Manufacturing Services Agreement

CONFIDENTIAL


MANUFACTURING SERVICES AGREEMENT


DATE: May 14, 1998


PARTIES: Hypertension Diagnostics, Inc.
2915 Waters Road, Suite 108
Eagan, MN 55121-1562
Telephone: 612-687-9999
TeleFax: 612-687-0485


"COMPANY"


Apollo Research Corporation
2640 North America Drive
West Seneca, NY 14224
Telephone: 716-674-3600
TeleFax: 716-674-3659


"CONTRACTOR"


RECITALS:


A. The Company designed, developed and intends to market a CardioVascular Profiling Instrument (the "PRODUCT") which has several components, including the Model 7013 Arterial Pulse Pressure Sensor (the "SENSOR"), which was designed and developed with the assistance of the Contractor.


B. The Contractor is in the business of manufacturing various medical components, including the Sensor.


C. The Sensor is a component that is critical to the functionality of the Product.


D. In consideration of the terms and conditions set forth in this Agreement, the parties desire to enter into this Agreement whereby Contractor agrees to manufacture and supply Sensors to the Company, and the Company agrees to purchase the Sensors from the Contractor.


AGREEMENT:


FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, it is agreed as follows:


ARTICLE I
MANUFACTURING SERVICES


SECTION 1.1 SUPPLY. During the term of this Agreement, the Contractor shall manufacture Sensors and shall supply such Sensors to the Company, and the Company shall purchase from the Contractor Sensors ordered by the Company which conform to the requirements of this Agreement, all as more particularly provided herein. The Contractor will manufacture the Sensors under the U.S. Food and Drug Administration's (the "FDA") good manufacturing practices ("GMP") and quality system requirements ("QSR") applicable to the manufacture of the Sensors. Any additional requirements applicable to the manufacture of the Sensors are as set forth herein. Any deviation from these requirements must be approved by the Company and the Contractor in writing and in advance of manufacture.


SECTION 1.2 FACILITY INSPECTION. The Company shall have the right, upon reasonable notice to the Contractor, during normal business hours, to inspect all phases of the manufacturing activities of the Sensors at the Contractor's or any subcontractor's facilities in order to verify the Contractor's compliance with the requirements of this Agreement. The Contractor agrees to give the Company access or arrange for the Company to have access during normal business hours to such records as are reasonably necessary to any such inspection including, but not limited to, quality control records, test records, manufacturing records and design records. The Contractor further agrees to permit or arrange for the Company to review and copy such records for purposes of conducting any such inspection, provided the Company agrees to maintain the confidentiality of any such records.


ARTICLE II
PLACEMENT OF ORDERS


SECTION 2.1 REQUEST FOR QUOTATIONS. Prior to the issuance of a purchase order, the Company shall provide to the Contractor a request for a written quotation from the Contractor as to the price for the number of Sensors requested and the time to manufacture such Sensors, attach such Sensors to cables ("SENSOR CABLES") supplied by the Company and ship such completed assemblies ("SENSOR ASSEMBLIES") to the Company. The Contractor will deliver such written quotation to the Company within twenty (20) calendar days of the Contractor's receipt of the request for a quotation.


SECTION 2.2 PURCHASE ORDERS. The Company's purchase of the Sensors shall be governed by purchase orders issued from time-to-time by the Company and accepted by the Contractor (the "AUTHORIZATION LETTERS"). If the Company sends an Authorization Letter to the Contractor, the Contractor will promptly accept or reject the Authorization Letter in writing. If the Contractor


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accepts the Authorization Letter, the Contractor will begin the manufacture of the Sensors no later than the date specified in the Authorization Letter and will otherwise adhere to the other terms and conditions specified therein.


SECTION 2.3 COMPANY COORDINATOR. In each Authorization Letter, the Company shall appoint a Manufacturing Coordinator. The Manufacturing Coordinator shall establish standards for the quality and acceptability of the manufacture of the Sensors and of the services to be performed by the Contractor under the applicable Authorization Letter, provided that such standards shall not materially affect the profitability to the Contractor attributable to the manufacture and assembly of the Sensors and Sensor Assemblies contemplated by such Authorization Letter.


SECTION 2.4 SUPERVISION BY THE CONTRACTOR. The Contractor shall inform the Company of the name of the primary employee, employees or subcontractors responsible for the work to be performed under each Authorization Letter. The Contractor shall be responsible for supervision and direction of the work of its employees and subcontractors, and if work is done on the Company's premises, the Contractor shall, at all times, provide supervision acceptable to the Company of its personnel working on the Company's premises. The Contractor shall require its employees and, if applicable, its subcontractors, to comply with the Company's plant regulations and policies.


