minimum Royalty Amounts") by Product Category and in the
aggregate which may give rise to increases in royalty payments otherwise
payable. Specifically, the royalty payable in connection with each quarter
ending January 31 shall be increased by the aggregate Category Shortfalls, if
any, and by the Aggregate Shortfall, if any, for such January 31. A "Category
Shortfall" shall mean, for any Product Category and any January 31, the excess,
if any, of the Minimum Royalty Amount for such Product Category and such January
31 over the amount of royalties paid and/or payable to MSO on account of Sales
relating to such Product Category that occurred during the twelve-month period
ending on such January 31. An "Aggregate Shortfall" for any January 31 shall
mean the excess, if any, of the aggregate Minimum Royalty Amount relating to
such January 31, over the amount of royalties paid and/or payable to MSO on
account of Sales of the Initial Products that occurred during the twelve-month
period ending on such January 31.

      (3) Kmart shall maintain complete and accurate records of the Sales,
royalty computations, royalty reports and amounts spent on advertising and
shall, upon reasonable request, make such records and all other documents and
materials in the possession or control of Kmart and reasonably required to
confirm Kmart's satisfaction of its obligations under this Agreement and the
Prior Agreements available to MSO or its duly authorized representatives, during
usual business hours at Kmart International Headquarters in Troy, Michigan, for
the duration of this Agreement and for one year thereafter, and to make extracts
therefrom at its sole expense. All such records and documents shall be deemed
Information under Section XXV hereof. In the event any audit reveals that Kmart
has underpaid MSO pursuant to this Agreement and/or any of the Prior Agreements,
Kmart shall promptly pay MSO the aggregate difference between what MSO should
have been paid, and what MSO was paid, plus interest on such amount at an annual
rate of 8%, compounded semi-annually. Moreover, in the event the amount of any
such underpayment equals or exceeds two and one-half percent (2.5%) of the
amounts actually paid to MSO during the period with respect to which the audit
was conducted, Kmart shall bear MSO's reasonable costs of the audit, including,
without limitation, any amounts payable to MSO's outside auditors in connection
therewith.

      VI. Licensed Product Design, Consultation, Quality, Schedules, Approvals,
and Expenses. (1) The parties recognize that the name Martha Stewart has
valuable goodwill with the consuming public, and that Martha Stewart ("Stewart")
is recognized as an authority on quality and style in the area of domestic
products and related activities. It is an objective of this Agreement that MSO,
Kmart, and Kmart's vendors of Licensed Products establish a broad spectrum of
Licensed Products with respect to quality and design consistent with Stewart's
image and Kmart's pricing philosophy. The parties agree that as an integral part
of this Agreement, MSO shall direct Kmart and Kmart's vendors of Licensed
Products in the establishment of the Strategic Direction (as defined below) of
the initial line and subsequent evolutionary lines (and all changes therein) of
merchandise comprising each Product Category. As used herein the "Strategic
Direction" shall include development of all aspects of the Licensed Products and
the promotion thereof including, without limitation, (A) concepts, designs, and
product selection, (B) marketing support, and (C) packages, labels, hang tags,
signage, other

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consumer facings and advertising and promotional materials to be used in
connection with the Licensed Products (materials in this sub-clause (C), whether
developed under this Agreement or a Prior Agreement, the "Materials") . The
Strategic Direction with respect to each Product Category shall be developed and
modified as follows:

            (i) Approximately eighteen months prior to the scheduled store
      implementation of each transition of Licensed Products or at such time as
      may be mutually agreed upon, MSO and Kmart shall meet with respect to such
      products. At such meetings, Kmart shall be responsible, in consultation
      with MSO, for proposing a merchandise plan (including selected vendors and
      planned linear footage) and time and action calendars for the relevant
      Licensed Products as well as related packaging/display requirements. MSO
      shall review the foregoing and shall work with Kmart to finalize the same.

            (ii) MSO shall then present Kmart with product and packaging design
      concepts. Kmart shall review such concepts and shall work with MSO to
      finalize the same. After the concepts have been finalized, MSO shall
      deliver to Kmart and the relevant vendors Licensed Product designs, each
      with a specific Martha Stewart Everyday design number, according to the
      approved time and action calendars. Kmart and the relevant vendors shall
      then review the product designs for price point, delivery and other
      pertinent merchandise needs and Kmart quality control shall review all
      designs to ensure that they meet or exceed industry standards.
      Notwithstanding the foregoing, prior to any vendor receiving any designs
      or other proprietary or confidential information, such vendor must enter
      into an agreement (the "Vendor Agreement") in substantially the form set
      forth on Schedule VI(1)(ii) hereof regarding the confidentiality and
      proprietary nature of certain information, designs and materials to which
      the vendors shall have access. MSO and Kmart shall cooperate to cause all
      vendors to enter into the Vendor Agreement.

            (iii) Kmart and the relevant vendors shall determine all package,
      display and label requirements, both legal and otherwise, and forward the
      related specifications and schedules to MSO. MSO shall then direct the
      creative look of all packaging, display and labels for the Licensed
      Products.

            (iv) As Licensed Products are developed by vendors based on MSO's
      approved design concepts, MSO shall review such development and submit
      comments and direction to Kmart and the vendors. When samples of each
      Licensed Product are completed, such samples shall be reviewed by Kmart
      and MSO. All samples shall be reviewed by Kmart and MSO prior to comments
      being given to the vendors and shall be tested for quality by Kmart. Both
      Kmart and MSO must approve a sample before it can be manufactured for
      sale. Kmart shall give such approvals based upon its merchandise needs and
      on the results of its quality testing and MSO shall give its approvals
      based upon the design concepts it submitted to Kmart and MSO's brand
      objectives (including quality).

            (v) Kmart shall monitor the packaging and display development to
      insure schedules for all vendors are being met. MSO shall monitor the
      packaging and display development to coordinate the design and art
      direction needs of all Licensed Products being packaged and displayed.
      Both Kmart and MSO must approve all packaging and displays before they can
      be used in connection with the Licensed Products. Kmart shall

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      give such approvals based upon its merchandise needs and MSO shall give
      such approvals based upon the design concepts it submitted to Kmart and
      MSO's brand objectives (including quality).

            (vi) The activities set forth in this Section VI(1) shall be
      conducted in a manner generally consistent with past practice under the
      Prior Agreements as of the date hereof.

      (2) Kmart agrees that each Licensed Product sold by it pursuant to this
Agreement, and the Materials utilized in connection therewith, shall conform to
the specifications developed by MSO pursuant to Section VI(1) hereof (or under a
Prior Agreement) and shall be of a quality equal to or exceeding the samples of
such Licensed Product approved by MSO pursuant to Section VI(1) hereof (or a
Prior Agreement). Promptly following execution of this Agreement, MSO and Kmart
shall develop and implement a mutually agreeable program for (i) reviewing and
testing the quality, safety and propriety for intended use of samples of
Licensed Products prior to the time at which they are approved for mass
manufacture and sale, and (ii) for monitoring quality and safety on a continuing
basis to make sure that the factory runs of each Licensed Product are consistent
with the initially approved samples. The costs of this program shall be the
responsibility of Kmart. This program shall include vigorous testing of Licensed
Products for wear and tear, maintenance, use and other appropriate elements to
be determined by the parties. The program shall be primarily implemented by
Kmart but shall involve MSO personnel as the parties deem appropriate.

      (3) Upon receipt of a notice from MSO pursuant to this Agreement setting
forth any quality deficiencies prohibited by this Agreement, or upon Kmart's
discovery of any such deficiencies, Kmart and/or Kmart's vendors of the Licensed
Products containing such deficiencies shall remedy such deficiencies prior to
the sale of the deficient Licensed Products or, at their option, dispose of such
off-quality merchandise through other outlets. Whenever such merchandise is sold
as aforesaid, no use of or reference to the name Martha Stewart or any Licensed
Property shall be used in connection with any advertising, publicity, labeling,
wrapping or packaging with respect to any such sales. In accordance with the
practice in the trade, Kmart's vendors of Licensed Products shall notify their
customers to assure compliance by them with the requirements of the preceding
sentence. Kmart and its vendors of Licensed Products shall be deemed to have met
this obligation by the removal of all labels, tags and marks which would
identify the goods as Martha Stewart merchandise and by placing the following
legend on all purchaser's invoices for such goods and by enforcing the terms of
such legend if, in the event of non-compliance and following consultation with
MSO, MSO and Kmart deem it appropriate for brand protection:

            "Purchaser agrees that it will not use the name `Martha Stewart' or
            the legend `designed by Martha Stewart' or any other phrase or
            statement using the name `Martha Stewart' on any advertising,
            publicity, labeling, wrapping or packaging with respect to the
            merchandise listed hereon."

In the event certain Licensed Products must be disposed of pursuant to this
Section VI(3) and such products have the Trademark or some derivation thereof
embedded in the product (e.g. a stamp or mold), Kmart and MSO agree to cooperate
in good faith to determine a manner in which such Licensed Products can be
disposed of that is mutually beneficial and minimizes any potential impact to
the Sales and brand image of the Licensed Products.

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      (4) Kmart shall select its vendors of Licensed Products pursuant to the
Kmart Quality Standards, Policies and Procedures set forth on Schedule VI(4)
hereto.

      (5) MSO and Kmart each agree to exercise their respective rights of
approval hereunder in a reasonable and timely manner, consistent with any agreed
upon time schedules and the established Strategic Direction. Notwithstanding the
foregoing, no decision by Kmart to refuse to offer for sale a particular product
that MSO desires to have manufactured for sale shall be considered unreasonable,
unless such refusal is made for purposes of frustrating the purposes of this
Agreement. Kmart shall designate one individual authorized to exercise its
approval rights hereunder and to be the liaison between Kmart and MSO.

      (6) Except as set forth in Section VIII(2) or as otherwise explicitly
stated herein or agreed upon by Kmart, MSO shall be responsible for the costs of
its personnel in connection with its services and activities hereunder
(including, without limitation, its services and activities under Section VI
(1)) (the "MSO Costs"). Kmart shall bear all its own expenses incurred in
connection with this Agreement, as well as all other costs incurred in
connection with the sourcing, design, manufacturing, distribution, marketing,
advertising and sale of the Licensed Products and the Materials, including,
without limitation, all photography and production costs relating to the
Materials. In connection with all still photography shoots, MSO shall continue
to conduct such shoots, to invoice Kmart therefor and to pay all relevant third
party costs (including photography costs) from such invoiced amounts, provided
that budgets for such shoots will be determined in advance by MSO and Kmart.

      (7) In furtherance of the valuable goodwill that Martha Stewart products
carry with the consuming public, Kmart agrees that it shall cause Kmart store
employees in every Kmart store to dedicate adequate and substantial time to (i)
replenishing the shelves that display Licensed Products, (ii) monitoring store
inventory levels of Licensed Products (including, without limitation, using
reasonable efforts to increase inventory levels in anticipation of sale events,
and generally maintaining inventory levels sufficient to meet demand), (iii)
ensuring that the areas in which the Licensed Products are sold are clean, and
(v) forwarding any Licensed Products which are returned to the relevant Kmart
store for reasons of defect to a Kmart quality assurance representative.

      (8) Kmart and MSO agree that the Seasonal Products shall be introduced at
all Kmart stores in time for the Christmas season in 2002, provided that each
party acknowledges certain products requiring substantial developmental
lead-times will not be available until 2003. The portion of the Martha Stewart
Everyday program comprising Garden Products shall be conducted according to the
terms set forth on Schedule VI(8) hereto as well as the rest of the terms of
this Agreement.

      VII. Term. This Agreement shall commence on August 1, 2001 and continue in
full force and effect until January 31, 2008 (the "Term"). Provided that (i) the
aggregate royalties earned by, and paid to, MSO hereunder with respect to Sales
of the Initial Products occurring from August 1, 2001 through January 31, 2007
equals or exceeds [ * * * ], and (ii) the royalties earned by, and paid to, MSO
with respect to Sales of the Initial Products during the four quarters ending
January 31, 2007 equals or exceeds [ * * * ], this Agreement shall automatically
be

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renewed for an additional five years (the "Renewal Term"). Notwithstanding the
foregoing, the Term commences as of the date hereof solely with respect to the
terms of Section XXIX hereof.

      VIII. Promotional and Marketing Services. (1) MSO shall cause Stewart to
render her services in a professional manner consistent with the intent of this
Agreement and to use her reasonable good faith efforts to participate in the
promotion and imaging of the Licensed Products including, without limitation,
through television, radio and print advertising, in-store videos, appearances
and other media presentations or programs and shall use reasonable and
appropriate opportunities, in her reasonable discretion, to promote the Licensed
Products and Kmart's sale thereof including, without limitation, interviews,
editorials, press conferences, press releases and television appearances. In
light of the considerable demands on Stewart's schedule, Kmart and MSO shall
cooperate in good faith to schedule the dates, times, places and manner in which
Stewart shall fulfill her obligations under this Section as far in advance, and
in the most convenient manner, possible. Subject to the final sentence of this
Section VIII(1), MSO shall cause Martha Stewart to be available to render
services under this Section VIII(1) consistent with past practices under the
Prior Agreements, but in no event for more than 25 days annually, inclusive of
travel time. Kmart shall pay all costs and expenses in connection with such
services including, without limitation, costs of first class air travel (or
private plane) and lodging consistent with Kmart's past practices with Stewart
under the Prior Agreements as of the date hereof. Any significant expenses
anticipated by MSO in excess of those generally borne by Kmart pursuant to past
practice under the Prior Agreements shall be first submitted to Kmart for
approval. No failure by MSO to comply with the terms of this provision by reason
of the death, disability or incapacity of Martha Stewart shall be considered a
breach of this Agreement.

      (2) Each year, Kmart and MSO shall consult regarding the advertising needs
for the Licensed Products for the following year, taking into account the
existence of any Additional Products and extensions of existing product lines,
following which Kmart shall determine the aggregate amount to be spent on
advertising for the Licensed Products ("MSE Advertising") during such year.
Notwithstanding the foregoing, the aggregate amount to be spent on MSE
Advertising during any twelve-month period ending on any January 31 throughout
the Term (the "Annual MSE Ad Spend"), commencing with the twelve-month period
ending January 31, 2002, shall represent a percentage of projected Sales for
such period that is no less than the percentage that estimated MSE Advertising
expenditures for 2001 as of the date hereof (such estimate, the "2001 MSE Ad
Spend") represents of Sales for 2001, provided, however, that the Annual MSE Ad
Spend for any year shall not represent a larger percentage of the aggregate
advertising expenditures by Kmart during such year than the percentage that the
2001 MSE Ad Spend represents of Kmart's aggregate advertising expenditures
during 2001. Marketing expenses relating to significant product launches shall
be outside of this budget. Kmart and MSO agree that in the event of a Renewal
Term the parties shall review whether the foregoing method of determining levels
of MSE Ad Spend is in the mutual best interest of MSO and Kmart and shall make
any changes thereto that are mutually agreed upon at the time of such renewal.
Kmart and MSO shall discuss the best allocation of the year's advertising budget
between production, media selection, and timing of advertising campaigns.
Although MSO shall be given the opportunity to meaningfully consult with Kmart
regarding such allocation, Kmart shall make the final determination as to how
such money should be allocated, provided that amounts dedicated to creative
development and production of advertisements on a per advertisement basis shall
be mutually agreed upon each year and shall be at least consistent with past
practice under the Prior Agreements. Once the allocations have been made and the
advertising needs determined, MSO

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shall be responsible for developing all creative elements of, and, with respect
to television advertisements, producing, all advertising for the Licensed
Products. In doing so, MSO may, subject to the approved budgets, retain
independent advertising agencies, production companies and photographers to
assist in developing, creating and producing the advertisements. All such
advertisements remain subject to Kmart's approval. Kmart shall pay MSO the
budgeted amounts for all creative development and production, out of which MSO
shall pay any third party fees including, where appropriate and approved, any
creative service fees to MSO. All media buying for advertising of the Licensed
Products will continue to be done by Kmart's advertising agency of record. Kmart
further agrees to continue purchasing advertising, whether or not for Licensed
Products, in Martha Stewart Living media properties at 2001 expenditure levels.

      (3) With respect to each television commercial relating in whole or part
to the Licensed Products and featuring Stewart, Kmart shall pay to MSO [ * * * ]
for Stewart's appearance in each such commercial. The foregoing payment shall be
an advance against all residuals owed to Stewart pursuant to any applicable
union, guild, or collective bargaining agreement on account of the use and reuse
of such commercials, provided that such residuals shall be credited and payable
at twice scale. Kmart shall pay or cause to be paid any and all pension, health
and/or welfare fund payments required by reason of Stewart's services hereunder
pursuant to any applicable union, guild or collective bargaining agreement and
covenants that Kmart, or any other entity for whom Stewart is rendering her
services in connection with each such commercial, shall be a signatory to any
applicable union, guild and collective bargaining agreement. The per commercial
fee payable hereunder shall increase by 4% each calendar year.

