Manufacturing And Supply Agreement

MANUFACTURING AND SUPPLY AGREEMENT


This Agreement is made and entered into between Mitsui Chemicals, Inc. , having a place of business at Kasumigaseki Building, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6070, Japan (hereinafter referred to as "MITSUI") and Southwall Technologies Inc. , having a place of business at 3975 East Bayshore Road, Palo Alto, California 94303, U.S.A. (hereinafter referred to as "SOUTHWALL"), with respect to the manufacture and supply by SOUTHWALL of certain multi-layered sputter film products for MITSUI.


Article 1 - Manufacture and Supply of Products


1.1 Schedule 1 Products. SOUTHWALL agrees to manufacture and supply, and MITSUI agrees to buy, the film products listed on Schedule 1 ("Schedule 1 Products") at the prices set forth on Schedule 1. The parties agree that the list of products and prices in Schedule 1 may be revised from time to time by mutual agreement of the parties. Nothing in this Agreement shall limit or restrict SOUTHWALL's ability to manufacture and sell Schedule 1 Products for use outside of the LCD and PDP applications ("Applications"). MITSUI hereby represents in good faith that it is MITSUI's intent to purchase its full demand for Schedule 1 Products which are supplied from outside sources from SOUTHWALL. MITSUI further represents in good faith that, except for its existing manufacturing capacity in Nagoya, Japan, in principle it is not MITSUI's intent to construct any additional manufacturing capacity for Schedule 1 Products during the term on this Agreement. In the event that SOUTHWALL is unable to meet MITSUI's quality or quantity requirements for Schedule 1 Products, SOUTHWALL and MITSUI agree to discuss and work in good faith the question of whether MITSUI will address its needs through increased development of capacity at MITSUI. Schedule 1 Products shall be subject to the following exclusivity conditions for the Applications.


(a) SOUTHWALL agrees to exclusively manufacture and supply the films for PDP applications ("PDP Films") listed in Schedule 1, for Mitsui's exclusive use worldwide, provided MITSUI meets the minimum purchase amount for PDP Films in Schedule 3 ("PDP Minimum Guaranty"). For this purpose, the PDP Minimum Guaranty shall be deemed to have been met by MITSUI when (i) purchase orders for the requisite quantity of PDP Films have been received by SOUTHWALL before the end of each applicable calendar year or (ii) MITSUI makes payment to SOUTHWALL for the Deficient Quantity (as defined in and pursuant to Paragraph 9.2) of PDP Films.


(b) SOUTHWALL agrees to exclusively manufacture and supply the reflecting films for LCD applications ("LCD Films") listed in Schedule 1, for Mitsui's exclusive use worldwide, provided MITSUI meets the minimum purchase amount for LCD Films in Schedule 3 ("LCD Minimum Guaranty"). For this purpose, the LCD Minimum Guaranty shall be deemed to have been met by MITSUI when (i) purchase orders for the requisite quantity of LCD Films have been received by SOUTHWALL before the end of each applicable calendar year or (ii) MITSUI makes payment to SOUTHWALL for the Deficient Quantity (as defined in and pursuant to Paragraph 9.2) of LCD Films.


(c) During the term of this Agreement and any extensions thereto, MITSUI agrees to purchase all of its requirements for the PDP Films and LCD Films listed in Schedule 1from SOUTHWALL under the terms set forth in this Agreement; provided, however, the foregoing shall not restrict in any way MITSUI's manufacture of PDP Films and LCD Films at MITSUI's facilities and sales thereof under the Amended License Agreement II. Notwithstanding this provision, if MITSUI reasonably demonstrates (but only to the extent MITSUI may do so without incurring any liability or obligation to third parties) that SOUTHWALL either (1) cannot meet MITSUI's specifications for such PDP Films or LCD Films for a particular application or customer; or (2) SOUTHWALL cannot meet MITSUI's demanded quantities (above the minimum quantities specified in Schedule 3) for such PDP or LCD Films, then MITSUI shall be free to purchase such PDP Films or LCD Films from a third party until such time as SOUTHWALL is able to meet the particular specifications or demand, at which time MITSUI's obligation to purchase exclusively from SOUTHWALL shall resume.


1.2 Schedule 2 Products. SOUTHWALL agrees to manufacture and supply, and MITSUI agrees to buy, the film products listed on Schedule 2 ("Schedule 2 Products") at the prices set forth on Schedule 2. The parties agree that the list of products and prices in Schedule 2 may be revised from time to time by mutual agreement of the parties. The parties agree that SOUTHWALL's manufacture and supply of Schedule 2 Products shall not be exclusive to Mitsui and that SOUTHWALL shall be free to manufacture and supply Schedule 2 Products for third parties.


1.3 Schedule 1 and Schedule 2 Products shall be referred to collectively as PRODUCTS.


Article 2 - Disclosure of Technical Information and Limited License


2.1 MITSUI shall disclose to SOUTHWALL any technical information that is deemed by MITSUI to be required by SOUTHWALL to produce the PRODUCTS.


2.2 For the sole purpose of SOUTHWALL manufacturing the PRODUCTS for MITSUI hereunder, MITSUI shall grant to SOUTHWALL a royalty-free license, without the right to further sublicense, for the technical information to be disclosed pursuant to Paragraph 2.1 and an indemnity from suit under MITSUI's patents listed in Schedule 2.5 and any continuations, continuations-in-part, or other relevant patents, during the term of this Agreement.


Article 3 - Forecast


3.1 MITSUI commits that it will use good faith efforts to spread its purchases of PRODUCTS evenly within each calendar year period.


