PRODUCTION AGREEMENT NXSTAGE MEDICAL, INC. & KMC SYSTEMS, INC. JUNE, 2005

 

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                                                                   Exhibit 10.19

 

          Confidential Materials omitted and filed separately with the

         Securities and Exchange Commission. Asterisks denote omissions.

 

                               PRODUCTION AGREEMENT

 

                             NXSTAGE MEDICAL, INC. &

 

                                KMC SYSTEMS, INC.

 

                                   JUNE, 2005

 

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                              PRODUCTION AGREEMENT

 

      THIS PRODUCTION AGREEMENT (the "AGREEMENT"), effective as of June 27, 2005

(the "EFFECTIVE DATE"), by and between NXSTAGE MEDICAL, INC., a Delaware

corporation, having a principal place of business at 439 South Union Street, 5th

Floor, Lawrence, MA 01843 ("NX") and KMC SYSTEMS, INC., a Delaware corporation,

having a principal place of business at 220 Daniel Webster Highway, Merrimack,

NH 03054 ("KMC").

 

      WHEREAS, NX is the owner of certain proprietary technology and expertise

in the field of dialysis;

 

       WHEREAS, KMC has expertise in the design, development and manufacture of

medical instrumentation and equipment; and

 

      WHEREAS, NX desires to appoint KMC, and KMC desires to accept NX's

appointment, as NX's manufacturer of the Instrument (as defined below) on the

terms and conditions set forth herein.

 

      NOW, THEREFORE, in consideration of the mutual representations, warranties

and covenants contained herein, and for other good and valuable consideration,

the receipt and sufficiency of which are hereby acknowledged, the parties agree

as follows:

 

      1.     DEFINITIONS

 

      As used in this Agreement:

 

            1.1 "ATP" shall mean the Acceptance Test Procedures developed by KMC

and approved by NX, a copy of which is annexed hereto as Attachment 1.

 

            1.2 "BILL OF MATERIALS" shall mean all materials necessary for the

production of the Instrument, as specified in Attachment 2 annexed hereto, as

may be amended from time to time by KMC.

 

            1.3 "BUSINESS DAY" shall mean a day that is not Saturday, Sunday or

a federal or New Hampshire holiday on which commercial banks are closed for

business in New Hampshire.

 

            1.4 "DOLLARS" or "$" shall mean United States dollars.

 

            1.5 "ECO" shall mean an Engineering Change Order, a standard KMC

document used to control incorporation of changes in the TDP.

 

            1.6 "EFFECTIVE DATE" shall have the meaning set forth in the title

to this Agreement.

 

            1.7 "EXTENSION TERM" shall have the meaning set forth in Section

12.1 hereof.

 

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            1.8 "FDA" shall mean the United States Food and Drug Administration

or any successor agency thereof.

 

            1.9 "FORECAST" shall have the meaning set forth in Section 6.4

hereof.

 

            1.10 "INITIAL TERM" shall have the meaning set forth in Section 12.1

hereof.

 

            1.11 "INSTRUMENT" shall mean a commercial production unit of the

NxStage System One Cycler((TM)) as, described further in Attachment 3 annexed

hereto, together with all future upgrades, modifications and derivatives

thereof.

 

            1.12 "INTELLECTUAL PROPERTY" shall mean

 

                  (a) all patents, patent applications, patent rights and

      inventions, discoveries, improvements and invention disclosures (whether

      or not patentable);

 

                  (b) all trade names, trade dress, logos, registered and

      unregistered trademarks and service marks and applications and all related

      goodwill;

 

                  (c) all copyrights in both published and unpublished works,

      including without limitation all compilations, databases and computer

      programs, and all copyright registrations and applications, and all

      derivatives, translations, adaptations and combinations of the above; and

 

                   (d) all know-how, trade secrets, confidential or proprietary

      information, research in progress, algorithms, data, designs, processes,

      formulae, drawings, schematics, blueprints, flow charts, models,

      prototypes and techniques and results,

 

all of which are developed and paid for by NX under this Agreement with respect

to the Instrument.