      (4) Kmart shall sell Licensed Products only through the Martha Stewart
Everyday "store-in-store" format, including, but not limited to, the fixturing,
signage, and layouts of such "store-in-stores." Unless there are compelling
business reasons dictating otherwise, Licensed Products shall be sold in
dedicated, full-run shelf-space. In no event will products that compete with
Licensed Products be commingled with Licensed Products in Kmart stores. The
"store-in-store" format employed by Kmart shall be developed with the assistance
of MSO and shall be subject to MSO's reasonable approval.

      IX. Property Retention. (1) All right, title and interest in the Licensed
Property including, without limitation, all copyrights, trademarks and other
rights therein (and all renewals and extensions thereof) shall be owned
exclusively by MSO. Subject to the terms of this Agreement, MSO shall have the
sole unrestricted right to exploit the Licensed Property in its sole discretion
in any manner in perpetuity in any and all media throughout the world whether
now known or hereafter devised with no further obligation whatsoever to Kmart or
any third party. Any use which Kmart may be permitted to make of the Licensed
Property pursuant to this Agreement shall be subject to MSO's prior approval as
specified herein.

      (2) Kmart confirms the sole ownership by MSO of the Licensed Property and
agrees that all use by Kmart of the Licensed Property shall inure solely to the
benefit of MSO and, as such, Kmart shall not at any time acquire any rights in
the Licensed Property or otherwise by virtue of any use or exploitation Kmart
may make thereof.

      (3) All rights in the Licensed Property other than those specifically
granted herein are reserved by MSO for its sole use and benefit and exploitation
in its sole discretion. Upon the expiration or termination of this Agreement for
any reason whatsoever, all rights in the Licensed

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Property shall automatically revert to MSO for its sole use and disposition with
no further obligation whatsoever to Kmart or any third party, provided, however,
Kmart shall have six months from the date of termination, or three months from
expiration, whichever the case may be, to sell all units of Licensed Products
purchased or ordered before expiration or termination of this Agreement and to
use the associated Materials approved pursuant to this Agreement prior to such
expiration or termination to accomplish such sell-off. MSO shall be paid
royalties on all such sales at the applicable rates under this Agreement.

      (4) Kmart agrees to promptly inform MSO of any use by any person or entity
of a trademark, servicemark or design similar to the Licensed Property which
comes to the attention of Kmart and which Kmart has reason to believe could be a
use unauthorized by MSO. MSO shall have the sole right to determine whether or
not any action shall be taken on account of any infringement and Kmart shall
join in such action at Kmart's expense if MSO so requests. Kmart shall have no
right to take any action with respect to the Licensed Property without prior
written approval from MSO which approval shall not be unreasonably withheld. MSO
and Kmart shall share any award of damages net of costs including, without
limitation, attorneys' fees and disbursements, as a result of such actions, in
proportion to their respective damages suffered by such infringement.

      (5) All designs, concepts, patterns, names and other intellectual property
(including copyright rights) in materials relating to the subject matter of this
Agreement or any Prior Agreement that are developed and/or created by MSO shall
be owned solely by MSO. All designs, concepts, patterns, names and other
intellectual property (including copyright rights) in materials relating to the
subject matter of this Agreement or any Prior Agreement that are developed
and/or created by third parties under MSO's direction, or which are incorporated
into the Licensed Products and/or the Materials at MSO's request, shall, as
between MSO and Kmart, be owned solely by MSO. All designs, concepts, patterns,
names and other intellectual property (including copyright rights) in materials
relating to the subject matter of this Agreement or any Prior Agreement that are
developed and/or created by Kmart shall be owned solely by Kmart. Subject to all
other provisions of this Agreement, the physical elements of all Materials will
be and remain the property of Kmart, provided that, in the event MSO owns the
intellectual property therein, Kmart will provide the necessary access to enable
MSO to duplicate any such Materials.

      (6) Nothing contained herein shall be construed as an assignment or grant
to Kmart of any right, title or interest in or to the Licensed Property, it
being understood that all rights thereto are reserved exclusively by MSO, except
for the license granted hereunder as specifically described herein.

      X. Representations and Warranties. (1) By MSO. MSO represents and warrants
to Kmart that (i) it has the full right and authority to enter into this
Agreement and to grant the licenses herein, and (ii) Kmart's authorized use of
the Licensed Property shall not infringe or violate the rights of any third
parties.

      (2) By Kmart. Kmart hereby represents and warrants to MSO that (i) it has
the full right and authority to enter into this Agreement and the relationship
contemplated herein, (ii) the manufacture, distribution, marketing, sale and use
of the Licensed Products shall not violate or infringe upon any rights
whatsoever of any third party (except as a result of a breach of MSO's

                                       10
<PAGE>   11
representations and warranties), (iii) the Licensed Products (including any
labeling thereon) will conform in all respects to, and satisfy applicable
requirements of, applicable federal, state and local laws, orders and
regulations, and (iv) Kmart has sufficient systems to accurately track, and that
it will accurately track, all Sales.

      XI. Indemnification. (1) Kmart agrees to defend, indemnify and hold
harmless MSO and its officers, directors, members, shareholders, employees and
representatives from, in respect of and against any and all claims, losses,
liabilities, expenses (including, without limitation, reasonable attorneys' fees
and disbursements), judgments, damages, demands, lawsuits or similar actions or
proceedings ("Claims") arising out of the breach of any of Kmart's
representations, warranties or covenants hereunder (or under any Prior
Agreement) or out of the manufacture, design, purchase, promotion, advertising,
distribution, use or sale of Licensed Products, including, without limitation,
any claims for product liability (a "Kmart Claim"). MSO agrees to notify Kmart
within a reasonable time after it receives notice of any Kmart Claim and Kmart
shall promptly assume MSO's defense thereof either directly or through counsel
to any relevant vendor. MSO shall have the right to participate in the defense
of any Kmart Claim with counsel of its choosing and at MSO's expense. Any
settlement which affects the Licensed Property or otherwise contains a remedy
other than the payment of money damages by Kmart (which in any way impacts upon
MSO) must be approved in writing in advance by MSO.

      (2) MSO agrees to defend, indemnify and hold harmless Kmart and its
officers, directors, shareholders, employees and representatives from, in
respect of and against any and all Claims arising out of the breach of any of
MSO's representations, warranties or covenants hereunder (or under any Prior
Agreement) or for copyright, trade dress, or trademark infringement or unfair
trade practice arising directly out of Kmart's authorized use of the Licensed
Property (an "MSO Claim"). Kmart agrees to notify MSO within a reasonable time
after it receives notice of any MSO Claim and MSO shall promptly assume Kmart's
defense thereof. Kmart shall have the right to participate in the defense of any
MSO Claim with counsel of its choosing and at Kmart's expense. Any settlement
which contains a remedy other than the payment of money damages by MSO (which in
any way impacts upon Kmart) must be approved in writing in advance by Kmart.

      XII. Insurance. Kmart shall maintain in full force and effect
comprehensive general liability insurance (the "Insurance"), including, without
limitation, product liability insurance, covering all Licensed Products sold by
it as well as any liability on its part or the part of MSO in the amount of at
least $25,000,000 per occurrence and $100,000,000 in the aggregate. The
Insurance shall be placed with an insurer or insurers of recognized worth and
reputation, duly licensed to carry on the business of insurance in all parts of
the Territory and shall name Martha Stewart, MSO, its officers, directors,
employees, representatives or agents as additional insureds, for coverage
against all forms of liability for death or injury to any individual, and for
loss or damage to property. The Insurance shall provide for primary coverage and
not contributory coverage, notwithstanding any other insurance which MSO may
obtain or maintain. The Insurance shall provide for prior written notice to MSO
of cancellation, lapse or material change in the Insurance and Kmart shall
provide MSO with a certificate of insurance as evidence of the Insurance prior
to, or as soon as practicable after, the execution hereof. MSO hereby
acknowledges that Kmart self-insures a per claim deductible in the amount of
$2,000,000.

                                       11
<PAGE>   12
      XIII. Guaranteed Products. Kmart agrees to manufacture and market Licensed
Products in the categories of merchandise set forth on Schedule XIII hereto upon
request from MSO and to use reasonable commercial efforts to cause Licensed
Products in each such product category to be available at each Kmart store.

      XIV. Projections. Schedule XIV sets forth the projections for annual Sales
relating to the Initial Products through the Term and the Extension, if any, as
of the date hereof (the "Initial Projections"). Promptly following the execution
of this Agreement, MSO and Kmart agree to develop a strategy for materially
increasing Sales in each Product Category to the maximum extent practicable. The
projections set forth on Schedule XIV shall be increased as a result of the
outcome of such efforts (the projections as they may be increased from time to
time, the "Projections"), and MSO and Kmart agree to meet at least annually to
strategize and otherwise develop programs and plans to maximize Sales and
increase Projections. Kmart agrees to use its best efforts to cause Sales to
equal or exceed the Projections.

      XV. [ * * * ].

      XVI. Kmart Bridal and Gift Registry. MSO hereby grants Kmart the right to
offer the Licensed Products as part of a Kmart bridal and/or gift registry
program, provided that the registry is not branded with the name "Martha
Stewart" or any related trademark and all aspects of the sale, marketing,
presentation, promotion and advertisement of the Licensed Products in connection
therewith shall be subject to the same approvals, rights, and processes as the
sale, marketing, presentation, promotion, and advertisement of the Licensed
Products under this Agreement generally.

      XVII. Termination. (1) Subject to subparagraph (2) below, this Agreement
may be immediately terminated by either party in the event a material breach
hereof by the other party continues uncured for a period of 30 days after
written notice thereof, provided, however, such cure period shall be 15 days
with respect to payments due hereunder.

      (2) In the event of termination or expiration of this Agreement, all
rights granted hereunder shall terminate and revert to MSO for its sole use and
disposition without any further obligation to Kmart.

      XVIII. Uniqueness of Services. The services to be performed by MSO and the
rights and privileges granted to Kmart hereunder are special, unique and
incapable of replacement and the loss thereof may not be reasonably or
adequately compensated in an action at law. Additionally, MSO's failure or
refusal to perform the obligations hereunder may cause irreparable harm or
damage. In the event of a material breach by MSO, Kmart shall be entitled, in
addition to any other remedies available to it, to seek injunctive or other
equitable relief against it to prevent the continuance of such failure or
refusal or to prevent it from performing services or granting rights to others
in violation of this Agreement.

      XIX. Services. MSO assumes no liability whatsoever for service, defects or
breach of warranty or any type of product liability claim whatsoever regarding
Licensed Products. In the event that an ultimate purchaser of such a Licensed
Product or any other third party claims it to be defective, in breach of
warranty or in need of service, Kmart or its vendor shall assume all
obligations, liability, cost and expense relating in any manner to such Licensed
Product

                                       12
<PAGE>   13
including, without limitation, any claimed defect, breach of warranty or
service need. In the event any such Licensed Product is returned to MSO on
account of any claimed defect, breach of warranty or service need, MSO shall
promptly notify Kmart regarding such Licensed Product and claim and shall
forward the same within a reasonable time to a reasonable destination designated
by Kmart for handling of the returned Licensed Product by Kmart or its vendor.
Kmart agrees to reimburse MSO for all reasonable costs incurred in connection
with such returns. Kmart agrees to keep MSO timely informed of any material
problems with any Licensed Product and shall meaningfully consult with MSO in a
timely fashion in the event Kmart and/or any vendors of Licensed Products
interact with the United States Consumer Product Safety Commission ("CPSC") and
before any Section 15 Report relating to any Licensed Product is filed with
CPSC.

      XX. Creative Services. As reasonably requested by Kmart, MSO shall
periodically provide creative personnel to consult with Kmart regarding issues
relating to overall Kmart advertising, store layout and other brand issues.

      XXI. Assignment. No party may assign any right or obligation under this
Agreement, other than the right to receive money, to any person or entity other
than its parent or subsidiary companies or a purchaser of all or substantially
all of the assets of a party, without the express written consent of the other
party, provided that MSO shall have the right to assign its interests under this
Agreement to any entity in which Martha Stewart owns a majority of the equity,
and which at or about the time of such assignment acquires the rights to the
Licensed Property licensed to Kmart hereunder. Notwithstanding the foregoing, in
the event either party enters into a transaction in which it sells or otherwise
conveys substantially all of the assets relevant to such party's performance of
its obligations hereunder, the other party shall have the right to compel
assignment of this Agreement as part of such transaction. MSO shall have the
right to cause any of its contractual obligations hereunder to be fulfilled by
an affiliate of MSO, and any such fulfillment shall be deemed a fulfillment of
such obligation by MSO. For purposes of clarity, it is acknowledged that Martha
Stewart Living Omnimedia LLC and Martha Stewart Living Omnimedia, Inc.
(collectively, "MSLO") were each predecessors-in-interest to MSO under the Prior
Agreements, and references herein to MSO in connection with the Prior Agreements
or actions taken thereunder shall include references to MSLO as the context
requires.

      XXII. Choice of Law. This Agreement shall be construed and enforced in
accordance with laws of the State of Michigan.

      XXIII. No Joint Venture. Neither party shall be or be deemed to be an
agent, employee, partner or joint venturer of or for the other party.

      XXIV. Confidentiality. After the date hereof, each of Kmart and MSO (i)
shall hold and shall cause its officers, directors, employees, agents,
accountants, representatives and advisors ("Representatives") to hold in strict
confidence all the terms of this Agreement and the Prior Agreements and all
information furnished to such party or its Representatives in connection with
the transactions contemplated by this Agreement as well as information
concerning the other party contained in analyses, compilations, studies or other
documents prepared by or on behalf of such party (collectively, the
"Information"); provided that the Information shall not include any information
which has become (A) generally available to the public other than as a result of
a disclosure by such party or such party's Representatives, (B) available to
such party on a non-

                                       13
<PAGE>   14
confidential basis from a source other than the other party or the agents of one
of them if such source is to such party's knowledge entitled to disclose such
information, or (C) independently acquired or developed by such party; and (ii)
shall not, without the prior written consent of the other party, release or
disclose any Information to any other person, except (A) to such person's
Representatives who need to know the Information in connection with the
consummation of the transactions contemplated by this Agreement, who are
informed by such person of the confidential nature of the Information and who
are caused by the relevant party to comply with the terms and conditions of this
Section XXV, and (B) as may be required by applicable law, regulations or legal
processes (including, without limitation, any disclosures of Information which
are required to be made by applicable securities laws in connection with any
financing activities of either party or standard disclosure requirements under
the Securities Exchange Act of 1934, as amended). The parties hereto agree to
cooperate with respect to a joint press release announcing the execution of this
Agreement.

      XXV. Notice. All notices under this Agreement shall be in writing and
shall be given by either party by certified mail, guaranteed express mail or
facsimile (confirmation of delivery received) as follows:

If to MSO:

                  MSO IP Holdings, Inc.
                  11100 Santa Monica Boulevard
                  Suite 600
                  Los Angeles, California 90025

      copy to:

                  Howard Shire, Esq.
                  Kenyon & Kenyon
                  One Broadway
                  New York, New York  10004

If to Kmart:

                  Kmart Corporation
                  3100 West Big Beaver Road
                  Troy, MI 48084
                  Attention: General Counsel

                  Facsimile No.  (248) 463-1054

      copy to:

                  Kmart of Michigan, Inc.
                  Suite 329
                  3250 West Big Beaver Road
                  Troy, MI 48084
                  Attention: Intellectual Property Counsel.

                                       14
<PAGE>   15
                  Facsimile No.  (248) 637-3057

      XXVI. Compliance with Human Rights and Labor Standards. Kmart warrants and
represents that purchase order terms and conditions for the purchase of all
Licensed Products require that such merchandise conforms in all respects with
all applicable federal, state and local laws, orders and regulations. Kmart will
require all manufacturers of Licensed Products hereunder to sign a Certification
of Compliance substantially similar to the form attached hereto as Schedule
XXVII. Upon written request from MSO, Kmart shall supply MSO with the
identification of all manufacturers of Licensed Products. Upon reasonable prior
written notice of MSO and at MSO's sole expense, MSO shall have the right to
inspect the physical facilities of any manufacturer of Licensed Products for the
purpose of assuring that such manufacturer is in satisfactory compliance with
legal and ethical human rights and labor standards and shall have the right to
refuse approval of any Licensed Product manufactured by any such manufacturer
which after such inspection may be reasonably found not to be in substantial
compliance with such standards.

