Manufacturing Agreement

EXHIBIT 10(u)
MANUFACTURING AGREEMENT


THIS MANUFACTURING AGREEMENT (the "Agreement") is entered into and effective as of the 30 day of September, 1997, by and between AlliedSignal Inc., a Delaware corporation, by and through its Communications Systems business unit having a principal place of business at 1300 East Joppa Road, Baltimore, Maryland 21286-5999 ("AlliedSignal") and Mykotronx, Inc., a California corporation, having a principal place of business at 357 Van Ness Way, Suite 200, Torrance, California 90501 ("Mykotronx"). AlliedSignal and Mykotronx may be individually referred to as a "Party" or collectively referred to as the "Parties".


WHEREAS, the Parties have entered into in addition to this Agreement: (a) an Asset Purchase Agreement (the "Purchase Agreement"), dated as of September 30, 1997, which provides for the sale by AlliedSignal to Mykotronx of certain assets including assets used in the manufacture and sale of the "Products", as defined below, and certain ancillary components and parts used in connection with the Products ("Ancillaries"); and (b) a Development Agreement on such date ("Development Agreement") to develop a later generation product for future sales (all three Agreements hereinafter referred to collectively as the "Collective Agreements"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Purchase Agreement.


WHEREAS, the Parties have determined that it is mutually desirable for AlliedSignal to continue to manufacture the Products for and in behalf of Mykotronx.


WHEREAS, the Parties wish to enter into this Manufacturing Agreement which shall set forth the terms and conditions upon which AlliedSignal shall continue to manufacture Products for Mykotronx.


NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Parties agree as follows:


1. TERM OF AGREEMENT; TERMINATION


(a) This Agreement shall expire on December 31, 1999, subject to earlier termination pursuant to the provisions of this Agreement.


(b) Mykotronx may, at its option, terminate this Agreement prior to December 31, 1999, by giving written notice to AlliedSignal of its desire to terminate this Agreement. Such notice shall include the effective date of the termination which date shall be not less than 180 days after the date of such notice. Such notice shall be given, if at all, at any time after June 30, 1998, but not later than June 30, 1999.


(c) Any provisions hereof that by their nature would be expected to survive the termination of this Agreement shall survive and not be affected by the termination or expiration of this Agreement, including, without limitation, Sections 13, 18, 19, 23 and 24.


2. MANUFACTURING


A. AlliedSignal shall manufacture and/or purchase the products for Mykotronx listed in EXHIBIT A annexed to this Agreement and made a part hereof, to the specifications and/or part number configurations identified opposite each product (hereinafter referred to as the "Product " or "Products"), including the Ancillaries used in connection with the Products set forth in EXHIBIT A.


B. The Product is a conceptual configuration and the subject of the Development Agreement. Upon completion of development of the Product, EXHIBIT A hereto shall be amended to add the Product to this Agreement as a Product.


3. LICENSE TO MANUFACTURE


For the term of this Agreement, Mykotronx does hereby grant to AlliedSignal a non-exclusive, royalty-free, irrevocable right and license: (i) to use all Intellectual Property transferred to Mykotronx by AlliedSignal pursuant to the Purchase Agreement and (ii) to make Products, or have the Products made, including purchasing the Ancillaries used in connection with the Products.


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4. PROHIBITION ON THIRD PARTY SALES


AlliedSignal agrees to manufacture the Products and/or Ancillaries used in connection with the Products exclusively for Mykotronx and further agrees not to sell any of the Products and/or Ancillaries used in connection with the Products to any third party unless directed to do so in writing by Mykotronx.


5. FORECASTS


Commencing not later than November 1, 1997, Mykotronx shall submit in writing to AlliedSignal a forecast of Products and Ancillaries that Mykotronx expects will be required for sale within the next six (6) months. The forecast shall include the total quantity and type of Products and Ancillaries, identified by part number, and such forecast shall be revised monthly. Forecasts are for general planning purposes only and, accordingly, Mykotronx shall not be responsible for forecasts that later turn out to be inaccurate.


6. PURCHASE ORDERS


A. Notwithstanding the provisions set forth in the paragraph entitled FORECASTS, Mykotronx shall issue purchase orders ("Purchase Orders") for all Products ordered which shall include the unit price, quantity, cumulative price, anticipated delivery date, place of delivery and method of transportation and carrier. Any terms and conditions contained in a Purchase Order that are inconsistent with the terms and conditions set forth in this Agreement shall have no force and effect unless set forth in writing executed by both Parties. AlliedSignal agrees to accept mandatory flowdown clauses similar to those accepted by Mykotronx in its prime contracts and to incorporate the terms and conditions thereof in the Purchase Orders. In addition, the Parties agree to negotiate in good faith to incorporate termination provisions similar to those accepted by Mykotronx in its prime contract(s) with its customers for the Products. Other additional terms and conditions shall have no force and effect.


B. Deliveries shall be made pursuant to reasonable manufacturing schedules based on no less than a sixty (60) day lead time.