 

            1.13 "ISO" shall mean maintaining a quality system certified by a

notified body to the International Standards Organization Quality System

Standard ISO 13485: 1996, Medical Devices Quality Management Systems.

 

            1.14 "KMC WORK PRODUCT" shall have the meaning set forth in Section

13.2 hereof.

 

            1.15 "ORIGINAL AGREEMENT" shall mean that certain Development and

Production Agreement NX and KMC dated as of October 6, 1999, as amended on May

9, 2000, February 2, 2001, February 22, 2002 and August 10, 2004.

 

            1.16 "QSR" shall mean the Quality System Regulation 21 of the Code

of Federal Regulations, part 820, for the development and manufacture of medical

devices and in-vitro diagnostic products.

 

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            1.17 "QUALITY PLAN" shall mean the KMC Manufacturing Quality Plan

prepared by KMC and approved by NX, annexed hereto as Attachment 4, which

defines the procedures, practices and requirements for the manufacture of the

Instrument by KMC.

 

            1.18 "SKU" shall mean the stock keeping unit designated for a

particular Instrument.

 

            1.19 "TDP" shall mean the technical data package for the Instrument

which includes, without limitation, detailed mechanical drawings, assembly

drawings, component specification drawings, bill of materials, schematic and

assembly drawings, specifications relating to all of the foregoing, and the ATP.

 

            1.20 "TERM" shall mean the Initial Term and any Extension Term

pursuant to Section 12.1 hereof.

 

            1.21 "UNITED TRANSFER PRICE" shall have the meaning set forth in

Section 7.1 hereof.

 

            1.22 "WORK PRODUCT" shall have the meaning set forth in Section 13.1

hereof.

 

            1.23 "WORK REQUEST" shall mean a written document proposing changes,

or additions of work scope to the then existing agreed upon scope of services

and work to be performed by KMC. A Work Request will state the reason or basis

of the request, an estimate of the anticipated costs associated with such

changes or additions and an estimate of the impact on the schedule and the Unit

Transfer Price.

 

      2.     EXCLUSIVITY

 

             2.1 NX (including its affiliates and their respective licensees)

shall, directly and indirectly, throughout the Initial Term, purchase all of the

world-wide requirements for the Instrument exclusively from KMC, and KMC shall

produce for and sell to NX (including its affiliates and their respective

licensees) all of their world-wide requirements for the Instrument, all on the

terms and conditions of this Agreement. Notwithstanding anything to the contrary

in this Section 2.1, NX shall have the right to manufacture the Instrument

itself and to assemble its products that include the Instrument.

 

            2.2 At any time during the Initial Term, NX shall have the right to

change KMC's exclusive manufacturing rights hereunder to non-exclusive rights by

providing KMC with not less than [**] prior written notice thereof and paying to

KMC an amount equal to [**] percent ([**]%) of the Unit Transfer Price for each

Instrument manufactured by any other party during the Initial Term up to the

aggregate amount of $[**] Dollars). The foregoing amount shall be paid to KMC by

NX on a monthly basis, accompanied by a statement setting forth the number of

Instruments manufactured by such other parties. KMC shall have the right, upon

[**] notice, to audit the underlying records supporting such statements. The

foregoing fee shall not be payable by NX with respect to units of the Instrument

manufactured by a second source as a result of NX's exercise of its rights under

Section 2.2 hereof, or with respect to units of the

 

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Instrument manufactured by NX as a result of NX's exercise of its rights under

Section 2.1 hereof.

 

            2.3 Notwithstanding the provisions of Section 2.1 hereof, in the

event that during the Initial Term KMC is unable, due solely to acts or

omissions by it or any of its suppliers to fulfill [**] percent ([**]%) of its

Delivery Commitment under Section 6 hereof for [**] then, and only in such event

(except as otherwise provided in Section 2.1 hereof), NX shall have the right to

appoint and use a second source of supply for the Instruments. Any such

appointment must be made upon written notice provided to KMC not later than [**]

following KMC's failure to meet the delivery commitment for the [**].