      XXVII. Bankruptcy. Kmart and MSO shall each, in addition to its other
rights, have the right, on written notice to the other, to terminate this
Agreement if the other party files a petition in bankruptcy, or is adjudicated a
bankrupt, or if a petition in bankruptcy is filed against it and is not
dismissed within (60) days thereafter, or if it becomes insolvent, or makes an
assignment for the benefit of creditors, or files a petition or otherwise seeks
relief under or pursuant to any federal or state bankruptcy, insolvency or
reorganization statute or procedure, or if a custodian, receiver or trustee is
appointed for it or a substantial portion of its business or assets (and such
receivership is not discharged within sixty (60) days thereafter).

      XXVIII. Integration. This Agreement shall be the final and complete
agreement between Kmart and MSO with respect to the subject matter hereof. No
representations, inducements, premises or understandings exist in relation to
the subject matter hereof, whether oral or written, except as expressly set
forth herein, and this Agreement shall supercede all prior understandings,
agreements, contracts or arrangements between the parties, whether oral or
written, unless otherwise expressly incorporated herein. No agreement or other
understanding purporting to add to or to modify the terms and conditions hereof
shall be binding unless agreed to by the parties in writing. Any terms or
conditions in any forms of the parties used in the performance of this Agreement
which are in conflict with the terms and conditions hereof shall be void.
Notwithstanding the foregoing, the Prior Agreements shall continue in full force
and effect through July 31, 2001, and shall continue to govern matters arising
under such agreements prior to August 1, 2001 (including, without limitation,
payment obligations relating to periods prior to August 1, 2001), unless
otherwise indicated herein.

      XXIX. Interim Period. From the date hereof through July 31, 2001, Kmart
agrees that it shall continue to conduct its purchasing practices with vendors
and inventory replenishment practices and all other matters relating to the
calculation of the royalties payable under the Prior Agreements in a manner
consistent with past practice and without any regard for the switch in the basis
for calculating royalties to MSO from wholesale purchases to retail sales that
will occur on August 1, 2001.

                                       15
<PAGE>   16
      IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.

                                KMART CORPORATION

                                By:  /s/ Charles Conaway
                                     --------------------
                                 Name: Charles Conaway
                                 Title: Chairman and CEO

                                MSO IP HOLDINGS, INC.

                                By:  /s/ Martha Stewart
                                     ------------------
                                 Name:  Martha Stewart
                                 Title:  Authorized Signatory

                                       16
<PAGE>   17
                                  SCHEDULE I(a)

                                  Home Products

BED ROOM
      Sheets (180 and 200 thread count)
      Mattress pads
      Slip covers
      Pillows (synthetic and natural)
      Pillow cases
      Pillow shams
      Comforters
      Quilts
      Bed Spreads
      Bed Skirts
      Duvet/comforter covers
      Blanket/throws
      Coordinating window treatments
      Coordinating decorative borders and wallpaper
      Coordinating rugs

BATH
      Towels (sheet, beach, bath, hand and wash cloth)
      Shower Curtains
      Coordinating bath rugs
      Bath accessories (tooth brush holder, lotion dispenser, soap dish,
      tumbler, tissue cover, etc.)
      Waste baskets
      Coordinating window treatments
      Coordinating decorative borders and wallpaper

KITCHEN
      Towels
      Pot holders
      Dish Cloths
      Tablecloths
      Napkins/Napkin rings
      Chairpads
      Placemats
      Coordinating decorative borders and wallpaper
      Coordinating window treatments (curtains, valances, fabric shades,
      vertical blinds, mini blinds, decorative hardware, drapery, panels, swags,
      tab tops, top treatments, tiers)
      Coordinating rugs

GENERAL SOFT HOME
      Window treatments (valances, mini blinds, decorative hardware, tab tops,
      top treatments, tiers)
      Decorative pillows
      Home Fragrances
      Closet Organizers

SEASONAL HOME TEXTILES

HOME TEXTILES FOR BABIES

                                       17
<PAGE>   18
SCHEDULE I(b)

                                 Garden Products

LIVE PLANTS

INDOOR FLORAL/PLANT KIOSK

OUTDOOR/GARDEN FURNITURE

WATERING EQUIPMENT

LONG HANDLE GARDEN TOOLS

SHORT HANDLE GARDEN TOOLS

GARDEN CUTTING TOOLS

GARDEN GLOVES

FERTILIZERS

SOILS

PEST CONTROL

GARDEN STORAGE & CARRIERS

GARDEN ACCESSORIES

PLANT POTS

GRILLING

OUTDOOR LAWN DECORATION

FALL BULBS

SPRING BULBS

SEED STARTING

WATER GARDENING

SEEDS

BIRD

LIGHTING

                                       18
<PAGE>   19
                                  SCHEDULE I(c)

                               Housewares Products

HOME

      Dinnerware (ceramic, glass, enamel)
      Flatware (18/0-18/8)
      Glassware (glass, plastic)
      Decorative Accessories
      Lamps and shades
      Picture Frames
      Candles

FOOD

      Kitchenware

KEEPING

      Closet Accessories                        Dish Felt Pads
      Hangers                                   Floor Savers
            Plastic                             Food Storage Containers
            Wood                                Kitchen Containers
            Metal                               Shelf Paper
      Cedar Products/Moth Protection            Trash Receptacles
      Clothing Storage - Bags and Boxes         Recycling Receptacles
            Shoes
            Sweaters
            Blankets
            Hanging
      Closet Shelving Organization Systems
      Laundry Organization Items
      Underbed Storage Containers
      Wire and Cable Ties
      Kitchen Organization Containers
      Kitchen Labels
      Dish Storage Containers

SEASONAL VARIATIONS OF HOUSEWARES PRODUCTS

                                       19
<PAGE>   20
                                  SCHEDULE I(d)

                                Seasonal Products

[***]

                                       20
<PAGE>   21
                                 SCHEDULE II(3)

                          ADDITIONAL PRODUCT CATEGORIES

Small appliances

Notions and crafts

Ready-to-assemble furniture

Decorative artificial flowers

Area rugs

Hardware

                                       21
<PAGE>   22
                                   SCHEDULE IV

                                  Royalty Rates

[ * * * ]

                                       22
<PAGE>   23
                                  SCHEDULE V(2)

                             Minimum Royalty Amounts

[ * * * ]

                                       23
<PAGE>   24
                               SCHEDULE VI(1)(ii)

          VENDOR CONFIDENTIALITY AND PROPRIETARY MATERIALS AGREEMENT

                      MARTHA STEWART LIVING OMNIMEDIA, INC.
                               11 WEST 42ND STREET
                            NEW YORK, NEW YORK 10036

                           As of ____________________

[Vendor Name and Address]

      Re:   "Martha Stewart Everyday"

Dear ______________________:

            As you know, you may soon be, or have been, manufacturing products
to be sold under the "Martha Stewart Everyday" brand. Although these products
will be and/or have been manufactured by you pursuant to agreements between you
and certain retailers, you recognize that such retailers have made this
agreement a condition to your manufacturing "Martha Stewart Everyday" products
(the "Products") for them. Accordingly, in consideration of your selection, or
potential selection, to manufacture certain Products, you hereby agree with
Martha Stewart Living Omnimedia, Inc. ("MSLO") as follows:

      1.    For the purposes of this Agreement, "Proprietary Materials" shall
            mean all (i) information or material, whether or not in tangible
            form, relating to MSLO or Martha Stewart or which is supplied to
            you by MSLO, or which is supplied to you by an Approved Retailer
            (as hereafter defined) in connection with the Products, other
            than  (A) any such information known to you, or material in your
            possession, prior to the commencement of your discussions
            regarding the manufacture of Products with any Approved Retailer
            or MSLO, as the case may be, (B) any such information generally
            known to, or such materials generally possessed by, the public at
            large (other than as a result of (X) a breach of this agreement
            by you, (Y) distribution of the Products, or (Z) the acts of any
            other party which you know, or have reason to know, is under an
            obligation of confidentiality to MSLO), and (C) any such
            information or material acquired by you from a third party (other
            than a third party which you know, or have reason to know, is
            under an obligation of confidentiality to MSLO or who acquired
            such information or material as a result of the distribution of
            the Products), (ii) materials, whether or not in tangible form,
            which you develop with MSLO or with any contribution, input,
            advice or direction whatsoever from MSLO (the "Vendor Materials")
            (for the sake of clarity, Vendor Materials shall include the
            entire applicable material, not just the portion developed with
            MSLO's contribution, input, advice or direction), and (iii)
            information or materials, whether or not in tangible form, with
            respect to which you gain access or knowledge as a direct result
            of (A) your relationship relating to the Products with an
            Approved Retailer

                                       24
<PAGE>   25
            or MSLO, as the case may be, or (B) carrying out any of your
            obligations to MSLO or an Approved Retailer relating to the
            Products. Notwithstanding the foregoing, the Proprietary Materials
            shall include any Materials (as defined below) in which MSLO owns
            any proprietary rights (including, without limitation, any copyright
            rights, trademark rights, or other intellectual property rights).

            The Proprietary Materials may include, but are not necessarily
            limited to, the following: concepts; techniques; data;
            documentation; research and development; customer lists; advertising
            plans; distribution networks; new product concepts; intellectual
            property of all types, including, without limitation, designs,
            patterns, ideas, and any physical manifestations thereof; prints;
            sketches; planned introduction dates; processes; marketing
            procedures; "know-how"; marketing techniques and materials;
            development plans; names and other information related to strategic
            partners, suppliers, or vendors; pricing policies and strategic,
            business or financial information, including business plans and
            financial pro formas (all of the foregoing, "Materials").

            Notwithstanding the foregoing, the Proprietary Materials shall not
            include materials you develop at your sole cost and expense with no
            contribution, input, advice or direction whatsoever from MSLO (the
            "_____ Materials"); provided, however, that no ______ Materials may
            in any way contain, embody or reference any Proprietary Materials,
            including, without limitation, any MSLO trademark, servicemark,
            mark, name or other designation.

            For purposes of this Agreement, "Approved Retailers" shall mean
            those entities set forth on Exhibit A hereto, which exhibit may be
            amended from time to time by MSLO.

      2.    You acknowledge that MSLO exclusively owns, in perpetuity and
            throughout the world, all right, title and interest, including,
            without limitation, all copyrights, trademarks and other
            proprietary rights (and all renewals and extensions thereof)
            embodied in, or related to, the Proprietary Materials, and any
            and all good will therein.  You recognize the great value of the
            publicity and good will associated with the Proprietary Materials
            and acknowledge that such value and good will belongs exclusively
            to MSLO.  You agree that you shall not acquire any rights in or
            to the Proprietary Materials by virtue of your performance of any
            obligations to MSLO or any Approved Retailer or otherwise.  Any
            use which you may make of the Proprietary Materials shall solely
            be pursuant to your agreements with MSLO or the Approved
            Retailers in connection with the Products and shall not restrict,
            limit or otherwise diminish MSLO's rights therein with respect to
            any other products or use.  You hereby acknowledge and agree that
            the Vendor Materials shall be and/or have been solely created by
            you as a "work-made-for-hire" specially commissioned by MSLO for
            use in connection with the Products pursuant to the United States
            Copyright Act, and any and all extensions and/or renewals
            thereof, it being understood that in the event any of the Vendor
            Materials are determined not to be a "work-made-for-hire", then
            you hereby irrevocably assign to MSLO all rights therein.  You
            represent and warrant that (i)

                                       25
<PAGE>   26
            you shall not undertake or cause any third party to undertake any
            act that violates, infringes, diminishes, challenges or otherwise
            conflicts with MSLO's exclusive ownership of all rights, title and
            interest in and to the Proprietary Materials, and (ii) that MSLO's
            exploitation of the Vendor Materials shall not infringe the rights
            of any third party.

1.          All notes, data, reference materials, sketches, drawings, memoranda,
            documentation and records in any way incorporating or reflecting any
            of the Proprietary Materials shall belong exclusively to MSLO and
            you agree to turn over all copies of such materials in your
            possession or control to MSLO upon the earlier of MSLO's request or
            termination of the final agreement pursuant to which you manufacture
            any Products.

2.          You shall hold in confidence and not directly or indirectly reveal,
            report, publish, disclose or transfer any of the Proprietary
            Materials in any form to any person or entity, nor shall you utilize
            any of the Proprietary Materials for any purpose, except in each
            case as may be necessary in the course of your manufacture of
            Products, provided that no Proprietary Materials which are
            designated as being "confidential" by MSLO may be revealed,
            reported, published, disclosed or transferred without the express
            written consent of MSLO. You shall cause each of your employees,
            agents or representatives that is provided access to any Proprietary
            Materials to abide by the same obligations and restrictions to which
            you are subject hereunder.

3.          You agree that you shall not sell any products incorporating any of
            the Proprietary Materials to any entity other than MSLO or an
            Approved Retailer, except as expressly permitted herein.

4.          Upon receipt of a notice from MSLO or an Approved Retailer that any
            Products manufactured by you are deficient in quality or are not
            consistent with the relevant specifications, or in the event of
            an Overrun (as hereafter defined), you may sell such deficient
            Products or Products with respect to which there has been an
            Overrun (collectively, "Excess Products") to parties other than
            Approved Retailers, provided that (i) no use of or reference to
            the name Martha Stewart, MSLO or any variation thereof is used in
            connection with any advertising, publicity, labeling, wrapping or
            packaging with respect to any such sales, (ii) that prior to
            making any such sale you receive assurances from the party to
            whom you sell such Excess Products that they will comply, and
            will cause any subsequent purchasers to comply, with the terms of
            sub-clause (i) above, and (iii) that such sales are made to
            purchasers who have warranted to you in writing that they shall
            only re-sell the Excess Products outside of North America (unless
            prior approval for North American sales is received from MSLO or
            the Approved Retailer for whom the Excess Products were
            originally manufactured). For purposes of this Agreement, there
            shall be an "Overrun" on a Product only in the event that (1) you
            have received notice from all Approved Retailers for whom you
            manufacture such Product that such Approved Retailers do not
            intend to purchase any more of such Product from you in the
            future, (2) you have delivered to the relevant Approved Retailers
            and to MSLO the amount of Product in your possession with

                                       26
<PAGE>   27
            respect to which there is an Overrun, and (3) MSLO and the relevant
            Approved Retailers have approved the quantity of such Overrun. MSLO
            and the Approved Retailers may, in their sole discretion, limit the
            amount of Excess Product you may dispose of pursuant to the terms of
            this paragraph if they determine that the amount of such Products
            that you have on hand for such disposal is excessive and beyond the
            quantity you would have possessed had you followed a normal and
            prudent manufacturing schedule.

5.          In the event that you receive a request to disclose any Proprietary
            Materials under a subpoena or court order, you will (a) promptly
            notify MSLO thereof, (b) consult with MSLO on the advisability of
            taking steps to resist or narrow such request, and (c) if
            disclosure is required or deemed advisable, cooperate with MSLO
            in any attempt that it may make to obtain an order or other
            reliable assurance that confidential treatment will be accorded
            to designated portions of the Proprietary Materials.

6.          Because of the unique nature of the Proprietary Materials, you
            understand and agree that MSLO will suffer irreparable harm in
            the event that you fail to comply with any of your obligations
            hereunder and that monetary damages may be inadequate to fully
            compensate MSLO for such breach.  Accordingly, you agree that
            MSLO will, in addition to any other remedies available to it at
            law or in equity, be entitled to injunctive relief, including,
            without limitation, temporary restraining orders and/or
            preliminary injunctions, to enforce the terms of this Agreement.
            In the event of any breach or purported breach by MSLO hereunder,
            your rights shall be limited to an action at law for money
            damages actually suffered.  In no event shall you be entitled to
            rescission, injunction or other equitable relief of any kind.

7.          In case any one or more of the provisions (or portions of the
            provisions) of this Agreement shall for any reason be held to be
            invalid, illegal or unenforceable in any respect, such
            invalidity, illegality or unenforceability shall not affect any
            other provisions (or portions of the provisions) of this
            Agreement and this Agreement shall be construed as if the
            invalid, illegal or unenforceable provisions (or portions of the
            provisions) had never been contained therein.

8.          In the interest of being guided by a well-developed body of law in
            the event of a dispute, the parties agree that this Agreement,
            including the validity and enforceability hereof, shall be
            interpreted in accordance with the laws of the State of New York
            pertaining to agreements made and performed therein, and the courts
            located in the State of New York, County of New York (federal, if
            jurisdiction is present, state, if federal jurisdiction is lacking),
            shall have exclusive jurisdiction and venue over all disputes
            hereunder.

            Upon execution hereof by your authorized signatory, this letter
shall constitute a binding agreement between you and MSLO, enforceable according
to its terms.

                                Sincerely yours,

                                       27
<PAGE>   28
                              MARTHA STEWART LIVING OMNIMEDIA, INC.

