EXHIBIT 10.22
MANUFACTURING
AGREEMENT
This Manufacturing Agreement is entered into as of March 27, 2003,
between Three Five Systems Inc., a Delaware corporation, located at 0000 Xxxxx
Xxxxxx Xxxxx, Xxxxx, XX 00000 ("hereinafter Company") and Microtune, Inc., a
Delaware Corporation located at corporation located at 0000 Xxxxx Xxxxxx, Xxxxx,
Xxxxx 00000 ("Buyer"). (hereinafter "Buyer").
WHEREAS, Company, is engaged in the business of manufacturing
electronic assemblies,
WHEREAS, Buyer, Inc. is engaged in the business of designing and
selling a variety of related and unrelated electronic goods and commodities,
WHEREAS, Buyer desires to retain the services of Company, and Company,
desires to provide its services to Buyer upon the terms and conditions
hereinafter set forth,
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
and covenants contained herein and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed as follows.
ARTICLE 1
DEFINITIONS AND AGREEMENT
1.1 Defined Terms. The following terms shall, when written with an
initial capital letter, have the following meanings for purposes of this
Manufacturing Agreement:
1.1.1 "Agreement" shall mean this Manufacturing Agreement.
1.1.2 "Asset Purchase Agreement" shall mean the agreement
executed by and among Three-Five Systems, Inc., NSF-Technologies
(Phils.), Inc. and Microtune (Texas), LP. The Asset Purchase Agreement
is attached hereto as Exhibit A and made a part of this Agreement by
this reference.
1.1.3 "Buyer" shall mean MICROTUNE, Inc., a Delaware
corporation, and all of its assigns and successors, affiliates and
subsidiaries.
1.1.4 "Company" shall mean Three Five Systems INC., a
Delaware corporation, and all of its assigns and successors, affiliates
and subsidiaries. .
1.1.5 "Inventory" shall have the same meaning assigned to
such term in the Asset Purchase Agreement.
1.1.6 "Manufacturing Price" shall mean the prices set forth
on Exhibit B attached hereto, which may be changed from time to time in
accordance with this Agreement, and which prices are exclusive of
freight, insurance and like charges, and net of any taxes, discounts,
returns, refunds and collection costs.
1
1.1.7 "Term Promissory Note" shall mean the promissory note
dated March 26, 2003, executed by Three-Five Systems Pacific, Inc.
(with Company as a guarantor) and delivered to Buyer. The Term
Promissory Note is attached hereto as Exhibit C and made a part of this
Agreement by this reference.
1.1.8 "Products" shall mean RF electronic modules and
printed circuit board assemblies. "Products" shall not include any
silicon products which are not contained in a module.
1.1.9 "Product Build Schedule" shall mean the manufacturing
forecasts submitted to the Company from time to time in accordance with
this Agreement.
1.1.10 "Specifications" shall mean the Buyer's
specifications and drawings attached hereto as Exhibit D which may be
added to or revised from time to time in accordance with this Agreement
ARTICLE 2
TERM OF AGREEMENT
2.1 Term. Except as otherwise provided in this Agreement,
the initial term of this Agreement shall commence on March 27, 2003 and shall
end on March 27, 2008. At the end of the initial five (5) year term, this
Agreement shall automatically be renewed for successive one (1) year terms until
terminated by the Company or the Buyer two hundred seventy (270) days prior to
the end of the initial term or any renewal term. The 270 day termination
provision can be invoked only after the twelve months from the date of
execution. In addition this notice period may be reduced if the Buyer notifies
the Company of any significant quality or shipment issues on Products provided
to the Buyer by the Company and such issues are not reasonably cured within 60
days from Company receiving such written notice from the Buyer. During such
initial or renewal term of this Agreement, the volume of Products to be
manufactured shall be established by purchase orders submitted and accepted in
accordance with Article 4 of this Agreement. After any proper termination of
this Agreement, all of the Company's and the Buyer's obligation hereunder shall
cease and terminate; provided, however, that in the event such termination
occurs prior to the Company's shipment of all Products for which the Company has
accepted Buyer's purchase order, the Buyer shall pay the Company for (i) all
custom components the Company has in stock for Product as of the date of notice
under this paragraph which are not used before this Agreement actually
terminates, (ii) a negotiated fee of up to 10% of all custom component parts the
Company has in stock for the Product that cannot be returned to the original
vendor ; and (iii) all unpaid tooling charges for the Product.