SECTION 2.5 ACCEPTABILITY OF PERSONNEL. The Contractor agrees not to assign to work on the Company's premises any of its employees not acceptable to the Company. The Contractor agrees to remove from the Company's premises, immediately in the case of misconduct, any of its employees at the Company's request. The Company agrees not to assign to work on the Contractor's premises any of its employees not acceptable to the Contractor. The Company agrees to remove from the Contractor's premises, immediately in the case of misconduct, any of its employees at the Contractor's request.


SECTION 2.6 AUTHORIZATION LETTERS. Each Authorization Letter shall contain, at a minimum, the following information:


(a) The incorporation, by reference, of this Agreement, and
the Contractor's quotation.


(b) A brief description of the Sensors to be manufactured
pursuant to the Authorization Letter (including the
quantity, necessary modifications to the Sensors,
special requests, if any, etc.).


(c) An enumeration of any items of special or unusual
expense authorized for reimbursement of the Contractor,
as well as the basis for such reimbursement.


(d) The maximum total expenditure authorized pursuant to
the Authorization Letter, subject to additional work
notices resulting in additional cost as approved by the
Company in advance.


(e) The dates by which:


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(1) The Company, in accord with the Contractor,
desires the services under the Authorization
Letter to commence.


(2) The Company, in accord with the Contractor,
desires to have the Sensor Assemblies completed
and delivered to the Company.


(f) Any other information pertinent to the work covered by
the Authorization Letter, including the content and
schedule for status reports from the Contractor, if
any.


(g) The agreed-upon amount and payment terms for Sensor
Assemblies to be delivered and services to be completed
under the Authorization Letter, based upon the
Contractor's quotation.


(h) A description of any special or unusual services to be
rendered by the Company as part of the Contractor's
manufacture and delivery of the Sensors and Sensor
Assemblies and the Company's review and approval of
same, including reasonable time frames for the
performance of said services.


(i) Signature(s) of authorized representatives of both the
Company and the Contractor.


SECTION 2.7 INVENTORY. The Contractor agrees to maintain a stock of components and materials in quantities sufficient to cover the current and reasonably anticipated production of Sensors for the Company.


SECTION 2.8 PREFERENCE TO DO BUSINESS WITH THE CONTRACTOR. The Company shall place all orders for Sensors or Sensor Assemblies with the Contractor provided that the Contractor is able and willing to, and does in fact, comply with all of its material obligations under this Agreement. If the Company concludes that the Contractor is unable and/or unwilling so to comply with any of its material obligations under this Agreement, and actually fails to comply with any of its material obligations under this Agreement, then the Company shall have the right, upon notice to the Contractor, to place orders for Sensors or Sensor Assemblies with a third party, provided that the notice to the Contractor shall specify the reasons for and nature of the order with such third party.


SECTION 2.9 DELIVERY. The Contractor shall ship the Sensor Assemblies at the Company's expense in accordance with the Company's instructions for method of shipment as designated by the Company in the Authorization Letter. Upon shipment, the Contractor shall inform the Company of the Company's pick number, SKU number, serial number, quantity shipped, product destination, carrier, bill-to and ship-to address, package weight and freight cost.


SECTION 2.10 SENSOR CABLES. The Company agrees to supply to the Contractor, at the Company's expense, such number of Sensor Cables as are necessary to fulfill the Contractor's obligations under each Authorization Letter, plus an allowance of ten percent (10%). Upon receipt of any Sensor Cable, the Contractor shall immediately inspect such Sensor Cable, and shall accept or reject the same. In the event that the Contractor rejects any Sensor Cable, the Contractor shall promptly return such Sensor Cable to the Company, and the Company shall promptly replace such


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Sensor Cable at its expense. Any Sensor Cables delivered by the Company in respect of the Sensors described in any given Authorization Letter that are not required by the Contractor shall be returned to the Company upon completion of such Authorization Letter. Any Sensor Cables required by the Contractor in respect of the Sensors described in any given Authorization Letter in excess of the number supplied by the Company and accepted by the Contractor in respect of such Authorization Letter as hereinbefore provided shall be at the Contractor's sole cost and expense.