                              By:_______________________________
                                 Name:
                                 Title:

ACCEPTED AND AGREED BY:

______________________________

By:____________________________
   Name:
   Title:

                                       28
<PAGE>   29
      EXHIBIT A

Kmart Corporation

Hudson's Bay Company

                                       29
<PAGE>   30
                                 SCHEDULE VI(4)

             VENDOR SELECTION STANDARDS, POLICIES AND PROCEDURES

A.    BEST QUALITY DESIGN

      1. An acceptance that Martha Stewart Everyday is the driver of product
      content defined as design, packaging, and all other consumer-related
      "facings"; and willingness to work in an open-minded and highly responsive
      development and design process that is based upon: a) hearing MSE's
      requirements, and b) meeting those needs through vendor knowledge and
      experience.

      REQUEST:    MSE REQUESTS THAT KMART TAKE VENDOR WILLINGNESS TO WORK WITH
                  AND FOR MSE DURING PRODUCT DESIGN AND DEVELOPMENT INTO ACCOUNT
                  IN SELECTING MANUFACTURERS FOR THE MSE PRODUCT COLLECTIONS AND
                  LINES.

      2. A desire to work with MSE and Kmart to meet and beat "best of industry"
      standards for all product SKU's and agreement to work within a process of
      prototype-testing with Kmart that ensures all product meets "best"
      standards prior to production and shipment.

      REQUEST:    MSE REQUESTS THAT KMART AND THE VENDORS WORK WITH MSE TO
                  DEVELOP "BEST OF INDUSTRY" STANDARDS FOR ALL MSE SKU'S, AND
                  THAT ALL SKU'S BE TESTED TO "MEET OR BEAT" THESE STANDARDS.
                  FOR THOSE SKU'S THAT FAIL TO MEET "BEST OF" STANDARDS, PRODUCT
                  IS RECALLED AND IS NOT STOCKED OR RESTOCKED UNTIL STANDARDS
                  ARE MET.

B.    MAINTAIN QUALITY THROUGH MANUFACTURING

      1.  A willingness of the vendor to inspect, inspect, inspect "out the
      door".

      REQUEST:    VENDORS SET A "ZERO" DEFECT TOLERANCE TARGET LEVEL TO BE
                  MONITORED ON SITE BY KMART FOR ALL MSE PRODUCT PRODUCED AND
                  SHIPPED, INCLUDING THE OUTPUT OF ALL SUBCONTRACTED
                  MANUFACTURING.

      2.  A willingness by Kmart to inspect, inspect, inspect "in the door" and
      "on the floor".

      REQUEST:    MSE REQUESTS THAT KMART SIGNIFICANTLY IMPROVE ITS IN-STORE
                  AUDIT WORKFORCE AND CAPABILITIES TO FILTER OUT ANY IN-STORE
                  MSE MERCHANDISE THAT DOES NOT MEET APPROVED PRODUCT STANDARDS
                  AND THAT THIS PRODUCT BE RECALLED AND RETURNED TO THE
                  MANUFACTURER WITHOUT PENALTY TO MSE.

C.    COMMUNICATE WITH THE CUSTOMER IN BRAND TERMS

      1. Over and above "best of breed" product, willingness to honestly
      disclose to MSE any and all potential "maintenance" problems with the
      product, set reasonable consumer expectations, and immediately rectify all
      problems.

      REQUEST:    THE SEWN IN LABELS AND HANG TAGS FULLY DISCLOSE ALL
                  POTENTIAL MAINTENANCE "ADVISORIES" AND CARE TIPS, AND
                  EXPECTED SHRINKAGE/STRETCH ADJUSTMENTS. CONSUMER PROBLEMS
                  BE IMMEDIATELY RECTIFIED IN WRITING AND THROUGH REFUND
                  PROGRAMS.

                                       30
<PAGE>   31
      2.  Agreement to qualify foreign manufacturing operations up-front against
      Kmart/MSE standards prior to commencing manufacturing.

      REQUEST:    MSE REQUESTS THAT THE PROCEDURES RECENTLY INSTITUTED BE
                  FORMALLY DOCUMENTED AND THAT ALL RESULTS BE PROMPTLY PASSED TO
                  MSE AND THE VENDORS. ALSO THAT A HIGH LEVEL POINT PERSON
                  (EXECUTIVE) BE RESPONSIBLE AND ACCESSIBLE TO MSE TO ASSURE
                  PROMPT RESOLUTION AND FOLLOW UP WHEN PROBLEMS ARISE.

      3. Agreement by all vendors, foreign and domestic, to uphold the highest
      level of manufacturing standards with regard to Human Rights and fair
      treatment of the vendors' workforce.

      REQUEST:    ALL VENDORS USE THE KMART 35-PAGE CHECKLIST TO QUALIFY AND ALL
                  FOREIGN AND DOMESTIC PLANTS PRIOR TO COMMENCING ANY MSE
                  MANUFACTURING AND THAT VENDORS ALLOW KMART AND MSE ACCESS TO
                  ITS FACILITIES TO HELP ASSURE THAT COMPLIANCE STANDARDS ARE
                  MET. KMART AGREES THAT NO VENDOR WILL BE USED WHO DOES NOT
                  MEET THESE STANDARDS.

                                EXCLUSIVELY AT KMART

                                       31
<PAGE>   32
                                 SCHEDULE VI(8)

                          Specifics to Garden Products

      (A) Under the Garden Agreement, live plants sold in connection with the
Licensed Property were intended to be sold pursuant to Schedule VI(7) of that
agreement. Following the execution of this Agreement the parties will cooperate
in good faith to revise that Schedule VI(7) to eliminate the roll of the
Designated Broker and the Required System and to otherwise simplify the program
in mutually agreeable ways, provided that the program will continue to be
comprised of Martha Picks and MSEG Commodities, that MSO will continue to have
the ability to determine the Martha Picks and will endeavor, along with Kmart,
to maintain the secrecy of such picks, and that MSO will be permitted to approve
all care and other instructions relating to the live plants. The revised
Schedule VI(7) will be adopted and become a part of this schedule.

      (B) Garden Products that are intended for indoor use shall generally be
available for sale at Kmart year-round. Garden Products that are intended for
outdoor use shall generally be available at all times from March 1 to September
15 of each year (the "Outdoor Availability Period") and at any other times the
parties deem desirable, provided that, with respect to certain Kmart Stores
located in the southern, southwestern and western portions of the Territory,
such products shall be available during longer periods (such periods and such
individual stores to be mutually determined by the parties). In the event of
unseasonal weather in particular regions of the Territory, Kmart and MSO shall
mutually agree on whether certain products intended for outdoor use should be
withheld from sale during a portion of the Outdoor Availability Period.

      (C) MSO shall be entitled to select the vendors who supply Licensed
Products that fall within the "All Natural Organics" product categories.

      (D) Kmart hereby agrees to dedicate funds annually throughout the Term to
the promotion of Sales of the Garden Products through innovative, MSO sponsored
events or promotions consistent with the publication of the Martha Stewart
Everyday Garden magazine in 2001 or the planned sponsorship of the National
Flower Show in 2000. MSO and Kmart shall mutually agree each year on the nature
of the event or project and the cost thereof, but it shall generally be a Martha
Stewart-branded project or promotion intended to enhance Martha Stewart-brand
awareness and Sales of Garden Products at Kmart.

                                       32
<PAGE>   33
                                  SCHEDULE XIII

                               GUARANTEED PRODUCTS

GARDEN
<TABLE>
<CAPTION>
                  1999                  2000                       2001
<S>               <C>                   <C>                        <C>
TOOL SHED
                  Garden Fork           Compost Bin                "Best" Level
                  Round Point Shovel    LH Bulb Planter
                  Flat Head Hoe         Square Spade
                  Bamboo Rake           Border Spade
                  Garden Rake           Heart Hoe
                                        Wheel barrow
                                        Hedge Shears
                                        Loppers
                                        Small Bamboo Rake
                                        Compost Fork
                                        Pistol Grip Saw
                                        Large Pruning Saw
                                        Pole Pruner
                                        Bow Saw

TOOL BAG
                  Pruning Shears        SH Bulb Planter            "Best" Level
                  Trowel                Garden Reel
                  Hand Cultivator       Fishtail Weeder
                  Hand Weeder           Holster for Shears
                  Planting Dibber       Mini Claw Cultivator
                  Tool Bag

STORAGE
                  Large Galvanized Bin  Garden Cart                Storage Hooks
                  Galvanized Bucket     Large Plastic Bin/Leaf     Med Plastic Bin
                  Soil Scoop            Small Bucket w/ Handle     Small Plastic Bin
                  Harvest Basket        Compost Pail w/ Lid        Wire Harvest Basket
                                        Folding Tarp/Leaf
                                        Small galvanized Bucket
                                        Lid for Galv. Bucket
                                        Scoops - large and small
                                        Tool Storage Rack

INDOOR FLORAL
                                        Floral Shears
                                        Plant Mister
                                        Small Watering Can
                                        Folding Floral Knife
                                        Floral Buckets
                                        Thinning Clippers
                                        Arranging Kit

WATERING
                  Watering Can          (4) Sprinklers
                  50' Garden Hose       80' & 100' Garden Hose
                  Quick Coupler Set     Watering Wand
</TABLE>

                                       33
<PAGE>   34
<TABLE>
<S>               <C>                             <C>                                  <C>
                  Adjustable Grip Nozzle          Soaker Hose
                  Skylands Sprinkler              Hose Hanger or Reel
                                                  Manual Irrigation Timer
                                                  Electronic Irrigation Timer
                                                  Misting Rose
                                                  Shut Off Valve

ACCESSORIES
                  Bamboo Stakes (3', 5')          Sharpener for Shovel                 Wide Brim Hat
                  Metal Plant Labels              Clogs
                  Wooden Plant Labels 2 sizes     Bamboo Stakes (7')                   Tool Belt
                  Pen for Plant Markers
                  Twine (2 weights_                                                    Apron
                                                                                       Plant Supports Nails

SEED STARTING
                                                  Planting Tray
                                                  Large Cell Seed Starting Insert
                                                  Small Cell Seed Starting Insert
                                                  Planting Dome
                                                  Seed Starting Mix
                                                  Mist Bottle
                                                  Small Wood Plant Labels
                                                  Cold Frame

GLOVES
                  Printed Jersey (W)              Plaid Jersey
                  Non-Skid Jersey                 Dot Jersey w/ Vinyl
                  Printed Jersey (K)              Plaid Jersey w/ Vinyl
                                                  Solid Jersey w/ Suede
                                                  Non-Skid Jersey (M)
                                                  Leather/Goatskin (W)
                                                  Suede Work Glove (W)
                                                  Solid Twill (W)
                                                  Surgical (W)
                                                  1 x 1 Rib Knit/Nitrile (W)
                                                  Velux
                                                  Fleece Chore Glove (M)
                                                  Solid Jersey (M)
                                                  Leather (M)
                                                  Surgical (M)
                                                  Heavy Suede & Twill (M)
                                                  Twill (M)
                                                  Heather Jersey (K)
                                                  Solid Jersey w/ Suede (K)

OUTDOOR POTS
                  Garland Rose                    "Better" / "Best" Plastic/Seasonal
                  Rolled Rim - Large              "Better" / "Best" Clay
                  Rolled Rim - Small
                  Basketweave

SOILS
                  General Soil Mix                Orchid Mix
                  Soilless Mix with Bark          Bulb Mix
                                                  Indoor Plant Mix
</TABLE>

                                       34
<PAGE>   35
<TABLE>
<S>                       <C>                         <C>                                                 <C>
FOODS/FERTILIZERS
                          Rose                        Soil Testing Kit
                          Tomato/Vegetable            Fish/Seaweed Concentrate
                          Acid Loving                 Fish/Seaweed Concentrate Tree & Shrub
                          Bonemeal                    Basic/Granular Tree & Shrub
                          Bulb Food
                          All Purpose

OUTDOOR LIGHTING
                                                      Solar/Low Voltage                                   Outdoor Decor Lighting
                                                      Lighting & Accessories

TRELLIS/EDGING/FENCE
                                                      Expandable Trellis
                                                      Basis Arch
                                                      Wild Lattice Components
                                                      Pound-in Edging
                                                      Rolled Edging

CHILDREN'S GARDEN
                                                      Children's Tool Set (Cultivator, trowel, weeder)
                                                      Bamboo Leaf Rake
                                                      Shovel
                                                      Cultivator
                                                      Garden Rake

BIRDS
                                                      Seed                                                "Best" Level
                                                      Suet
                                                      Bird Baths
                                                      Feeders
                                                      Bird Houses

LAWN/ORNAMENT/DECOR
                                                      Stone/Concrete Decor                                "Better"/"Best" Levels

PEST CONTROL
                          Mosquito Barrier            Garden Insecticide
                          Yellow Jacket & Flying      Garden Pesticide
                                  Insect Trap         Garden Fungiside
                          Flying Insect Killer
                          Wasp & Hornet Killer
                          Ant Killer
</TABLE>

HOUSEWARES

FOOD

      Enamel Cast Iron Cookware
      Cast Iron Cookware
      Enamel Steel Cookware
      Anodized Aluminum Cookware
      Stainless Steel Cookware
      Aluminum Cookware
      Metal Bakeware

                                       35
<PAGE>   36
      Ceramic Bakeware
      Glass Bakeware
            Clear
            Colored
      Cutlery
            Serrated
            Non-Serrated
      Tea Kettles
      Kitchen Gadgets & Utensils
            Wooden
            Stainless Steel
            Nylon
            Melamine
            Ergonomic
      Specialty Cookware
            Ethnic
            Healthy
      Barbeque Accessories
      Baking Gadgets & Utensils
      Mixing Bowls
            Glass
            Stainless Steel
            Plastic
            Ceramic
      Spice Racks
      Cleaners for Stainless Steel Cookware

HOME

      Embossed Whiteware Dinnerware
      Mix and Match Stoneware, Dinnerware and Serveware
      Glass Dinnerware
      Plastic Dinnerware
      Beverageware
      Stemware
      Glass Serveware
      Flatware
            18/0
            18/8
      Wooden Serveware
      Enamelware
      Picture Frames
      Mirrors
      Lamps
            Accent
            Desk
            Floor
      Lamp Shades
      Clocks
      Candles
            Scented
            Non-Scented
      Candle Accessories
            Holders
            Snuffers
            Lanterns
            Hurricanes

                                       36
<PAGE>   37
      Matches

KEEPING

      Closet Accessories
      Hangers
            Plastic
            Wood
            Metal
      Cedar Products/Moth Protection
      Clothing Storage - Bags and Boxes
            Shoes
            Sweaters
            Blankets
            Hanging
      Closet Shelving Organization Systems
      Laundry Organization Items
      Underbed Storage Containers
      Wire and Cable Ties
      Kitchen Organization Containers
      Kitchen Labels
      Dish Storage Containers
      Dish Felt Pads
      Floor Savers
      Floor Storage Containers
      Kitchen Containers
      Shelf Paper
      Trash Receptacles
      Recycling Receptacles

SEASONAL

[TO COME FROM MSO]

                                       37
<PAGE>   38
                                  SCHEDULE XIV

                                Sales Projections

[ * * * ]

                                       38
<PAGE>   39
                                  SCHEDULE XXVI

                    LABOR STANDARDS COMPLIANCE CERTIFICATE

All Kmart Vendors:

Kmart is strongly committed to full compliance with human rights and labor
standards as related to the manufacturing of all merchandise sold at our stores.
As a vendor to Kmart, you must ensure that there is no misstatements as to the
true country of origin of your merchandise, and that none of your merchandise is
made in whole or in part using any child, forced or prison labor. This
obligation applies not only to your own company, but to any subcontractors you
may use in producing goods for Kmart.

If Kmart learns that a factory used by any of our vendors for the production of
merchandise has committed legal violations, or failed to comply with our
standard Kmart order terms, we will:

-     Cancel the affected order(s)

-     Terminate our relationship with the vendor

-     Take legal action or pursue other equitable remedies to recoup any
      financial losses incurred by Kmart

-     Assess a payment to the vendor, equivalent to 50 percent of the order(s),
      that Kmart will donate to a human rights or children's organization

With our current and planned growth in global sourcing, Kmart is increasing our
quality control staff to ensure compliance with all applicable human rights and
labor standards as well as other critical elements of quality assurance.
Consistent with these actions, we expect all of our vendors to increase their
factory inspections and take vigilant and immediate action to eliminate any
problems that are found to exist.

Please sign and return the following Certification of Compliance to John
Rutherford, _______________, 3100 W. Big Beaver, Troy, MI 48084 by
_______________.

Thank you for your prompt attention and personal commitment to this very
important matter.