2.2 Termination for Breach. If either party breaches this
Agreement, the non-breaching party shall give written notice of breach to the
breaching party. If the breaching party fails to cure such breach default or
fails to submit a written plan acceptable to the non-breaching within thirty
(30) days of receipt of the notice of breach, the non-breaching party may
terminate this Agreement by giving the breaching party thirty (30) days written
notice of termination. If the Company fails to cure a breach under this
Agreement which results in Buyer failing to supply its customers in accordance
with the Buyers purchase orders submitted under Section 4.1, Company
2
shall reimburse Buyer for all reasonable costs in securing inventory to meet its
customers needs for a period of six months until Buyer can secure another
manufacturing source. In addition, Company shall pay all damages Buyer incurs as
a result of its contractual obligations to customers to timely deliver including
any "line down charges". If Buyer terminates this Agreement under this paragraph
due to a material breach by Company, Buyer is relieved of any obligations under
this Agreement to purchase inventory or components or to honor existing purchase
orders.
2.3 THE FOREGOING REMEDIES ARE EXCLUSIVE AND ARE MADE
EXPRESSLY IN LIEU OF ALL OTHER REMEMDIES EXPRESS OR IMPLIED, EITHER IN FACT OR
BY OPERATION OF LAW, STATUTORY OR OTHERWISE. BOTH PARTIES SHALL NOT BE LIABLE
FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES NOT PROVIDED FOR BY CONTRACT.
2.4 Termination for Insolvency, etc. This Agreement shall
immediately terminate should either party: (i) become insolvent; (ii) enter into
or file a petition, arrangement or proceeding seeking an order for relief under
the bankruptcy laws; (iii) enter into a receivership of any of its assets or;
(iii) enter into a dissolution or liquidation of its assets or an assignment of
the benefit of creditors.
ARTICLE 3
MANUFACTURING AND TESTING
3.1 Manufacturing. The Company will exclusively manufacture the
Products for the Buyer, and the Buyer will place all purchase orders for the
Products exclusively with the Company, in accordance with the terms of this
Agreement, the Specification, and the Product Build Schedule. The terms of this
Agreement shall prevail over the terms of the Specification, the Product Build
Schedule, and any purchase order. The Company guarantees 95% on time delivery
for products on accepted purchase orders under Section 4.1 and will pay all
reasonable costs or damages the Buyer incurs as a result of any noncompliance
with this on time delivery warranty.
3.2 Quarterly Meetings. The Company and Buyer will hold quarterly
meeting to review performance, critical procedures, key programs, and
manufacturing indexes.
3.3 Specification Changes. The Buyer shall submit the
Specifications and any changes thereto to the Company. Upon receipt of written
notice of a proposed change to the Specifications, the Company will promptly
(but in no event less than seven (7) business days and no more than ten 10
business days) review anticipated cost and schedule impacts of the proposed
Specification changes. All cost impacts, material availability issues and
Manufacturing Price changes resulting from any Specification change must be
approved in writing by the Company prior to implementation of the proposed
Specification changes. In the event Company consents to any Specification
changes, the Buyer shall pay the Company for (i) all component parts the Company
has ordered, are in transit or are in stock for the original Product design,
Specifications, Product Build Schedule or Product Volume that cannot be returned
to the original vendor or used in another Company product; and (ii) all vendor
cancellation or restock charges for component parts the Company has ordered or
are in transit for the original Product design,
3
Specifications or Product Build Schedule. The Company shall make reasonable
efforts to utilize all materials in alternative products and/or return the
materials to the original vendor. Buyer is only responsible for raw materials
which have been purchased in accordance with vendor required lead times and
accepted purchase orders. Any raw material purchases outside of this criteria is
the sole responsibility of the Company.