C. Mykotronx agrees to place Purchase Orders for a minimum quantity of ___ Units for delivery per month and shall not exceed a maximum quantity of ___ Units for delivery per month (except as contemplated otherwise in this Section 6.C). Any requirements for a quantity of less than ___ Units (but not less than ___ Units) or more than ___ Units (but not more than ___ Units) shall be priced as provided on Part III of Exhibit B, and the delivery schedule shall be adjusted if impacted by an order outside the _______ minimum-maximum quantity range. "Units" shall mean, collectively, the Product embeddable _____ COMSEC module, the Product high speed embeddable ____ COMSEC module, the ____, and the Product (which is the subject of the Development Agreement). If the Product has not been endorsed by the NSA by January 1, 1999, then, commencing in January 1999, and continuing on a month-to-month basis thereafter, Mykotronx shall be relieved of its obligation to purchase a minimum number of Units until the first calendar month after the month in which the Product receives NSA endorsement.


D. Payment for Products and/or Ancillaries ready for delivery shall be made by Mykotronx on a net thirty (30) basis from receipt of the invoice from AlliedSignal with respect to deliveries under the IDIQ and on a net forty-five (45) basis for all other deliveries (including purchase orders for Mykotronx to be shipped to its inventory). Invoices shall be transmitted to Mykotronx at the time the Products are deemed "accepted" as provided in Section 12 hereof.


E. Notwithstanding anything which may be to the contrary herein, Mykotronx shall deliver to AlliedSignal an initial Purchase Order hereunder not later than November 1, 1997. Such initial Purchase Order shall cover Mykotronx' orders for Products for the period October 1, 1997, through December 31, 1997, and for each month in such period shall include orders for at least ____ Units in the aggregate per month. In addition the Purchase Order for the month of October 1997 shall include orders that reflect by AlliedSignal in such month pursuant to the next sentence of this Section 6.E. For the period from October 1, 1997 through the date Mykotronx delivers the initial Purchase Order, AlliedSignal shall continue to manufacture and ship Products in a manner that is, at a minimum, sufficient to satisfy existing outstanding obligations under the Customer Contracts, and Mykotronx shall be deemed to have ordered such Products as if it had delivered a Purchase Order therefor.


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7. PRICING


A. Pricing for the Products and/or Ancillaries ("Transfer Price") shall remain firm through December 31, 1999, as shown in Part I of EXHIBIT B annexed hereto and made a part of this Agreement, except that such prices may be adjusted to reflect an increase in the cost of material (applying burden rates applicable thereto) in accordance with the formula set forth in Part Il of EXHIBIT B. In addition, in the event that any raw materials or component parts are supplied by Mykotronx, an appropriate decrease will be made in the transfer price.


B. The price to be paid by Mykotronx to AlliedSignal for the Presidio module on a pass-through basis shall be fixed at $____ per unit; provided, however, that in the event that any materials relating to the Presidio module are supplied by Mykotronx, an appropriate decrease will be made in such $____ base transfer price net of the amount, if any, accruing to the benefit of AlliedSignal pursuant to the next sentence of this Section 7.B. In the event the Presidio module cost is less than or exceeds the $____ unit cost, Mykotronx and AlliedSignal shall share any price decrease benefit and/or price increase cost on an equal basis below and above such unit cost, but AlliedSignal's maximum liability or benefit under this provision for Presidio cost increases above or decreases below the $____ per unit cost shall cumulatively not exceed $______. Upon AlliedSignal incurring $______ in costs for its share of price increases in excess of $____ per unit, Mykotronx shall thereafter be responsible for all such costs of the Presidio module.


C. Upon completion of the development of the Product pursuant to the Development Agreement, an initial Transfer Price shall be established for this new Product which shall be determined in a manner consistent with the manner in which the initial transfer prices hereunder were determined. In furtherance and not in limitation of the foregoing, such price shall include AlliedSignal's material costs plus burden (at 1997 rates) and labor costs plus burden at 1998 rates, plus 1.5% for warranty and 1% for administrative requirements, with no other general and administrative expenses included in the Transfer Price of the Product. After the initial Transfer Price has been determined, such initial Transfer Price shall be added to Part I of EXHIBIT B hereto, and such price shall remain firm through December 31, 1999, except that such price may be adjusted to reflect an increase in the cost of material (applying burden rates applicable thereto) in accordance with the formula set forth in Part II of EXHIBIT B or as otherwise contemplated in Section 7.B, this Section 7.C or Section 7.D. In addition, in the event that any raw materials or component parts are supplied by Mykotronx, an appropriate decrease will be made in the transfer price.


D. Notwithstanding anything which may be to the contrary herein, the transfer price for the Product (with respect to orders placed for delivery within the month ___ minimum/ ___ maximum Unit range) shall not exceed $ ____ per unit (the "Cap"), provided, however , that the Cap shall be increased on a dollar for dollar basis to the extent that the cost of the Presidio module exceeds $____ per unit. For Product Units that are ordered for delivery outside of the monthly ___ minimum/ ___ maximum range, AlliedSignal will offer Transfer Prices which shall be determined in a manner consistent with the 90% learning curve methodology used to determine the ranges outside the ___ minimum/ ___ maximum ranges set forth in Part III of Section B.


E. Attached hereto as Exhibit C is a l ...