Sincerely,

Kmart Representative

________________________________________________________________________________
Certification of Compliance

"By my signature below, as Chief Executive Officer, and on behalf of my company,
I acknowledge receipt of the above letter, and do hereby certify and agree that
the company will comply with all applicable labor laws and the order terms and
conditions set forth on the back of this agreement for any and all goods
supplied to Kmart regardless of country of origin. My company also agrees to
make the above assessed payments for donation by Kmart to a human rights or
children's organization in the event of failure to comply with the above
requirements."

________________________________________________________________________________
(Print) Name & Title - Chief Executive Officer        Signature         Date

________________________________________________________________________________
Company Name & Address

                                       39<PAGE>   1
                                                              Exhibit 10(29)

                                    AGREEMENT

                                    NUMBER 1

                               DATED 20 MARCH 1998

                   ON JOINT INVESTMENT PRODUCTION ACTIVITY
        FOR DEVELOPMENT AND FURTHER EXPLORATION OF BUGRUVATIVSK FIELD
                       WITHOUT CREATION OF A LEGAL ENTITY

                                      KIEV

                                       1
<PAGE>   2
The Joint Stock company Ukrnafta (hereinafter referred to as the Ukrnafta or
"First Participant"), represented by its Chairman of the Board - President Mr
Yaroslav Kozak, acting based on the Charter, and Mr Grygorry Brazyna, acting
based on the Power of Attorney No. 97 issued on 18 March 1998, and

the Canadian Company "Lateral Vector Resources Inc." (hereinafter referred to
as "LVR" or "Second Participant"), represented by its President - Mr Wayne
Goranson, acting based on the Charter, and

the Closed Joint Stock Company "IPEC" (hereinafter referred to as "IPEC"),
represented by its Founders, namely: President of Lateral Vector Resources
Inc. Mr Wayne Goranson, acting based on the Charter, and President of
Northern Industrial Development Ltd Mr Rocky Rombs, acting based on the
Charter

which hereinafter referred to individually as a Participant and collectively as
the Participants, and which in accordance with the Laws of Ukraine "On
Property", "On Regime of Foreign Investment" have concluded this Agreement on
the following:

DEFINITION OF FUNDAMENTAL TERMS

Hydrocarbons - means crude oil, gas condensate, petroleum and natural gas.

Base Hydrocarbons - means a volume of Hydrocarbons' production, which is being
recovered on Bugruvativsk Field or can be recovered on this Field in the future
under condition of use of productive capacities created or gated in on the field
by Ukrnafta and technological processes, which are commercially introduced there
prior to the Effective Date. According to the Decree of the President of Ukraine
No 433/96 of 17 June 1996 "On measures for attraction of investment for
development oil fields with hard-producing and exhausted deposits" base volume
of hydrocarbons' production for Bugruvativsk Field was defined by Regulation of
the Cabinet of Ministers of Ukraine No 1223 of 6 November 1997 "On approval of
the list of oil fields with hard-producing and exhausted deposits". (Copies of
these documents attached as Exhibit 1 hereto).

Incremental Hydrocarbons - means a volume of Hydrocarbons recovered on
Bugruvativsk Field over Base Hydrocarbons at the expense of the Investments and
use of modern know-how as described in aggregate in all of the Joint Activity
Programs.

Calculated Hydrocarbons for Contributed Well - means part of the Base
Hydrocarbons are defined according to individual calculation prepared by the
Group of Experts.

Incremental Hydrocarbons for Contributed Well - means the total volume of the
Hydrocarbons produced at a particular well minus the Calculated Hydrocarbons for
Contributed Well at the expense of investment and using of modern technology.

Current Expenses - means expenses for Hydrocarbons recovery that according to
legislation of Ukraine when identifying the taxable income are deducted from
gross incomes from Joint Investment Production Activity.

Contribution - means any funds, tangible and intangible assets, which are
contributed to the Joint Investment Production Activity in accordance with
conditions of this Agreement and includes Labour Contributions.

Effective Date - means the date of registration of this Agreement by relevant
bodies of the Ministry of Foreign Economic Relations and Trade of Ukraine.

                                       2
<PAGE>   3
Further exploration of Bugruvativsk Field - means complex of operations which
are carried out during commercial development of Bugruvativsk Field for
elaboration of its geological structure and Hydrocarbons reserves.

Obligations on Investment of Joint Investment Production Activity - means
Contribution that in accordance with Work Program and Agreed Budget is going to
be contributed by any Participant during current financial year.

Investments - means monetary funds, property, property rights and intangible
assets, working participation, providing services, etc, which are contributed by
the Participants to the Joint Investment Production Activity and will be used
for improvement or building of Investment Activity Sites during development of
Bugruvativsk Field in accordance with this Agreement.

Capital Exp(e)anses - means exp(e)anses for creation or acquisition of fixed
assets at the Bugruvativsk Field, which will be borne in accordance with this
Agreement and which are subject to depreciation according to procedure provided
by Ukrainian Law.

Management Committee - means the supreme authority which consists of managers
and authorized representatives of the Participants and is authorized to make the
decisions as of principal issues of Joint Investment Production Activity as it
is indicated in Article XVII.

Accumulative Contribution - means amount of Contributions from the beginning of
the Joint Investment Production Activity till any date.

Investment Activity Sites (Sites of Investment) - means existing on the
Bugruvativsk Field wells and other tangible assets, on which according to this
Agreement will be carried out operations on providing of Incremental
Hydrocarbons production, and also the appropriate new sites, which will be
constructed at the field during Joint Investment Production Activity.

Operator - means the IPEC, represented by its Chairman of the Board, who carries
out management of Joint Investment Production Activity and organises running of
joint matters of the Participants. In future, the Operator can be changed in
accordance with an agreement of Participants.

High Risk Operation - means a high risk operation as described in Article IX.

Separate Balance Sheet - means separate balance sheet intended for accounting
the assets and liabilities connected to Joint Investment Production Activity,
including money resources, property etc. which are being united by the
Participants of this Agreement for carrying out Joint Investment Production
Activity and created in the process of such activity and also for accounting of
commercial operations on Joint Investment Production Activity and financial
results.

Separate Settlement Account - means separate settlement account in Ukrainian
currency opened with one of the Ukrainian banks for providing the Joint
Investment Production Activity.

Separate Account in Foreign Currency - means separate account in foreign
currency opened with one of the Ukrainian banks for providing the Joint
Investment Production Activity.

Initial Contribution - means property and intellectual values, which will be
initially (during 1998) contributed by Participants into the Separate Balance
Sheet for performance of Joint Investment Production Activity on development of
Bugruvativsk Field.

Joint Investment Production Activity Programs - means the programs of works for
each fiscal year based on the commercial production project of the Bugruvativsk
field which includes production and geophysics studying of wells and layers,
complex of works for drilling of exploitation wells, repair of

                                       3
<PAGE>   4
wells, construction and exploitation of accumulative objects, transport and
preparation of production (hydrocarbons) and production of Hydrocarbons.

Exploration of the Bugruvativsk field area - means complex of operations, which
will be carried out on the territory of Bugruvativsk oil field and on the
adjacent to it territories on the basis of the separate Licence for Exploration
which one can be obtained by one of the Participants based on a solution of
Management Committee.

Development of Bugruvativsk field - means complex of operations being carried
out in the period of commercial development of field pursuant to volumes
specified in development projects.

Joint Investment Production Activity - means investment and production activity
of the Participants based on the Joint Property, Labo(u)r Contribution and
co-operation among the Participants of this Agreement that envisages the
distribution of risks and results of this activity as described further in the
Joint Activity Programs. Joint Investment Production Activity is regulated by
this Agreement which has legal force, norms of Civil Code of Ukraine in respect
of joint activity, by the Law of Ukraine "On Investment Activity", the Law of
Ukraine "On Regime of Foreign Investment", the Law of Ukraine "On Taxation of
Enterprises Profit" and by other Ukrainian legal documents.

Joint Production (Joint Hydrocarbons) - means any Hydrocarbons produced using
wells which are contributed to the Joint Investment Production Activity. The
volume of the Joint Production - the Joint Produced Hydrocarbons will be defined
by calculation based on the provisions of Article XI.

Joint Property - means monetary funds, assets, property rights and intangible
assets transferred to the joint property by the Participants and other monetary
funds, assets, property rights and intangible assets created or otherwise
obtained in a result of the Joint Investment Production Activity and are
reflected at the Separate Balance Sheet.

Labour Contribution - means free of charge services and operations for
improvement or construction of Investment Activity Sites and its free of charge
maintenance during process of its further exploitation. Evaluation of the Labour
Contribution will be carried out by mutual consent of all Participants.

Participants - means Ukrnafta, LVR and IPEC which have executed this Agreement
but later may include some other legal entities or persons that might join the
Agreement in accordance with a procedure stipulated in Article XIX.

Agreed Budget - means the document which estimates the expenses and costs to
carry out each Joint Activity Program. The Agreed Budget of joint activity
includes all financial sources, which are directed to acquisition property
resources for Joint Investment Production Activity, including Participants' own
monetary funds.

Fiscal Year - means calendar year, but for the first year of Joint Investment
Production Activity it means the period from the Effective Date until finishing
of calendar year.

Actual Participation - means the ratio of accumulative amounts of actual
Contributions of any of the Participants to the total amount of Contributions
over the period from the beginning of Joint Investment Production Activity.

Planned Participation - means the ratio of accumulative amount of actual
Contributions of the Participant for the period prior to the current fiscal
year, and its Obligations for the current fiscal year to the total amount of
Contributions and Obligations.

                                       4
<PAGE>   5
Group of Experts - means a group of expert which will be crated in accordance
with terms defined in Clause 9.4 of Article 9 of this Agreement.

Contributed Well - means a well, its equipment associated with production and
which are used for Hydrocarbons production and constitute a part of Ukrnafta's
Contribution to the Joint Investment Production Activity.

Bugruvativsk Field - means the oil and gas field, located in Ukraine, Sumy
oblast, and geographical co-ordination of which are defined in Annex [ ] hereto.

ARTICLE I

General Provisions

1.1     This Agreement is executed for the purposes of:

-       obtaining the profits by its Participants;

-       providing with organisational economic conditions for joint investment
        for development of the Bugruvativsk Field, achieving high economic
        results while development of this field using up-to-date domestic and
        foreign production techniques for intensifying its exploration and
        production, increasing of volumes of oil and gas development, providing
        for labo(u)r safety measures, protection of subterranean resources and
        environmental protection.

1.2     The subject of this Agreement is:

-       carrying out the Joint Investment Production Activity on creation,
        reconstruction and modernisation of production facilities for future
        exploitation of Bugruvativsk Field; introduction of updated technology
        and equipment in the area of commercial-geophysical investigations of
        wells and formations, construction and completion of wells, and their
        workovers;

-       conducting the joint production and economic activity in oil recovery
        in the process of development of Bugruvativsk oil-field using the
        Joint Property;

-       distribution of profits received as a result of Joint Investment
        Production Activity either in cash or in kind.

1.3     To the extent the Joint Investment Production Activity has been
        authorized under this Agreement, the Participants unite their monetary,
        material, labour resources, production, technical and economic
        potentials with the purpose of fulfillment of the Joint Investment
        Production Activity as described in this Agreement.

1.4     The Participants preserve their legal independence. The property
        independence of the Participants is limited by using the property which
        is the Joint Property.

1.5     All los(s)es and expenses which are arisen during Joint Investment
        Production Activity shall be paid at the expense of the Joint Property.
        In case the Joint Property is not enough for covering such los(s)es and
        expenses, the Participants shall cover such loses and expenses pro rata
        to their Plan(n)ed Participation.

1.6     All Participants are liable in proportion to their Plan(n)ed
        Participation for obligation of one Participant which arise under
        performance of Power of Attorney executed by all Participants.

                                       5
<PAGE>   6
1.7     Risk of accidental loss or damage of Joint Property is borne by the
        Participants proportionally to their Actual Contributions.

1.8     Risk of accidental loss of property used by the Participants for
        fulfillment of operations connected with performance of this Agreement
        but not contributed to Joint Property is borne by appropriate
        Participant.

1.9     This Agreement shall be governed by Ukrainian law.

1.10    Termination of any paragraph of this Agreement because of its
        contradiction to the new, or changes to the existing Ukrainian law does
        not cause termination of the Agreement as a whole. Should such
        contradictions arise the Participants agree to make changes and amend
        the text of this Agreement to the extent necessary to preserve the
        original intention of this Agreement.

1.11    This Agreement is concluded for the period of 20 (twenty) years subject
        to provisions of Section 3.2 hereof and can be extended for unlimited
        period of time if all Participants agree so.

1.12    The following process will be used as further described in this
        Agreement:

        (a)    During the term of this Agreement, the Operator will define the
               Sites of Investment from as per section 2.2 (the "Designated
               Sites of Investment") and submit such information for approval of
               the Participants. If the Participants cannot agree on the Sites
               of Investment, they may designate the Sites of Investment as a
               High Risk Operation;

        (b)    The Designated Sites of Investment will be valuated in
               accordance with section 2.10;

        (c)    Once evaluated, the Operator shall prepare a Joint Investment
               Production Activity Program and Agreed Budget for the Designated
               Sites of Investment for review and approval by the Management
               Committee;

        (d)    After approval of the Joint Investment Production Activity
               Program and Agreed Budget by the Management Committee, the
               Operator will request performance of contributions by
               Participants as it is provided for in this Agreement, the Joint
               Investment Production Activity Program and Agreed Budget;

        (e)    Once approved by the Management Committee the Operator shall
               execute the Joint Activity Program in accordance with the Agreed
               Budget;

        (f)    Any changes to the Joint Activity Program or Agreed Budget in
               respect of necessity to perform operations which are not defined
               in these documents shall be subject to the approval of by the
               Management Committee if expenses for they performance exceed 10%
               (ten per cent) of Agreed Budget;

        (g)    All Joint Production will be sold by the Operator with the
               proceeds paid into the Separate Settlement Account.  As
               permitted by Ukrainian law, the Participants will have the
               option of taking a part of the Joint Production equal to its
               Actual Contribution in kind provided that an equal part of the
               expenses of the Joint Investment Production Activity was paid
               in full at the expense of their monetary funds, which are
               transferred to the Joint Investment Production Activity for
               the particular purpose.

                                       6
<PAGE>   7
ARTICLE II

The Sites of Investments, Contributions and the Terms of their performance
and Correction

2.1     The Sites of Investment according to this Agreement are:

-       existing wells of the Bugruvativsk Field, on which repair-restoration
        works, reworks, enhancements and other works, as well as the operation
        of such wells will be carried out;

-       new wells, which will be drilled and constructed on the Bugruvativsk
        Field;

-       existing gathering and injection systems and those which will be
        constructed, and other infrastructure facilities of the Bugruvativsk
        Field;

-       sites of exploration and production of Hydrocarbons on adjacent areas
        subject to obtaining appropriate licences.

2.2     The initial list (lists) of Investment Sites will be determined by a
        mutual written agreement of all Participants and shall constitute an
        integral part of this Agreement. This list (lists) can be further
        amended and new Investment Sites added according to the decision of the
        Participants.

2.3     During 1998 Ukrnafta will contribute to the Joint Property assets and
        intellectual property in form of "know-how", with the agreed value for
        the total amount of [ ] thousand hryvnias, which constitutes at the
        official rate of National Bank of Ukraine as of property estimation date
        (figures are conventional) 1040 thousand US dollars.

2.4     In 1998 LVR will contribute to the Joint Property the investments in the
        monetary form and assets as its Initial Contribution for the total
        amount of 760 thousand US dollars.

2.5     In 1998 IPEC will contribute monetary funds and its labour participation
        for the total amount of [ ] thousand hryvnias, which constitutes at the
        official rate of National Bank of Ukraine as of property estimation date
        (figures are conventional) 200 thousand US dollars.

2.6     Beginning from 1999 the Contributions to the Joint Investment Production
        Activity will be carried out according to annual Joint Activity Program
        and Agreed Budget. The Participants agree that approved Joint Activity
        Programs and Agreed Budgets for any Fiscal Year are the Supplements to
        this Agreement.

        In case of substantial change of exchange rate of the National Bank of
        Ukraine and by mutual consent of all Participants, Ukrnafta and IPEC
        hereby agree to perform additional contributions with a purpose to
        maintain amount of their Contributions defined in US dollars.

2.7     The Participants hereby agree to make their initial Contributions to the
        Joint Investment Production Activity and hold their Participations in
        the Joint Property in the following proportions:

<TABLE>
<S>               <C>
        Ukrnafta  52%
        LVR       38%
        IPEC      10%
</TABLE>

                                       7
<PAGE>   8
2.8     If one of the Participants declares that it is unable to make a
        Contribution described in this Agreement and the Joint Activity Program
        and will not provide its Contribution in the amount required for full
        performance of Joint Activity Program and other Participant is able to
        cover the deficit then the Management Committee can make a decision to
        change, for a certain period of time, the Participation for each
        Participant in order to reflect the increased Participation of the
        non-defaulting Participant and make the appropriate changes to the Joint
        Activity Program and to the Agreed Budget. In that case Participants
        agree to make appropriate amendments to this Agreement.