 

             2.4 In the event of the appointment of a second source manufacturer

pursuant to Sections 2.2 or 2.3 hereof, or in the event of NX manufacturing the

Instrument itself pursuant to Section 2.1 hereof, KMC shall (at NX's expense)

cooperate in the transfer of technical data in its possession in order to assist

such second source, or NX, in producing the Instrument.

 

      3.     REGULATORY RESPONSIBILITY

 

            3.1 NX shall be responsible for all submissions in connection with

and obtaining all necessary regulatory approvals to market, distribute and sell

the Instruments. NX shall also be responsible for all follow-up communication

and actions with regulatory agencies related to the Instrument, including but

not limited to any import and export regulations, device tracking requirements

and medical device reporting. KMC shall assist and support these efforts as

reasonably required by NX and at NX's expense.

 

            3.2 KMC will be responsible for maintaining an FDA registered

medical device manufacturing facility, in compliance with current QSR

regulations. If at any time during the Term, KMC is found to be non-compliant

with applicable QSR requirements, it shall immediately notify NX and promptly

provide and implement a corrective action plan. In addition, KMC shall take such

remedial action (at its expense, and after prior consultation and agreement with

NX, which agreement shall not be unreasonably withheld or delayed) which may be

mandated by the FDA with regard to the Instruments, if any, shipped during

non-compliance with QSR regulations.

 

            3.3 KMC will be responsible for maintaining an ISO registered

medical device manufacturing facility, in compliance with current regulations.

If at any time during the Term, KMC is found to be non-compliant with applicable

ISO requirements, it shall immediately notify NX and promptly provide and

implement a corrective action plan.

 

      4.     TOOLING AND TEST EQUIPMENT

 

      KMC will purchase, with NX's approval and at NX's expense in accordance

with Section 9.1 hereof, or NX will supply at its expense, all additional

necessary tooling and test equipment for the build, test and delivery of the

Instrument that has not already been purchased or supplied under the Original

Agreement. All such tooling and test equipment paid for (or supplied) by NX in

accordance with the provisions of this Agreement or the Original Agreement

 

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shall remain the property of NX. KMC shall safeguard and maintain such tooling

and test equipment in the same manner as it does its own tooling and equipment,

provided that NX shall be responsible for all maintenance beyond ordinary and

routine maintenance and for refurbishment and/or replacement of such tooling and

test equipment, except where the refurbishment and/or replacement is caused by

the negligence or willful misconduct of KMC. All tooling and test equipment

developed and owned by KMC prior to this Agreement and all tooling and test

equipment not paid for (or supplied) by NX shall remain the property of KMC. KMC

shall not use any such tooling and test equipment paid for or supplied by NX to

manufacture or test products for anyone other than NX.

 

      5.     PRODUCTION OF INSTRUMENTS

 

            5.1 Upon receipt of the purchase orders for the Instruments from NX

which are accepted in accordance with Section 6.2 hereof, KMC will build, test,

label and ship the Instruments in accordance with applicable QSR regulations and

the TDP.

 

            5.2 Instruments manufactured by KMC shall be subjected to the ATP

prior to shipment. Instruments shall be shipped after meeting the requirements

of the ATP, as confirmed by KMC's written certification provided to NX. NX shall

only accept Instruments which meet the requirements of the ATP as so certified

by KMC, subject to the F.O.B. conditions specified within Section 10.1. Any

claims for defects in the Instruments must thereafter be made pursuant to the

warranty provisions of Article 11 hereof

 

            5.3 NX will supply to KMC at NX's expense any NX proprietary

disposables required to complete the ATP.

 

            5.4 The Instruments shall contain such trademarks, tradenames and

logos, and patent markings as NX may designate from time to time.

 

            5.5 KMC and NX shall each identify an individual who has the primary

responsibility for maintaining contact and communication with the other.