3.4 Support and Cooperation. The Buyer shall supply the Company
all necessary and technical support for the Products. The Buyer agrees (i) to
respond promptly to any reasonable request by the Company for information, (ii)
to forward promptly to the Company any inquiry or other communication concerning
the Products (iii) to cooperate fully with the Company in regard to all
activities related to the Products. In return, the Company agrees to accept and
comply with all Microtune existing processes, production procedures, and provide
required documentation such as existing part-numbering conventions, DCC
procedures, BOM structure, process-FMEA, Capability studies, production
releases, and RMA procedures. The Company will retain all Buyer data for a
minimum of ten (10) years. In documentation which is currently retained in SAP
by Buyer will be kept in SAP or a functioning equivalent which can be accessed
easily by Buyer. Buyer and Buyer's customers have the right to perform factory
audits upon reasonable notice to the Company.
3.5 Manufacturing Certification. The Company will manufacture the
Products under ISO-9002 Certification, QS9000, TS16949, and ISO-14001, or such
other manufacturing certification required by the Buyer. The Company will obtain
all certifications on or before July 31, 2003 and will keep all certifications
current after that date. Failure to obtain a certification or keep certification
shall be considered a material breach of this Agreement. The Buyer will provide
specific certification requirements and schedules to the Company periodically as
required. The Company will full support Buyer's need for SQA functions for
customers (i.e. supplier audits, supplier ratings, supplier development).
3.6 Manufacturing Standards. The Company will manufacture the
Products to Buyer's design and layout standards. The Company warrants it will
develop critical manufacturing processes such as lead-free-solder in both
through hole and surface mounts applications on or before June 30, 2003 and
converting products to re-flow process, in a timeframe approved by the Buyer.
The Company will adopt Buyer's existing PTR (production test run) procedures
including cost and cycle time commitments which is attached as Exhibit E. The
Company notes that Buyer does not use IPC standards in the design (layout) of
its Products.
3.7 ERP Systems. The Company will work with Buyer to develop and
maintain an acceptable communication path for the real-time access of PTR and
production information. The Company agrees that its ERP system must have the
ability to interface with MT's current ERP systems to provide product status on
a real-time basis. The Company agrees that Buyer must be able to interface with
the Company's document control system and upload and download documents. The
Company will make best efforts to meet the requirements of the Buyer for WIP
tracking, shop floor control, and required interfaces with Buyer ERP systems.
3.8 Testing. The Company will perform Incircuit Tests, final
tests, and quality assurance tests on the Products. The Company agrees to keep
all Buyer IP related to testing confidential. The Company agrees that Buyer
requires its employees have access to test
4
equipment for real-time monitoring of test results and will give Buyer full
access to the test equipment and results. Company agrees to perform all testing
of the Products according to documented Test Instructions, to be made available
to the Company by Buyer.
3.9 Consigned Test Equipment. The Company will maintain all
equipment consigned by the Buyer in good working condition and will keep all
calibrations of equipment current and accurate in accordance with Buyer's
requirements. All calibration and maintenance records will be made available to
Buyer upon request.
3.10 Inventory. In the event that the Company determines in its
reasonable, good faith discretion that any portion of the Inventory is defective
or otherwise unsuitable for use pursuant to the Asset Purchase Agreement, then
the balance or amount payable (including principal and interest) remaining on
the Term Promissory Note shall be reduced on a dollar for dollar basis by the
value, as determined by mutual agreement of the Parties, of such defective or
otherwise unusable Inventory.
ARTICLE 4
MANUFACTURING ORDERS
4.1 Purchase Orders. The Buyer shall submit to the Company thirty
(30) day rolling purchase orders for the Products in accordance with the
Specifications and the Product Build Schedule. Such purchase orders shall be in
writing or by e-mail, facsimile, and shall at a minimum identify the quantity
of, and requested shipping dates and delivery places for, the Products. Each
thirty (30) day rolling purchase order shall be accompanied by a revised Product
Build Schedule setting forth the Buyer's revised forecast of the quantity of
Products to be manufactured for the Buyer during the one hundred eighty (180)
period following the thirty (30) day period set forth in the purchase order. The
Buyer shall ensure that its purchase orders and Product Build Schedules are
timely received by the Company.