2.9     Any Contribution to the Joint Investment Production Activity must be
        recorded as required by Ukrainian law.

2.10    In order to evaluate any Contributions of Ukrnafta in kind, a separate
        commission will be created which will examine, evaluate and give the
        estimate to the assets which are proposed to be Contributed by Ukrnafta.
        The commission shall consist of three people: one nominated by LVR: one
        nominated by Ukrnafta: and one independent expert agree to by the
        Participants' nominee. If the Participants' nominees cannot agree on an
        independent expert, then such independent expert shall be appointed by
        the reference to the resolution of disputes provisions described in
        Article XXI.

        If Ukrnafta will decide to contribute Hydrocarbons in kind, than the
        Group of Expert will value the contributed Hydrocarbons.

        The Participants of the Joint Investment Production Activity hereby
        agreed on the following principles of the evaluation of the assets which
        is transferred by Ukrnafta to the Joint Activity. The evaluation of the
        assets which is transferred to the Joint Investment Production Activity
        will be based on a determination of possible value of the assets or its
        construction at the present conditions and considering its wear and
        tear, actual production capacity at the time when such evaluation are
        carried out. It is agreed that, the fact that the assets contributed to
        the Joint Investment Production Activity will be used for production of
        Ukrnafta's Hydrocarbons as they are defined in Article XX, will be
        considered when such evaluation will be carried out. Therefore, the
        coefficient which equals to 0.5 will be used for determination of the
        assets' value and such coefficient reflects the minimum expected
        correlation of Base and Incremental Hydrocarbons which is equal to 1 to
        1.

2.11    Cash and property transferred by the Participants to the Joint
        Investment Production Activity and also those created, received or
        obtained in the process of Joint Investment Production Activity and
        contributed to the Joint Investment Production Activity constitute their
        joint share property. The Participants have no right to be in charge of
        their Actual Contribution in common property without consent of the rest
        of the Participants.

ARTICLE III

Licences for Commercial Development of the Bugruvativsk Field and for
Exploration of its area

3.1     Ukrnafta hereby guarantee that its has exclusive right for development
        and exploitation of the Bugruvativsk Field and before the Effective Date
        will proof this fact by giving copies of appropriate documents to the
        Ukrainian solicitors for LVR.

3.2     The Participants may by mutual agreement of all Participants request
        Ukrnafta to obtain a License for Further Exploration of the Bugruvativsk
        Field and adjacent territories. If such license is obtained it shall be
        included in this Agreement and subject to its provisions. If the

                                       8
<PAGE>   9
        term of validity of any other new license obtained by Ukrnafta or any
        other Participant in respect of the Bugruvativsk Field or adjacent areas
        exceeds the validity term of this Agreement, then this Agreement shall
        be automatically prolonged for the validity term of such new license(s).

3.3     Ukrnafta hereby agrees that during the term of this Agreement it will
        not enter into any agreement with any other party relating to the
        Bugruvativsk Field and adjacent areas, licenses for exploration and
        production of which could be obtained in the future.

3.4     Ukrnafta hereby agrees to maintain all licenses referred to in Section
        3.1 and 3.2 in good standing and to not take any actions or inactions to
        jeopardise such licenses. If Ukrnafta receives a notice or is otherwise
        aware that it is in default under such licenses, it will immediately
        notify LVR and IPEC. Upon receipt of such notification LVR and IPEC may
        take such steps and such actions as they may (but are not obliged to)
        deem appropriate to resolve such default. Any amounts paid or costs
        incurred by LVR in remedying such default shall be considered a
        Contribution to the Joint Investment Production Activity.

3.5     Ukrnafta hereby understands and agrees that LVR and IPEC are held
        harmless against any and all claims, expenditures, damages, losses and
        other liabilities whatsoever in respect of the licenses resulting from
        (1) Ukrnafta's prior activities or failures to act within the
        Bugruvativsk Field; (2) any pre-existing conditions or (3) by virtue of
        Ukrnafta remaining as the license holder.

ARTICLE IV

Arrangement of Works for Production of Hydrocarbons within the Bugruvativsk
Field

4.1     IPEC is recognised to be an Operator as it is traditionally understood
        in international oil and gas business and shall on its own and with
        contractors selected by the Operator perform operations on Hydrocarbons
        production and conduct all organizational and practical activity on
        operation of the Bugruvativsk Field as it relates to the Joint
        Investment Production Activity. All such operations will be conducted at
        the expense of the Joint Property in accordance with the Joint Activity
        Programs and the Agreed Budget. The Operator can be changed in
        accordance with an agreement among participants if (1) IPEC will
        withdraw itself form the Participants of the Agreement or (2) the
        Participants will decide to change an Operator.

4.2     Some separate operations connected with field development, new well
        drilling, restoration works and stimulation of existing wells will be
        carried out by Ukrnafta, LVR and IPEC as its Labour Contribution and
        also on the basis of separate agreements on provision of the contractor
        services (service contracts) on its own or with participation of the
        Ukrainian and foreign contractors, provided that such operations are
        approved in the Joint Activity Programs and Agreed Budgets.

4.3     IPEC will take measures stipulated by the Joint Activity Program, for
        technical re-equipment of Ukrainian enterprises involved as
        subcontractors of agreements on giving services (service contracts).

4.4     For tax purposes economic relations among the Participants of the Joint
        Investment Production Activity equal to the relations on the basis of
        separate contracts such as contractor agreements and contracts on
        providing services. The Participants must perform

                                       9
<PAGE>   10
        only those operations, works and services which are provided by the
        Joint Investment Production Activity Program.

4.5     With the aim to ensure introduction of modern technologies of drilling
        and finishing the wells and intensification of Hydrocarbons production
        the Participants will consider the issue of establishment of a separate
        service company in the form of a joint-stock company.

ARTICLE V

The Rights of the Participants

5.1     The Participants have the following rights:

5.1.1   To participate in solving the issues of co-ordination and the management
        of the Joint Investment Production Activity and the management of Joint
        Production in accordance with this Agreement;

5.1.2   To obtain all available information concerning the Joint Investment
        Production Activity free of charge. To have access to accounting and
        financial documents, to all geological, technological and technical
        documentation. All such information must be maintained in confidence as
        per Article XX;

5.1.3   To receive a share of profits received as a result of the Joint
        Investment Production Activity or a part of production produced in
        accordance with this Agreement.

ARTICLE VI

Responsibilities of the Participants

6.1     The Participants are responsible for the following:

6.1.1   To observe the provisions of this Agreement and to perform the
        Management Committee's decisions in respect of performance of the Joint
        Investment Production Activity;

6.1.2   To perform their responsibilities under the Agreement including those
        connected with property participation in Joint Investment Production
        Activity in the amount, order and means provided by this Agreement and
        approved by the Management Committee in the Joint Activity Programs;

6.1.3   Do not disclose any information or documents provided in connection with
        the Joint Investment Production Activity to the Participants including
        information regarding discussions and decisions of the Operator which
        are confidential information and shall be maintained in confidence as
        per Article XX;

6.1.4   To perform other obligations if it is provided by additions to this
        Agreement or by the Joint Activity Programs;

6.2     In addition to general responsibilities provided in Section 6.1 above,
        Ukrnafta shall be responsible for the following:

                                       10
<PAGE>   11
6.2.1   In accordance with this Agreement, the Joint Activity Program and
        additional agreements to transfer the wells, assets and other property
        to the Joint Investment Production Activity within the terms agreed in
        the Joint Activity Program;

6.2.2   To use the License for Production of Hydrocarbons referred to in Section
        3.1 at Bugruvativsk Field in the interests of Joint Investment
        Production Activity, as well as to use any licenses obtained in the
        future for the Bugruvativsk Field or adjacent areas in the interests of
        the Joint Investment Production Activity;

6.2.3   To use the existing and wells which are going to be constructed and
        surface facilities on the Bugruvativsk Field in the interests of Joint
        Investment Production Activity;

6.2.4   When authorized in the Joint Activity Program to service facilities of
        the Joint Investment Production Activity by its personnel and to
        implement some technological works on the basis of co-operation;

6.2.5   In the interests of Joint Investment Production Activity to make
        efficient use of equipment handed over to it for use on terms of
        separate agreements and intended for use when servicing the Joint
        Investment Production Activity. To provide the Participants with
        conditions for control over the use of equipment transferred by them for
        utilization.

6.3     In addition to general responsibilities provided in Section 6.1
        above, IPEC is responsible for the following:

6.3.1   to fulfil functions of Operator on development of the Bugruvativsk Field
        as it relates to the Joint Investment Production Activity, including
        accounting of the Joint Property and of Joint Investment Production
        Activity's operations. All to be done in accordance with the Joint
        Activity Program.

6.3.2   To act as a contractor (General contractor) in construction of wells and
        facilities in accordance with the Joint Activity Program.

6.3.3   To perform some separate operations connected with the Bugruvativsk
        Field development, new well drilling, restoration works and stimulation
        of existing wells as Labo(u)r Contribution and also on the basis of
        separate agreements on providing services (service contracts) on its own
        or involving Ukrainian and foreign subcontractors. All to be done in
        accordance with the Joint Activity Program.

6.3.4   To sign the contracts on behalf of other Participants including
        contracts for the sale of Hydrocarbons produced as a result of Joint
        Investment Production Activity;

6.4     In addition to general responsibilities provided in Section 6.1
        above, LVR is responsible for the following:

6.4.1   To make measures, stipulated by the Joint Activity Program, for
        technical re-equipment of Ukrainian enterprises involved as
        subcontractors of agreements on giving services (service contracts).

6.4.2   To provide Ukrnafta with scientific technical information as of advanced
        achievements in exploration, development of hydrocarbon fields, oil and
        gas production. All such information shall be maintained in confidence
        by Ukrnafta as per Article XX.

                                       11
<PAGE>   12
6.4.3   To provide the participation of foreign specialists at the expense of
        the Joint Property Account, including foreigners, in preparation of
        Joint Activity Programs and Agreed Budgets.

6.4.4   To arrange the training of specialists abroad;

ARTICLE VII

Joint Activity Program and its Financing

7.1     All annual Joint Activity Programs will be prepared by the Operator for
        review and approval by the Management Committee.

7.2     All annual Joint Activity Programs must be approved by the Management
        Committee within 30 days of their submission to the Management Committee
        by the Operator. All Annual Joint Activity Program must be approved by
        the Management Committee 30 days prior to the beginning of each Fiscal
        Year.

7.3     Repeated approval of each Joint Activity Program is carried out if
        necessary if new circumstances connected with the Bugruvativsk Field
        operation conditions arise and also if incomes from Hydrocarbons sale
        and cash provided by the Participants is not sufficient for the
        performance of works planned by the Joint Activity Program earlier.

7.4     If the Management Committee does not reach an agreement regarding
        principle issues of the Joint Activity Program, then such Joint Activity
        Program may be defined as a High Risk Operation as further described in
        Article IX.

7.5     The Participants have no right to conduct operations on the Bugruvativsk
        Field which were not provided by the Joint Activity Program and are not
        defined as High Risk Operations.

7.6     Financial needs for operations provided by the Joint Activity Program
        and the Agreed Budget may be covered at the expense of:

-       financial contributions (investments) of the Participants transferred
        to the Joint Property;

-       monetary funds of the Participants used by them for purchasing or
        creation of property in the form of equipment, transport facilities,
        construction modules, other material resources as well as buildings,
        constructions, transmission facilities that are contributed to Joint
        Investment Production Activity and reflected at the Joint Property
        Balance Sheet:

        Financial needs for Hydrocarbons production (for current expenses) at
        the initial period shall be covered at the expense of monetary funds as
        described in each Joint Activity Program, which may include cash
        contributed by the Participants to the Joint Property (deleted text in
        this paragraph was not incorporated in Ukrainian text which was
        submitted to Ukrnafta).

7.7     The Agreed Budget shall be prepared on the basis of expected expenses
        for operations being executed by the Operator, market prices for
        services and production of the contractors and suppliers (further
        referred to as Settlement Prices), volumes of works and services, tax
        rates, obligatory payments and the Joint Activity Programs.

7.8     The Agreed Budget of the Joint Investment Production Activity is
        approved by the Management Committee for the next Fiscal Year 30 days
        prior to its beginning and is subject to revision and repeated approval
        in case if the Joint Activity Program changes and

                                       12
<PAGE>   13
        also in case if the Settlement Prices change. The Agreed Budget is
        formed in accordance with the provisions of Clauses 2.6 and 2.7. At the
        same time, if one of the Participants can not fully perform its
        obligation that are required for full performance of Joint Activity
        Program and other Participant is able to cover the deficit then the
        Management Committee can define other Participation in Investment as it
        provided for in Clause 2.8 of this Agreement.

        The Participants hereby agree to create a Reserve fund in amount up to
        20% (twenty per cent) of Agreed Budget as it may be required by the
        Operator.

7.9     If during the first ten days of the month when the appropriate stage of
        the Joint Investment Production Activity Program and Agreed Budget
        begins, any of the Participants is unable to finance the expenses
        provided by the Agreed Budget for current year it shall notify other
        Participants about it in writing before the end twenty days of that
        month. These Participants shall notify of their desire and possible time
        of financing expenses uncovered by the Participant declared about it
        within 30 days. If the other Participants agree to cover such expenses
        then the process described in Section 2.8 shall apply. If the other
        Participants will not completely cover the additional requirements as
        per Section 7.11, then within the next 15 days the Participants come to
        an agreement as of this issue or appoint special session of the
        Management Committee that makes a decision about correction of the Joint
        Activity Program and the Agreed Budget.

7.10    LVR will transfer monetary funds intended for the Joint Investment
        Production Activity from its bank accounts at the foreign banks to a
        Separate Account in Foreign Currency opened for performance of the
        purposes of this Agreement. IPEC will open a Separate Settlement Account
        in Ukrainian currency for performance of the Joint Investment Production
        Activity.

7.11    The Operator will efficiently (not less than once in a ten-day-period)
        inform the Participants about the operations with the accounts by
        providing copies of lists of credit payment orders received from a bank.

7.12    The performance of the Joint Activity Program and the Agreed Budget and
        use of the Joint Property by the Operator is controlled by the
        Management Committee which analyses the results of activity for every
        six months

ARTICLE VIII

Commercial Development Project of the Bugruvativsk Field

8.1     The Participants agreed that the commercial development project which is
        valid at the moment of the Effective Date will be updated by the
        Operator and approved in the appropriate order. The updated project of
        commercial development of the Bugruvativsk Field may be used as the
        basis for preparation of the Joint Activity Programs.

ARTICLE IX

High Risk Operations

9.1     Under this Agreement an Investment Activity Site may be designated as a
        High Risk Operation ("HRO-IAS"), which means carrying out the projects
        that are proceeding in spite

                                       13
<PAGE>   14
        of disagreement of one of the Participants. A Participant may designate
        a High Risk Operation as follows:-

-       the Participants (the "Initiating Participants") who wish to proceed
        with the HRO-IAS may provide a written notice to the Participants (the
        "Receiving Participants") who do not wish to proceed indicating that the
        Initiating Participants wish to designate the HRO-IAS as a High Risk
        Operation;

-       The Receiving Participants will have 30 days from receipt of the written
        notice to elect, in writing to the Initiating Participants, as follows:

        (a)    that they wish to participate, in which event the HRO-IAS will be
               included within the Joint Investment Production Activity and the
               remaining processes described in this Agreement shall apply; or

        (b)    not to participate, in which event the HRO-IAS will be designated
               as a High Risk Operation of the Initiating Participant.

        If the Receiving Participants do not respond within the 30 day time
        period described above, they will be deemed to have elected not to
        participate.

9.2     High Risk Operation may include:

-       carrying out the additional seismic survey on the area where such
        surveys have been conducted earlier;

-       carrying out of 3-D seismic;

-       drilling of additional exploratory wells and also some production
        wells;

-       other projects in which one Participant does not wish to be involved
        in.

9.3     High Risk Operations will be conducted solely at the expense of the
        Initiating Participants. In case of negative result of these High Risk
        Operations the expenditures for their carrying out are not taken into
        account in calculating the Actual Contribution of the Participants. In
        case of positive result, the Initiating Participant will have a right to
        use a result of HRO during the period of time which gives an opportunity
        to reimburse the Initiating Participant's expenses with using the
        coefficient equals to 2.0. After that period, the Initiating Participant
        must contribute the result of HRO to the Joint Investment Production
        Activity and value of such contribution will be equal 0.