ARTICLE III
BILLING, PAYMENT AND PRICING


SECTION 3.1 PRICE. The per-Sensor price charged to the Company by the Contractor for the Sensors delivered and accepted by the Company under this Agreement will be as set forth in the applicable Authorization Letter. The Company agrees that per-Sensor pricing under this Agreement will reflect an entitlement on the part of the Contractor to make a reasonable profit in connection with its activities hereunder.


SECTION 3.2 INVOICES. Upon delivery of the Sensor Assemblies by the Contractor to the possession of the carrier designated in the Authorization Letter, the Contractor shall bill the Company for the Sensors shipped pursuant to the Authorization Letter. Such invoices shall state the number of Sensors shipped, the per-Sensor price, and the total price. The Company shall make payment to the Contractor for the Sensors shipped to and accepted by the Company within thirty (30) days following receipt of the Contractor's invoice. The Company agrees to pay the Contractor a late penalty of one and one-half percent (1 1/2 %) per month on any unpaid balance.


ARTICLE IV
WARRANTIES, QUALITY STANDARDS AND INSPECTION


SECTION 4.1 CONTRACTOR WARRANTIES. (a) The Contractor warrants that all Sensors manufactured by the Contractor pursuant to this Agreement shall conform strictly to the Specifications of the Company described in Section 4.3 hereof. In addition, the Contractor warrants that all Sensors manufactured by the Contractor shall be free from defects in materials and workmanship for a period of one (1) year from the date of shipment. Any Sensor in breach of this warranty will be returned to the Contractor at the Company's expense and will promptly be repaired by a member of the Contractor's authorized service staff at the Contractor's expense. Any defective Sensor which, for any reason, cannot be repaired by the Contractor when returned to the Contractor, will be replaced at the Contractor's expense (including transportation). All replaced Sensors will be warranted for a period of one (1) year from the date of shipment thereof as required by this Section 4.1. Returned Sensors will be processed as defined in Section 4.1(c).


(b) SERVICES. The services provided by the Contractor or any subcontractor employed by the Contractor will be rendered by qualified personnel employed by the Contractor or any such subcontractor who will perform the tasks assigned in a manner that is consistent with good professional practice and standards, and, where applicable, in accordance with the FDA's GMP, QSR


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and/or other such regulations as appropriate. Should the Company's Manufacturing Coordinator determine that any Contractor or any subcontractor personnel assigned to manufacture of the Sensors (or services relating thereto) is not performing satisfactorily, the Contractor will replace such personnel or cause any applicable subcontractor to replace any such personnel upon receiving written notice thereof from the Company. The Contractor reserves the right to make staffing changes in Senior Staff, Manufacturing Personnel, and/or other personnel upon reasonable notice to the Company's Manufacturing Coordinator at logical breakpoints of the work. In the event of such staffing change, the Company shall not be charged for the time required to train the replacement(s). The amount of non-compensatory training time, if any, shall be mutually determined and agreed to by the Contractor's and the Company's management and/or Manufacturing Coordinator.


(c) SERVICE DEPOT. The Contractor will provide Service Depot functions for the Sensors. The program will be structured as follows:


- The Contractor, in cooperation with the Company, will establish a
mutually-acceptable inventory of functioning, complete and packaged
Sensors.


- The Company's customer will send in failed Sensors to the Company,
upon receipt of which the Company will ship a functioning permanent
replacement to the customer.


- The failed Sensors will be cleaned and disinfected, if necessary, by
the Company prior to being repaired.


- Repair instructions from the Company will accompany the failed
Sensors describing failure-mode and any additional
refurbishment services required. The Contractor and the Company
will jointly develop a minimum set of standards for repair of the
Sensors.


- The Contractor will determine classification of all failed Sensors as
follows: warranty repair, normal repair (outside warranty), misuse
or damage repair, or some combination thereof.


- All non-warranty work will be performed on a time-and-materials basis
at the current Contractor rates at the time the work is performed.


- Standard lead-time for all warranty work and repair work will be a
maximum of ten (10) business days from receipt of the Sensors by the
Contractor or, if the Sensor in question is not repairable, it shall
be replaced within ten (10) business days.


- The Contractor will return all Sensors to the Company and provide the
Company with a description of work performed. All warranty shipments
are F.O.B., the Company's facilities. All non-warranty shipments are
F.O.B., the Contractor's manufacturing and Service Depot facilities.
All repaired Sensors will be warranted for a period of one (1) year
from the date of repair thereof as required by Section 4.1.


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