3.2 A forecast of quantities of the PDP Minimum Guaranty and the LCD Minimum Guaranty to be produced and delivered during calendar years 2003 to 2006 is provided for in Schedule 3. As of the effective date of this Agreement, the quantities of the PDP Minimum Guaranty and the LCD Minimum Guaranty for calendar years 2003 and 2004 in Schedule 3 shall be binding on the parties, and the quantities for calendar years 2005 and 2006 in Schedule 3 shall be non-binding on the parties. On or before the first business day of each calendar year beginning with 2004, MITSUI shall provide SOUTHWALL with a binding forecast for quantities of the PDP Minimum Guaranty and the LCD Minimum Guaranty to be produced and delivered for the following twenty-four (24) month period beyond the current calendar year and a non-binding forecast for the two years after that, so that SOUTHWALL always has yearly forecasts for forty-eight (48) months, of which the first twenty-four (24) months are binding on the parti es and the last twelve (24) months are non-binding on the parties. For the avoidance of doubt and as an example, on or before the first business day of January 2004, MITSUI shall provide SOUTHWALL with a forecast for calendar years 2005, 2006 and 2007 of which calendar year 2005 shall be binding and calendar years 2006 and 2007 shall be non-binding; SOUTHWALL will therefore have a binding 24 month forecast for calendar years 2004 and 2005, and a non-binding 24 month forecast for calendar years 2006 and 2007.


3.3 One month prior to the start of each new calendar quarter, MITSUI shall notify SOUTHWALL of the forecast quantities and grades of the Schedule 1 Products to be produced and delivered by SOUTHWALL during the new calendar quarter. Upon receipt of such forecast, the parties shall agree on the final production quantities per grade of the Schedule 1 Products. Such mutually agreed forecasts shall be binding on the parties and MITSUI will issue a firm and irrevocable purchase order in accordance with the agreed production quantities.


3.4 If, for any given calendar year beginning with calendar year 2005, the binding forecast is less than 80% of the level provided by Mitsui in its preceding non-binding forecast, then MITSUI and SOUTHWALL agree to determine in good faith the causes for the reduction in forecasts and to negotiate in good faith to arrive at potential remedies, and, in the event the parties are not able to reach a mutually acceptable remedy, SOUTHWALL shall have the right, at its discretion and in good faith, to convert the exclusivity provisions in this Agreement to non-exclusivity, in which case MITSUI's obligations in this Agreement relating to the PDP Minimum Guaranty and the LCD Minimum Guaranty shall terminate entirely.


3.5 In the event MITSUI wishes to increase the quantities in the purchase order, SOUTHWALL shall make every reasonable effort to accommodate such increases.


3.6 SOUTHWALL shall notify MITSUI when there is newly available excess capacity at SOUTHWALL's production facilities to allow increased production of the PRODUCTS for MITSUI. Such notice by SOUTHWALL shall be reasonably precise and shall include, without limitation, the excess capacity in square meters for multi-layered sputter films for use in plasma display panel. Thereafter, upon request by MITSUI, the parties shall negotiate in good faith on revising the existing forecast for the PRODUCTS in the relevant twelve (12) month period.


Article 4 - Production of Products


4.1 SOUTHWALL shall produce the PRODUCTS based on the specifications to be mutually agreed upon by the parties ("SPECIFICATIONS").


4.2 Packaging and storage of the PRODUCTS shall be made in the manner usually effected by SOUTHWALL for its export of products or in a mode separately agreed upon by the parties hereto.


4.3 MITSUI and SOUTHWALL shall hold periodic meetings to ensure the smooth production and delivery of the PRODUCTS.


4.4 Upon request by MITSUI, SOUTHWALL shall allow MITSUI to enter the facilities for manufacturing and storing the PRODUCTS for an audit of quality control, provided MITSUI shall give SOUTHWALL reasonable advance written notice.


4.5 SOUTHWALL shall notify MITSUI in writing and in advance of all proposed changes to any of the raw materials used to produce the PRODUCTS or any related manufacturing processes and quality assurance processes at SOUTHWALL's facilities. Such notice by SOUTHWALL shall include the reason for the change, details of its implementation and the planned date of the change. MITSUI may request test data and a sufficient sampling of the affected PRODUCTS associated with any proposed changes and SOUTHWALL shall make reasonable efforts to comply with MITSUI's request. MITSUI shall evaluate and determine in good faith if such proposed changes by SOUTHWALL would have an undesirable or detrimental effect on the quality of the PRODUCTS. SOUTHWALL shall not proceed with such proposed changes until MITSUI notifies SOUTHWALL in writing that such proposed changes are acceptable to MITSUI.


Article 5 - Quality and Inspection of Products


5.1 The SPECIFICATIONS and testing methods for each individual grade of the PRODUCTS to be produced under this Agreement are to be mutually agreed upon and may be amended from time to time by mutual agreement of MITSUI and SOUTHWALL.


5.2 SOUTHWALL shall inspect the PRODUCTS in accordance with the SPECIFICATIONS and shall send the test report for each lot of the PRODUCTS to MITSUI within ten (10) business days from the production of each lot.


5.3 Within 180 days after receipt of PRODUCTS, MITSUI reserves the right, but shall not be obligated, to inspect the PRODUCTS and determine whether, based upon practical external inspection of the PRODUCTS, there is evidence that the PRODUCTS do not meet the SPECIFICATIONS, have suffered transport damage or are otherwise defective.


a) In the event of transport damage to PRODUCTS, MITSUI shall inform the freight carrier and SOUTHWALL of such damage as soon as reasonably practicable after discovery thereof, but not later than the 180 days specified above, and take whatever steps are reasonably necessary to recover for suc ...