4.2 Acceptance of Purchase Orders. All purchase orders from Buyer
are subject to acceptance by the Company at its manufacturing facility in
Calamba, City, the Philippines. Each purchase, when accepted by the Company,
shall give rise to a contract under the terms set forth in this Agreement and to
the exclusion of any additional terms set forth in the purchase order. The
Company shall not be required to maintain any consignment or other inventory of
the Products. The Company will notify the Buyer within 48 hours of receiving a
purchase order if such purchase order is accepted or rejected. Failure to reject
a purchase order shall be deemed acceptance.
4.3 Shipping Terms. Buyer will designate where Company is to ship
products with terms to be FOB TFS Calumba, the Philippines or FOB Buyer facility
for the transition production period.
4.4 Modification of Purchase Orders. No accepted purchase order
shall be changed or modified unless mutually agreed upon in writing by both
parties.
4.5 Manufacturing Price. The prices to be paid by Buyer for the
Products manufactured pursuant to this Agreement shall be the Manufacturing
Price in effect at the time
5
of acceptance of the relevant purchase order submitted by Buyer except that
until September 1, 2003, all prices are to be as set forth in Exhibit B Target
Prices. In addition, the Company guarantees a 5% price reduction from Target
Prices as set forth in Exhibit B six months from the date of this Agreement and
an additional 5% price reduction from Target Prices as set forth in Exhibit A
three months from the date of the initial price reduction. Any identified
material savings will be shared 50% by each the Company and the Buyer after the
above reductions have occurred.
4.6. Manufacturing Price Changes. The Company may (based upon
documented and verified material price increases or decreases) change the
Manufacturing Price by the amount of the direct material increase or decrease
providing the Buyer with at least forty-five (45) days prior written notice but
in no event prior to March 1, 2004. Notwithstanding the above, on or before each
anniversary date of the Closing, the Buyer and the Company will agree (in
writing) to pricing for the next 12 months. In the event that the parties do not
agree to such pricing, then Buyer will have the right to solicit a competitive
quote (taking into consideration volume and other requirements) for all Products
listed under Exhibit E. If Company does not reasonably match such competitive
quote in the aggregate, then Buyer shall have the right to place all or any part
of such Product business with such other supplier.
4.7 Payment Terms. All payments by the Buyer for the Products
shall be due net thirty (30) days from the date the of the Company's invoice to
the Buyer. In the event of any dispute arising over any part of an invoice or
the total amount due under an invoice, all undisputed amounts shall be promptly
paid by the Buyer.
4.8 Overdue Payments. If and for so long as any payment from the
Buyer to the Company under this Agreement shall be overdue, unless overdue
payment is for product or items in dispute per section 4.7 and payment
arrangements have not been made, the Company shall have the right, in its sole
discretion and until the Buyer's account is current, to require payment in
advance for additional shipments of the Products or by C.O.D. or by irrevocable,
revolving, transferable and divisible letter of credit opened at the Buyer's
expense, issued or confirmed by a bank specified by, or acceptable to, the
Company, or by such other method of secured payment as the Company shall
prescribe, instead of by open account as provided above.
4.9 Acceptance of Products. In the event of any shortage, damage
or discrepancy in or to a shipment of Products, the Buyer shall promptly report
the same to the Company and furnish such written evidence or other documentation
as the Company may deem appropriate. The Company shall not be liable for any
such shortage, damage or discrepancy unless the Company has received notice and
substantiating evidence thereof from the Buyer within thirty (30) days of
arrival of the products at the Buyer's designated shipping address. If the
substantiating evidence delivered by Buyer demonstrates to the Company's
satisfaction that the Company is responsible for such shortage, damage or
discrepancy, the Company shall deliver, in its sole discretion, additional,
replacement or substitute Products to the Buyer; provided, however, the Company
may be liable for any additional costs, expenses or damages incurred by the
Buyer directly or indirectly as a result of such shortage, damage or discrepancy
in or to a shipment.