9.4     If the Participants have different opinion in evaluation of results of
        High Risk Operations stated in paragraph 9.3, then their dispute shall
        be considered by the special expert group. The special expert group
        shall consist of 3 (three) persons:

               (i)    one specialist of the Ukrainian Oil Research Institute
                      or High School;

               (ii)   one specialist from American Petroleum Institute (API) or
                      some other Oil Research Institute of one of the other
                      countries recognised all over the world;

               (iii)  one specialist appointed by the two specialists
                      nominated by Ukrnafta and LVR.

                                       14
<PAGE>   15
        The first expert will be appointed by Ukrnafta within the appropriate
        group, the second expert will be selected by LVR within the appropriate
        group and the two experts will agree upon the third expert. If those two
        experts cannot agree upon the third expert the issue will be resolved in
        accordance with the dispute resolution provisions in article XXI.

9.5     Once a Participant identifies it intends to proceed with a High Risk
        Operation, the other Participants agree to allow access to the
        Bugruvativsk Field, equipment or facilities necessary to proceed with
        the High Risk Operations.

ARTICLE X

Base and Incremental Hydrocarbons

10.1    Definitions "Base Hydrocarbons" and "Incremental Hydrocarbons" are used
        in order to determine the amounts of payments to the State budget
        according to the provisions of the Decree of the President of Ukraine No
        433/96 of 17 June 1996 "On Measures for Attraction of Investments for
        Development of Oil Fields with Hard-Producing and Exhausted Deposits".

        Base Hydrocarbons are deemed to be anticipated volumes of oil
        development which are established by the Resolution of the Cabinet of
        Ministers of Ukraine No 1223 of 6 November 1997 "On Approval of the List
        of Oil Fields with Hard-Producing and Exhausted Deposits" with a purpose
        of use of the established by law procedure concerning taxation of
        Incremental Hydrocarbons.

10.2    Participants after the Effective Date will immediately carry out the
        works in respect to determining the volumes of development of Calculated
        Hydrocarbons for Contributed Wells. Until transfer of all wells to the
        Joint Investment Production Activity, amount of Calculated Hydrocarbons
        for Contributed Well will be used for determination of Incremental
        Hydrocarbons. In this case, Incremental Hydrocarbons (means crude oil)
        are defined as a deference between actual Hydrocarbons (means crude oil)
        production produced from wells contributed to the Joint Investment
        Production Activity and appropriate amount of Calculated Hydrocarbons
        for Contributed Well.

10.3    Taxes and other obligatory payments, which is stipulated only for Base
        Hydrocarbons will be paid by Ukrnafta.

ARTICLE XI

Distribution of Hydrocarbons

11.1    Oil and Gas produced in the Bugruvativsk Field shall be divided into
        Hydrocarbons of Ukrnafta and Joint Produced Hydrocarbons.

11.2    Hydrocarbons of Ukrnafta are deemed to be actual volumes of production
        of oil and gas from the wells not contributed to the Joint Investment
        Production Activity and Calculated Hydrocarbons for Contributed Well,
        contributed to the Joint Investment Production Activity. These
        Hydrocarbons are property of Ukrnafta and are not the Product of the
        Joint Production under this Agreement.

11.3    Calculated Hydrocarbons for Contributed Well in form of oil are defined
        at the moment of transfer such wells to the Joint Investment Production
        Activity. Estimation of Calculated

                                       15
<PAGE>   16
        Hydrocarbons for Contributed Well will be made by the Group of Experts.
        The Calculated Hydrocarbons of Contributed Wells in form of casing-head
        gas will be defined during process of exploitation of such wells based
        on the Calculated Hydrocarbons in form of oil and actual gas factors.

11.4    Joint Produced Hydrocarbons are deemed to be volume of oil and gas
        produced at the Bugruvativsk Field using the Joint Property minus
        Hydrocarbons of Ukrnafta.

11.5    In case when as a result of decrease of volumes of Hydrocarbons'
        development of the wells which are not contributed to the Joint
        Investment Production Activity, the sum of Calculated Hydrocarbons for
        Contributed Well which are contributed to the Joint Investment
        Production Activity and actual development of Hydrocarbons of the wells
        which are not contributed to the Joint Activity are less than the
        volumes of Base Hydrocarbons approved in respect to the entire
        Bugruvativsk field, taxes and payments which are only specified for Base
        Hydrocarbons shall be paid at the expense of Ukrnafta's profits received
        from the distribution of the profit of the Joint Investment Production
        Activity.

11.6    The Participants will prepare detailed procedure of (1) measure of
        Hydrocarbons' volume produced at the Bugruvativsk field and (2)
        Hydrocarbons division on Hydrocarbons of Ukrnafta and Hydrocarbons of
        the Joint Production.

11.7    Profit from the sale of Hydrocarbons of the Joint Production or, in case
        of execution of additional agreement Hydrocarbons itself, will be
        distributed among the Participants.

ARTICLE XII

Accounting of Property, Operations on the Joint Investment Production
Activity, the Expenditures for its Fulfillment and Production Results

12.1    Accounting of the Joint Property will be performed by the Operator on
        the Joint Activity Balance Sheet.

12.2    The expenses for carrying out exploration, drilling of production wells,
        major construction including purchasing the equipment, fulfillment of
        research works and other expenses provided in the Joint Activity Program
        will be paid at the expense of the Separate Settlement Account provided
        such expense was authorized in the Agreed Budget.

        If it is authorized in the Joint Activity Programs, the Participants at
        the expense of their own (not united) funds can make capital expenses
        that will be included to the value of capital funds that are transferred
        to the Joint Balance Sheet.

        All expenses and costs incurred by all Participants in carrying out
        their obligations under the Joint Activity Program or this Agreement,
        except expenses connected with performance of Contributions, shall be at
        the expense of Joint Property and are the subject to the prior approval
        by the Management Committee.

12.3    The Operator under a separate Operational Agreement, which is a
        supplement to this Agreement will agree to perform all required
        operations in accordance with the Joint Activity Programs and to only
        incur expenses authorized in the Agreed Budget.

12.4    Ukrnafta and LVR will perform operations connected with development of
        Bugruvativsk field in volumes provided by the Joint Activity Program
        based on the conditions stipulated

                                       16
<PAGE>   17
        in Operation Agreement, which is mentioned in Clause 12.3, or they
        (Ukrnafta and LVR) can be defined as a contract or in accordance with
        separate agreements.

12.5    Quarterly, the profits of the Joint Investment Production Activity will
        be calculated and paid out as follows:

        (a)    sales of the Joint Production and other income;

               (i)    less taxes, royalties, and other expenses to be charged
                      against the Joint Property pursuant to the provisions
                      of this Agreement;

               (ii)   less any amount approved by the Management Committee to be
                      reserved for the use in future operations, to create a
                      reserve for re-investments, or for any other purpose;

        The remaining funds shall be paid on a quarterly basis to the
        Participants in accordance with the provisions of Article XIV and the
        requirements of Ukrainian law. The Participants may on request in
        writing to the Operator, take a portion of the Joint Production in kind
        equal to the Participant's Actual Contribution provided that the
        Participant pays a corresponding part of the expenses charged to date to
        the Joint Property. In such event the Participant may sell its part of
        the Joint Production on either domestic or international markets.

12.6    Services which are provided by any of the Participants for performance
        of the Joint Investment Production Activity must be approved by the
        Joint Activity Program and payment is authorized in an Agreed Budget.

12.7    The Participants of the Joint Investment Production Activity have the
        right of inspection of all accounting documents on the Joint Investment
        Production Activity by means of audits conducted by independent auditing
        institutions. Planned audits shall be carried out no less than once a
        year and shall be paid by all Participants pro rata to their Plan(n)ed
        Participation. Beyond-the-plan audits shall be paid by the initiators.

12.8    The accounting shall be maintained in accordance with the rules accepted
        in Ukraine, and also with internationally accepted accounting rules.

12.9    Upon approval of the Management Committee assets of the Joint Property
        may be sold and the proceeds of any such sale shall be credited to the
        Separate Settlement Account.

        Investment Production Activity to the total amount of the Cumulative
        Contributions for the appropriate period of the Joint Investment
        Production Activity.

14.3    the Accumulative Contributions of Ukrnafta are calculated at the end
        of every quarter and included:

-       Contributed Wells and surface facilities constructed prior Effective
        Date (as valued in accordance with this Agreement and contributed to the
        Joint Investment Production Activity);

-       monetary funds of Ukrnafta contributed to the Joint Investment
        Production Activity;

-       the expenses of Ukrnafta at its own or with involving of contractors for
        conducting in accordance with the Joint Activity Program contractual
        drilling, commercial construction and workover of wells pursuant to
        contractual prices, taking into account the cost of material resources
        passed to contractors.

                                       17
<PAGE>   18
-       the non-material rights, including intellectual property rights.

All such items must be approved in a Joint Activity Program before defining them
as a Cumulative Contributions of Ukrnafta.

14.4    The Accumulative Contribution of LVR are calculated quarterly and
        include:

-       monetary funds of LVR contributed to the Joint Investment Productions
        Activity;

-       cost of material resources, transferred to the Joint Balance Sheet, or
        in accordance with Joint Investment Production Activity Program to other
        contractors or other participants;

-       cost of services connected with drilling, construction and workover
        rendered to the Joint Production by LVR as production co-operation
        (Working Contributions) according to approved Joint Activity Programs.

ARTICLE XIII

Taxes and Payments to the State Budget

13.1    Taxes, obligatory payments to the State Budget as well as Value Added
        Taxes ("VAT") and profit tax which are part of the Total Expenses are
        being paid based on proceeds received from sale of the Joint Production
        and shall be paid at the expense of the Joint Production Activity.

13.2    In case of production distribution in kind among the Participants they
        will pay by themselves VAT, rent payments, deductions for geological
        explorations and the payments for the use of mineral resources, taxes
        for property and land and also the profit tax.

13.3    The Participants execute this Agreement on the basis of the financial
        and other conditions (including tax rates, payments, etc.) which are in
        force on the Effective Date as they may affect the Joint Investment
        Production Activity. If in the future any law, decree or regulation
        applicable to the Joint Investment Production Activity or pertaining to
        the economic interests of the Participants are enacted in Ukraine that
        adversely affect the original economic rights and benefits of the
        Participants, the Participants agree to co-operate in good faith to
        determine practical opportunities to reinstate the original economic
        rights and benefits granted to the Participants according to Ukranian
        law and by this Agreement on the Effective Date, and shall jointly
        conduct negotiations with the appropriate State authorities in order to
        retain and regain such economic rights and benefits.

ARTICLE XIV

Distribution of Profits

14.1    Profit from sales of Hydrocarbons produced on the Bugruvativsk Field is
        quarterly or other way distributed between the Participants in
        accordance with written agreement of Participants and with Ukranian law.

14.2    The Actual Contribution of any of the Participants is determined by
        calculation, as the ratio of the cumulative Contributions of the
        Participants for the whole period of the Joint

14.5    Cumulative Contribution for the IPEC are calculated quarterly and
        include:

-       the cost of material resources purchased at the expense of the
        Operator and contributed to the Joint Investment Production Activity;

                                       18
<PAGE>   19
-       monetary funds contributed to the Joint Investment Production
        Activity;

-       the cost of services connected with drilling, construction and repairs
        provided by IPEC to the Joint Investment Production Activity in
        accordance with the order approved by the Joint Investment Production
        Activity Program;

14.6    The Actual Participations of the Participants will be defined quarterly
        on the basis of the amounts of the Cumulative Contributions of the
        Participants.

14.7    For the purpose of Joint Investment Production Activity's profit
        distribution, Participation of LVR will be corrected using coefficient
        equals to 0.93.

14.8    The Accumulative Contributions, Actual Contribution of the Participants
        and Corrected Participations are to be approved by the Management
        Committee.

14.9    The profit from sale of Hydrocarbons of the Joint Production is
        distributed among the Participants depending on their Corrected
        Participations.

14.10   The above-mentioned proportions and distributions method for profits
        distribution will also be used in case of distributing of production
        between the Participants. In case of such distribution each Participant
        can sell its part of the Joint Production at the domestic or
        international markets.

ARTICLE XV

Sale of Joint Production

15.1    Sale of the Joint Production will be carried out by the Operator
        following the instructions of the Management Committee at prices
        established by the operator and purchasers.

15.2    The participants have the right to purchase the Joint Production from
        the Operator provided that such operations must be performed under the
        same terms and conditions as is established for the sale to third
        parties.

ARTICLE XVI

The Order of Conducting the Joint Investment Production Activity

16.1    The Operator, properly authorized by the Participants, is entrusted to
        conduct the Joint Investment Production Activity, to arrange and manage
        the operations, to be representative before third parties. Efficient
        management of the activity is carried out by the Operator.

16.2    The Rights and Obligations of the Operator are defined in a power of
        Attorney for conducting the Joint Investment Production Activity which
        is issued in accordance with Article 66 and 431 of the Civil Code of
        Ukraine and signed by all Participants.

16.3    The Operator concludes the agreements to secure the Joint Investment
        Production Activity, obtains civil rights and undertakes obligations
        under the agreements on its behalf. The agreements concluded by the
        Operator create rights and obligations for other Participants pursuant
        to existing Powers of Attorney.

16.4    The procedure of products sale and payments is defined by this Agreement
        and specific agreements with purchasers of products.

                                       19
<PAGE>   20
16.5    The issues of the Joint Investment Production Activity which require
        mutually agreed decisions are solved if necessary by calling of meetings
        of the Management Committee according to the Management Committee's
        working plan, on chairman's initiative or at any of Participants
        request. Making decisions is also allowed by exchange of letters,
        telegrams, faxes and other written notifications.

        If newly-taken decisions of the Management Committee require changes to
        the provisions of this Agreement, then these changes are documented in
        the form of additional agreements to this Agreement and shall constitute
        an integral part hereof.

        No amendment or decision will be effective unless approved in writing by
        all Participants.

16.6    The Operator shall conduct all operations in accordance with this
        Agreement, the Joint Activity Programs and Agreed Budget.

16.7    Management, officers and controlling bodies of the Participants as
        defined by their foundation or incorporation documents retain control
        over financial and commercial activity of that Participant. The
        Participants shall have the rights to study any documentation concerning
        the Joint Investment Production Activity. If required, independent
        audits can be performed upon written agreement of all Participants.

ARTICLE XVII

The Management Committee

17.1    The Management Committee carries out co-ordination of the Joint
        Investment Production Activity's management by adoption of appropriate
        decision.

        Exclusive competence of the Management Committee includes the following:

-       drafting of changes and amendments to this Agreement;

-       approval of the Joint Activity Programs and Agreed Budgets and making
        control over their performance;

-       approval of contracts with contractors to fulfill well drilling
        operations complex of geophysical surveys, formation fracturing
        operations and/or other expensive works of a value of more than 500,000
        (five hundred thousand) USD;

-       approval of the Joint Investment Production Activity's termination.

17.2    The Participants shall appoint six representatives to participate in the
        Management Committee, including three persons to be appointed by
        Ukrnafta and three persons to be appointed by LVR. The Management
        Committee decisions shall be taken by individual voting with all
        decisions requiring the approval of 100% of the members on the
        Management Committee. The Management Committee shall be competent when
        members attending the meeting or their representatives holding notarized
        proxies represent 100% of the members on the Management Committee. Each
        Committee member shall have one vote.

17.3    Decision of the Management Committee is adopted by means of
        individual voting.

        When the Management Committee can not make a decision on operational
        aspects of the Joint Investment Production Activity, such as choosing of
        a contractor, co-ordination of

                                       20
<PAGE>   21
        operational contract or the contract for purchasing the equipment then
        the matter shall be considered by expert group that is created and works
        according to procedure stipulated in Section 9.4.

17.4    The Management Committee is the highest governing body of the Joint
        Investment Production Activity. The Management Committee shall have full
        autonomy and authority to make decisions and take actions consistent
        with this Agreement and Ukranian law.

17.5    The Participants may attend or appoint representatives having notarized
        proxies to act for them at the Management Committee Meeting.

17.6    The Participants intend for the first Chairman of the Management
        Committee to be nominated by Ukrnafta and the first Deputy Chairman to
        be nominated by LVR, with sole nomination thereafter to be rotated every
        two years between Ukrnafta and LVR.

17.7    A meeting of the Management Committee may be convened by the Chairman or
        Deputy Chairman by his or her sending a certified (return receipt
        requested) letter, fax, telex or telegram to all of the members of the
        Committee. The notification shall contain the date, place and agenda for
        the proposed meeting of the Management Committee. The notification must
        be received by all of the members of the Committee at least 45 days in
        advance of the proposed date of the meeting of the Management Committee.
        In case of emergency, by mutual written agreement of all, members of the
        Committee notification of any meeting of the Management Committee may be
        sent without complying with the foregoing period for advance notice or
        by allowing for shorter notice.

17.8    The right to put questions for consideration of the Management Committee
        shall belong to each Committee member and to the Operator.