6
4.10 End of Life. If a component on a board is made obsolete or
production of a board is discontinued, the buyer is responsible for all obsolete
materials that cannot be returned for full credit. The Company will maintain the
capability to manufacture and ship products for twelve (12) months after End of
Life notification.
ARTICLE 5
BUYER'S WARRANTY
AND REMEDIES
5.1 Buyer's Product Warranty. The Company warrants to the Buyer
for a period of one (1) year after it ships the Products to the Buyer for
general commercial products and for three (3) years after it ships the Products
to the Buyer for Automative products that the Products shall be free from
defects in material and workmanship. The Company will adopt Microtune's RMA
procedure which is attached as Exhibit F. The Company will credit Microtune's
account for all such returned Product and the freight incurred in returning the
Product to the Company.
5.2 Minimum Quality Standards. The Company and the Buyer have
agreed to adopt various procedures and processes of the Buyer. Failure to comply
with Buyer's procedures and processes shall be deemed a warranty failure and the
Company shall reimburse Buyer for all reasonable costs connected with obtaining
products which meet its minimum quality standards.
5.3 Minimum Quality Levels. The Company warrants to the Buyer that
it will guarantee a quality level of no greater than 500PPM defect rate for
commercial products and no greater than 50PPM defect rate for automotive per MT
standards.
5.4 On Time Delivery. The Company guarantees 95% on time delivery
for products and will pay all reasonable costs or damages the Buyer incurs as a
result of any noncompliance with this on time delivery warranty.
5.5 Excluded Claims. The Company shall have no obligation under
the Buyer's Product Warranty in the event that the replacement or substitution
of the Products or parts shall have been caused by the fault or negligence of
the Buyer or shall have been caused by the modification of the Products in any
manner without prior written consent of the Company.
5.6 Buyers Limited Warranty. The Buyer's product warranty set
forth in this Article 5 is intended solely for the benefit of the Buyer or their
designee. The Buyer's product warranty set forth above is in lieu of all other
warranties, express or implied, which are hereby disclaimed and excluded by the
Company, including, without limitation, any warranty of merchantability or
fitness for a particular purpose or use and all obligations or liabilities on
the part of the Company for damages arising out of or in connection with the
use, repair or performance of the products.
5.7 Force Majeure. Neither party shall be responsible for delays
or failures in performance resulting from acts beyond the control of such party.
Such acts shall include but not be limited to acts of god, riots, acts of war,
governmental regulations superimposed after the facts, communication line
failures, power failures, fire or other disasters.
7
5.8 Delays and Approved Vendor List. Company shall inform Buyer
immediately of any production delays caused by Parts Manufacturers missing their
promised ship dates to Company and Company agrees to only approved components as
specifically listed in the Product BOM (vendor and exact type) and acknowledges
that it is not sufficient to only purchase products from Buyer's approved vendor
list. All part changes must be approved in writing by the Buyer. The Company
will provide the Buyer all required data for such items as PPAPs, Qualpacks,
SoC, hazardous material reporting, etc. The Company agrees that all purchasing
contracts must support the Hazardous Material limitations under EACEM EU2000
and/or CS9003D per Certificate of Conformance as well as any future limitations
required by Buyer or its customers.
5.9 Consequential Damages. In no event shall the Company's
liability of any kind to the Buyer include any indirect, special, punitive,
incidental or consequential losses or damages, even if the Company shall have
been advised of the possibility of such potential losses or damages except as
set forth in this Agreement.
ARTICLE 6
INTELLECTUAL PROPERTY
6.1 Use of Intellectual Property. The Buyer hereby grants to the
Company a non-exclusive non-transferable, and royalty-free right and license to
use all Buyer's copyrights, patents, patent applications, trademarks and
tradenames relating to the Products in connection with the Company's performance
of this Agreement. Company shall not use Buyer's copyrights, patents, patent
applications, trademarks, and trade names, product designs or specifications, or
confidential or proprietary information in any manner for its benefit or
purposes. The Nondisclosure Agreement, dated November 27, 2002, between the
Company and the Buyer is incorporated in herein by this reference. The Company
understands and agrees that its obligations under the Nondisclosure Agreement
continue until one year after this Agreement terminates.