17.9    The Management Committee shall be convened for meetings whenever
        necessary, but not less than twice a year. The results of the Joint
        Investment Production Activity for each annual Fiscal Year shall be
        considered by the Management Committee not later than three months after
        the end of the relevant Fiscal Year or other period as may be required
        by Ukranian law.

17.10   Meeting of the Management Committee may take place in Ukraine or in any
        country as may be agreed to by the members of the Committee.

17.11   The Committee members' reasonable expenses and the expenses of holding
        the Management Committee meetings shall be charged and paid at the
        expense of the Joint Investment Production Activity.

17.12   Day-to-day management of the Joint Investment Production Activity is
        carried out by the Operator.

17.13   The Operator prepares the documents required by the Management Committee
        for making the decisions on co-ordination of the Joint Investment
        Production Activity.

17.14   The Management Committee shall appoint a Management Committee
        Co-ordinator and Management Committee Financial Co-ordinator. The
        Management Committee Co-ordinator shall be appointed on the nomination
        of Ukrnafta and the Management Committee Financial Co-ordinator shall be
        appointed on the nomination of LVR.

All agreements, and other financial documents on amount which exceeds 50,000
(fifty thousand) USD must be approved in written form by both the Management
Committee Co-ordinator and the Management Committee Financial Co-ordinator.
Written approval of the Management Committee

                                       21
<PAGE>   22
Co-ordinator and the Management Committee Financial Co-ordinator are required
for all operations with the Separate Settlement Account on amount which exceeds
50,000 (fifty thousand) USD, including hard currency exchange which is on the
Separate Account in Foreign Currency.

ARTICLE XVIII

Rights Assignment and Succession

18.1    The Participants have no right to assign their rights and obligations
        under this Agreement.

18.2    The joining of new Participants is not considered to be the assignment
        of right irrespective of the terms of such joining.

18.3    In case of the Joint Investment Production Activity's termination of any
        Participant due to its liquidation or re-organization, its rights and
        liabilities under this Agreement shall pass to official successor,
        provided that the right of the last to be legally confirmed.

ARTICLE XIX

Joining to the Agreement

19.1    Any legal entity or individual has the right to join this Agreement
        provided that all the Participants shall agree to it in writing.

19.2    Any new Participant of this Agreement which will join this Agreement
        according to the consent of all Participants, may acquire or receive
        from any Participants part of their Participation in Joint Property and
        it is requires appropriate consent.

19.3    Joining to this Agreement of new Participants will entail the signing of
        additional agreement by all the Participants.

ARTICLE XX

Confidentiality of Information

20.1    Any information passed by one of the Participants to another one during
        the validity term of this Agreement containing the data of carried out
        operations, products, prices, negotiations and offers including the
        terms of this Agreement, divulgence of which may inflict losses to any
        Participant is treated as confidential and is not subject to divulgence
        to any third parties excluding the cases foreseen by legislation
        currently in force (both Ukranian and International).

20.2    Any other information offered by any of the Participants or their
        suggestions and ideas should not be treated as secret or confidential
        information excluding those cases when it is specially stipulated in
        additional agreement executed by the Participants.

ARTICLE XXI

Mutual Responsibility of the Participants and Resolution of Disputes

21.1    Each Participant is financially responsible for non-fulfillment or
        improper fulfillment of the terms to this Agreement and Supplements
        hereto and in case of their breach must compensate other Participants
        any direct damage arisen through its fault.

                                       22
<PAGE>   23
21.2    Participants shall not be liable for non-performance or delay in
        performance of any of the obligations if such non-performance or delay
        of performance is caused by Force Majeure event. Force Majeure event
        will mean any event or circumstance, which does not depend on the
        Participant and is beyond the reasonable control of the Participant, who
        announced Force Majeure event, which event prevents or delays such
        Participant's performance hereunder, ability to meet a term hereunder.
        Force Majeure event includes fire, explosions, epidemics, unavoidable
        accidents, acts of war (declared or undeclared) or conditions arising
        out of or attributable thereto, strikes, lockouts and other labour
        disturbances, land disputes, delays in transportation, unavailability
        of, inability to acquire or restrictions on the use of essential
        technology, information, equipment, suppliers or personnel, floods,
        storms, earthquakes and other natural disturbances, blockades,
        embargoes, insurrections, rebellions, riots and other civil
        disturbances, and changes in legislation, essential lowering of state
        price on gas. The Participant, which is under such conditions, must
        inform other Participant about the beginning such circumstances, the
        term and the termination of their acting.

21.3    The Participants agreed to resolve all disagreements through amicable
        negotiations.

21.4    If the Participants can not reach to an agreement by means of
        negotiations within the period of 60 (sixty) days from the date of
        notification by one of the Participants to other about the dispute,
        disagreements will be appealed to the Arbitration Court under the
        Stockholm Chamber of Commerce and Industry for final resolution of the
        dispute. The Participants have agreed that the Arbitration shall be
        consist with the UNCITRAL provisions. The place for the arbitration
        shall be Stockholm, Sweden and the arbitration shall take place in
        Ukranian and English.

21.5    The Arbitrage consists of three (3) arbitrators appointed as follows:
        both complainant and respondent select one arbitrator each; these
        arbitrators shall then select a third arbitrator. If within thirty (30)
        days after notice of the initiation of the arbitration proceedings the
        respondent fails to appoint an arbitrator, such arbitrator shall be
        appointed by the Chairman of the Arbitration Court under the Stockholm
        Chamber of Commerce and Industry. If two arbitrators fail to agree on
        the third arbitrator within (60) days after the date of appointment of
        the second arbitrator, such third arbitrator shall be appointed by the
        Chairman of the Arbitration Court under the Stockholm Chamber of
        Commerce and Industry from a list of three (3) arbitrators proposed by
        the complainant.

ARTICLE XXII

Termination of the Activity Under the Present Agreement or its Cancellation

22.1    This Agreement expires upon termination of its validity term.

22.2    The Participants may terminate this Agreement on the basis of consent of
        at least two Participants.

22.3    When validity term of this Agreement is finished, as well as when this
        Agreement is terminated, if it is necessary, issue on Liquidation of
        wells, pipelines and other technical equipment will be considered.
        Financing of Liquidation is carried out at the expense of monetary
        funds' balance at the Separate Settlement Account and monetary funds of
        the Participants, which will be finance liquidation works in proportion
        to latest actual Joint Investment Production Activity profit's
        distribution. If Liquidation of defined assets is unsuitable or
        impossible because of technical, geophysics or other reasons, that
        assets are transferred to the Liquidation Commission, which has all
        authority in respect of disposal of assets, payments of the debts,
        making settlements with the Participants. If the Liquidation Commission
        would not dispose assets such as wells, pipelines and other technical
        equipment

                                       23
<PAGE>   24
        within six month, then Ukrnafta agrees to take such assets at its own
        balance sheet after payment to Joint Activity amount which equal to ten
        times multiplied profit received after sale of the Joint Production
        during last quarter before issue on termination of the Joint Investment
        Production Activity was raised. This amount will be distributed between
        the Participants in proportion to their Actual Participation.

22.4    On expiration of the term of this Agreement or its cancellation, the
        property, passed by the Participants to each other for use, is returned
        to the owners.

22.5    Any party can withdraw itself from the Participants of this Agreement on
        the basis of consent of at least two Participants.

22.6    In case if one of the Participants has the intention to terminate this
        Agreement, it must notify other Participant about it no less than 3
        (three) months prior such termination. Simultaneously, this Participant
        will propose to other Participant to acquire its part in the Joint
        Property. If such acquisition will take place then Participant which
        sold it part in the Joint Property are defined as terminated its
        participation in this Agreement. If it will not happen then Participant
        are defined as terminated its participation in this Agreement after the
        said period is finished and remaining Participants within three month
        will make with that Participant settlement in respect of profit and the
        Joint Property distribution. In this case, investments in monetary form
        will be returned to the Participant which terminated this Agreement
        taking into account actual wear (depreciation) of the Joint Property at
        the moment of the Agreement's termination.

22.7    In case when after declaration of one of the Participants about
        withdrawal the issue on termination will rise, consideration of such
        issue shall have priority.

ARTICLE XXIII

Miscellaneous

23.1    On mutual agreement of the Participants this Agreement may be changed
        and added including the involvement of other Participants to the Joint
        Investment Production Activity.

23.2    The Participants guarantee that:

-       they have full required authority for signing this Agreement;

-       they will not undertake actions that may damage the goals and targets
        of this Agreement.

This Agreement is signed in 6 copies in Ukranian and in 6 copies in English,
that is 2 copies for each Participant. All of them is considered to be original
and have equal legal force.

On behalf of Ukrnafta:

-------------------------------------------------------------

-------------------------------------------------------------

-------------------------------------------------------------

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On behalf of LVR:
-------------------------------------------------------------

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                                       24
<PAGE>   25
-------------------------------------------------------------

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On behalf of IPEC:
-------------------------------------------------------------

-------------------------------------------------------------

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                                       25
<PAGE>   26
Supplemental Agreement

This Supplemental Agreement No 1 to the Agreement on Joint Investment Production
Activity for development and further exploration of the Bugruvativsk Field
without the creation of a legal entity of 20 March 1998 (hereinafter the
"Supplemental Agreement") is executed on 11 December 1998 in Kyiv, Ukraine
between:

the Joint Stock Company Ukrnafta (hereinafter referred to as "Ukrnafta"),
represented by its Chairman of the Board Mr D Eger, acting based on the Charter,
and Mr G Brazyna, acting based on the Power of Attorney No 97 issued on 18 March
1998.

the Canadian Company "Lateral Vector Recourses Inc" (hereinafter referred to as
"LVR"), represented by its President - Mr Wayne Goranson, acting based on its
Charter, and

the Closed Joint Stock Company "IPEC" (hereinafter referred to as "IPEC"),
represented by the Chairman of its Board Mr Wayne Goranson, acting on the basis
of the Charter and Mr Rocky Rombs, acting on the basis of the power of attorney

each of which is hereinafter sometimes referred to individually as a Party
and collectively as the Parties.

Whereas, the Parties executed the Agreement on Joint Investment Production
Activity for development and further exploration of the Bugruvativsk Field
without the creation of a legal entity No 1 of 20 March 1998 (the "Agreement");
and

Whereas the provisions of the Agreement provide for the Agreement to become
effective upon the registration within the Ministry of Foreign Economic Affairs
and Trade, and

Whereas the Agreement was registered on 23 November 1998, registration No
30291-1-3-61,

Now, therefore, the Parties hereby agreed to amend Sections 2.3, 2.4 and 2.5 of
the agreement as follows:

1.      In Section 2.3 of the Agreement, replace the date "1998" with "the
        period beginning on the Effective Date till 31 December 2000", so that
        Section 2.3 shall be read as follows:

        "During the period beginning on the Effective Date until 31 December
        2000 Ukrnafta will contribute to the Joint Property assets and
        intellectual property in form of "know-how" with the agreed value for
        the total amount of [ ] thousand hryvnias, which constitutes at the
        official rate of National Bank of Ukraine as of property estimation date
        (figures are conventional) 1040 thousand US dollars".

2.      In Section 2.4 of the Agreement, replace the words "In 1998" with
        "During the period beginning on the Effective Date until 31 December
        2000", so that Section 2.4 shall be read as follows:

        "During the period beginning on the Effective Date until 31 December
        2000 LVR will contribute to the Joint Property the investments in the
        monetary form and assets as its Initial Contribution for the total
        amount of 760 thousand US dollars".

3.      In Section 2.5 of the Agreement, replace the words "In 1998" with
        "During the period beginning on the Effective Date until 31 December
        2000", so that Section 2.5 shall be read as follows:

                                       1
<PAGE>   27
        "During the period beginning on the Effective Date until 31 December
        2000 IPEC will contribute monetary funds and its labour participation
        for the total amount of [ ] thousand hryvnias, which constitutes at the
        official rate of National Bank of Ukraine as of property estimation date
        (figures are conventional) 200 thousand US dollars".

4.      All provisions of the Agreement shall apply to this Supplemental
        Agreement except as may be expressly provided otherwise. In case of any
        conflict between any provisions of this Supplemental Agreement with the
        provisions of the Agreement, the provisions of this Supplemental
        Agreement shall prevail.

5.      This Supplemental Agreement shall be considered an integral part of the
        Agreement and shall be governed by and interpreted and performed in
        accordance with the provisions of the Agreement. In particular the
        governing law, force majeure and other provisions of the Agreement shall
        apply to this Supplemental Agreement, and any disputes hereunder shall
        be resolved by arbitration as is provided for in the Agreement.

IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement in the
spaces provided below.

Joint Stock Company Ukrnafta
By

------------------------------------------------------
Name: D Egar
Title:

------------------------------------------------------
Name: G Brazyna
Title:

LVR
By

------------------------------------------------------
Name:  Wayne Goranson
Title: President

IPEC
By

------------------------------------------------------
Name:  Wayne Goranson
Title: Director

------------------------------------------------------
Name:  Rocky Rombs
Title: Deputy Director

                                       2
<PAGE>   28
This Supplemental Agreement No 2 (hereinafter the "Supplemental Agreement") to
the Agreement No 1 on Joint Investment Production Activity for development and
further exploration of the Bugruvativsk Field without the creation of a legal
entity of 20 March 1998 is executed on 14 December 1999 in Kyiv, Ukraine,
between:

the Joint Stock Company Ukrnafta (hereinafter referred to as "Ukrnafta"),
represented by the Chairman of its Board Mr D Eger, acting based on the Charter,

the Canadian Company "Lateral Vector Recourses Inc" (hereinafter referred to as
"LVR"), represented by its President - Mr Wayne Goranson, acting based on its
Charter, and

the Closed Joint Stock Company "IPEC" (hereinafter referred to as "IPEC"),
represented by the Chairman of its Board Mr Wayne Goranson, acting on the basis
of its Charter

each of which is hereinafter sometimes referred to individually as a Party
and collectively as the Parties.

Whereas, the Parties executed the Agreement on Joint Investment Production
Activity for development and further exploration of the Bugruvativsk Field
without the creation of a legal entity No 1 of 20 March 1998 (the "Agreement");

Whereas IPEC has declared on its inability to fully make its Contribution
described in the Agreement and therefore has agreed to decrease its
Participation to 0.1 (one tenth) per cent and the other Parties agreed to accept
that subject to the terms hereof; and

Whereas, LVR agreed to cover the deficit created by the IPEC's inability to
invest and provided that LVR increases its Participation to 47.9 (forty seven
and nine tenth) per cent;

Now, therefore, the Parties hereby agreed to amend Sections 2.4, 2.5 and 2.7 of
the Agreement as follows:

1.      In Section 2.4 of the Agreement, replace the figures "760" with
        "958", so that Section 2.4 shall be read as follows:

        "During the period beginning on the Effective Date until 31 December
        2000 LVR will contribute to the Joint Property the investments in the
        monetary form and assets as its Initial Contribution for the total
        amount of 958 thousand US dollars".

2.      In Section 2.5 of the Agreement, replace the words "200 thousand US
        dollars" with "2 thousand US dollars", so that Section 2.5 shall be read
        as follows:

        "During the period beginning on the Effective Date until 31 December
        2000 IPEC will contribute monetary funds and its labour participation
        for the total amount of [ ] thousand hryvnias, which constitutes at the
        official rate of National Bank of Ukraine as of property estimation date
        (figures are conventional) 2 thousand US dollars".

3.      The Section 2.7 of the Agreement shall be read as follows:

        "The Participants hereby agree to make their initial Contributions to
        the Joint Investment Production Activity and hold their Participations
        in the Joint Property in the following proportions:

<TABLE>
<S>               <C>
        Ukrnafta  52%
        LVR       47.9%
        IPEC      0.1%
</TABLE>

                                       3
<PAGE>   29
4.      All provisions of the Agreement shall apply to this Supplemental
        Agreement except as may be expressly provided otherwise. In case of any
        conflict between any provisions of this Supplemental Agreement with the
        provisions of the Agreement, the provisions of this Supplemental
        Agreement shall prevail.

5.      This Supplemental Agreement shall be considered an integral part of the
        Agreement and shall be governed by and interpreted and performed in
        accordance with the provisions of the Agreement. In particular the
        governing law, force majeure and other provisions of the Agreement shall
        apply to this Supplemental Agreement, and any disputes hereunder shall
        be resolved by arbitration as is provided for in the Agreement.

IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement in the
spaces provided below.

Joint Stock Company Ukrnafta
By

------------------------------------------------------
Name:  D Eger D.O.
Title: Chairman of the Board

LVR
By

------------------------------------------------------
Name:  Wayne Goranson
Title: President

IPEC
By

------------------------------------------------------
Name:  Wayne Goranson
Title: Chairman of the Board

                                       4

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