6.2 Indemnification. The Buyer shall, at its own expense,
indemnify and hold the Company harmless from any claim against the Company which
is based on an allegation that any Product manufactured by the Company for Buyer
hereunder constitutes an infringement of any copyright, patent or trademark and
shall indemnify the Company against any cost, damages, expenses, or losses
incurred by the Company as a result of such infringement claim unless such claim
arises from the manufacturing process used by the Company outside of the scope
of Buyer's requirements. Without limiting the generality of the foregoing, the
Buyer shall, at its own expense, defend any lawsuit instituted against the
Company which is based on an allegation that any Product manufactured by the
Company for Buyer hereunder constitutes an infringement of any copyright, patent
or trademark and shall indemnify the Company against any cost, damages,
expenses, or losses incurred by the Company as a result of any such lawsuit,
including, without limitation, any damage award and or costs against the Company
if such award is based in whole or in part on infringement by any Product unless
such infringement claim arises from the manufacturing process used by the
Company outside the scope of Buyer's requirements.
8
ARTICLE 7
DISPUTE RESOLUTION
7.1 Dispute Resolution. Except as otherwise provided in this
Agreement, in the event of a dispute hereunder, either party may initiate
negotiation proceedings by written notice of to the other party setting forth
the details of such dispute. If such negotiations are initiated, the parties
agree to meet in good faith within fifteen (15) of such written notice to
jointly define the scope and method to remedy the dispute. If this meeting is
not productive, then the parties shall promptly submit such dispute to mediation
with and independent mediator acceptable to the Company and the Buyer within
twenty (20) days after the good faith meeting attempt failed. In the event the
parties are unable to agree upon a mediator or the mediation does not resolve
such dispute, then the parties may exercise all their respective legal and
equitably rights in a court of competent jurisdiction. In the event of a breach
of this Agreement which endangers Buyer's ability to supply its customers, the
Dispute Resolution procedures shall not apply.
ARTICLE 8
GENERAL PROVISIONS
8.1 Non-Waiver. The failure of any party to insist upon the strict
performance of any term or condition in this Agreement shall not be considered a
waiver or relinquishment of future compliance therewith.
8.2 Independent Contractors. The relationship of the Company and
the Buyer shall be that of independent contractors and nothing contained in this
Agreement shall be construed to (a) give any of the parties the power to direct
and control the day-to-day activities of any other party, (b) constitute the
parties as partners, joint venturers, co-owners or otherwise as participants in
a joint or common undertaking, or (c) make any of the Buyer the agent or
employee of the Company or grant to the Buyer any power or authority to act for,
bind or otherwise create or assume any obligation on behalf of the Company for
any purpose whatsoever.
8.3 Compliance with Laws. The parties shall comply with all
applicable laws affecting this Agreement and their performance of this
Agreement.
8.4 Governing Law, Venue and Jurisdiction. This Agreement shall be
construed in accordance with and governed by the laws of the State of Texas,
U.S.A.
8.5 Attorneys' Fees. In the event of a dispute arising hereunder,
the prevailing party shall be entitled to all costs and reasonable attorneys'
fees incurred in connection with such dispute.
8.6 Entire Agreement; Modification. This Agreement contains the
entire agreement between the parties relating to the subject matter hereof. No
modification of this Agreement shall be valid unless it is made in writing and
signed by the parties hereto.
8.7 Duplicate Originals. This Agreement may be executed in two (2)
duplicate originals.
9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
COMPANY: BUYER:
THREE FIVE SYSTEMS INC., MICROTUNE INC.,
By: /s/Xxxxxxx X. Xxxxxxxx By:/s/Xxxxxxx X. Xxxxxx
-------------------------------------- -------------------------------
Xxxxxxx X. Xxxxxxxx, Executive Vice Xxxxxxx X. Xxxxxx, CEO and Chairman
President and Chief Financial Officer
10