 

            5.6 NX may elect to have KMC provide post-production services in

support of the Instrument. These services may include, without limitation:

management of spare parts/sub-assembly inventory (including shipments to field

service sites), development of test equipment and procedures for testing of

spare parts/sub-assemblies and/or post-warranty repair and refurbishment

services. The parties shall negotiate a separate agreement to cover such support

services.

 

      6.     FORECASTS AND PURCHASE ORDER.

 

            6.1 NX shall submit by registered mail, telefax or email, addressed

to the attention of the KMC Contract Administration Department, firm, binding

and irrevocable written purchase orders authorizing KMC to manufacture the

Instruments under the purchase order and obligating NX to purchase such

Instruments. In addition, KMC is authorized by such purchase orders to purchase

the materials required to produce the Instruments under the purchase orders.

 

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Each purchase order will contain an express reference to this Agreement and will

state (i) the desired quantity and SKU of Instruments to be produced under such

purchase order, and (ii) shipment instructions for such Instruments. With the

exception of such quantity and shipping instructions, all other terms and

conditions of any purchase order shall be void and of no force or effect.

Notwithstanding the forgoing, each purchase order under the Agreement shall

specify the first requested delivery date under the purchase order, which shall

be no earlier than [**] from the date of the purchase order, and no later than

[**] from the date of such purchase order.

 

            6.2 KMC shall accept all NX purchase orders, with respect to

quantities ordered, and will provide written acknowledgement of its acceptance

to NX within [**] of KMC's receipt of such purchase order. If KMC fails to

respond to NX within said [**], the purchase order shall be deemed accepted by

KMC as issued by NX with respect to (i) and (ii) in Section 6.1 hereof. The

first requested delivery date under the first purchase order under this

agreement shall also be accepted by KMC so long as it falls within the timelines

set forth in section 6.1 above. All terms and conditions of any acknowledgement

in addition or contrary to the provisions of this Agreement shall be void and of

no force or effect.

 

            6.3 Each purchase order under this Agreement shall be in increments

of [**] units of the Instrument and shall be provided by NX to KMC no later than

[**] prior to the scheduled delivery of the last unit of Instrument under the

Original Agreement or the previous purchase order under this Agreement (as the

case may be). NX shall submit purchase orders in accordance with the applicable

Forecast.

 

            6.4 No later than [**] prior to the first delivery requested under

the first purchase order under the Agreement, NX shall provide to KMC a good

faith forecast of its anticipated Instrument delivery requirements for the [**]

period commencing [**] from the date of such forecast (the "Initial Forecast").

No later than [**] prior to the first delivery under the Initial Forecast, NX

shall provide to KMC a good faith forecast of its anticipated Instrument

delivery requirements for the [**] period commencing [**] from the date of such

forecast (the "Second Forecast"). At the first day of the calendar month of the

first delivery under the Second Forecast, and at the start of each calendar

month thereafter, NX shall provide to KMC a good faith rolling forecast of its

anticipated Instrument delivery requirements for the [**] period commencing with

the date of such forecast (the "Rolling Forecast", collectively with the Initial

Forecast and the Second Forecast, the "Forecast").

 

            6.5 The [**] of each Forecast shall constitute a firm, binding and

irrevocable commitment by KMC to deliver the specified quantity of Instruments

and by NX to accept such Instruments, provided, however, that the delivery

request for the first month of each Forecast may not vary from the delivery

request for that month under the immediately preceding Forecast, and that the

delivery request for the second month of each Forecast may not be in excess of

[**] percent ([**]%) of the delivery requests for that month under the

immediately preceding Forecast ("Delivery Commitment"). Except as otherwise

provided hereunder, delivery requests for the remainder of the Forecast shall be

non-binding.

 

            6.6 If the quantity of Instruments requested to be delivered under

the [**] of any Forecast is in excess of the Delivery Commitment, KMC shall use

its reasonable commercial

 

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efforts to deliver all such excess delivery requests by NX. KMC shall promptly

advise NX in writing whether KMC will satisfy the excess delivery requests by

NX. The parties hereby acknowledge and agree that in any event, KMC shall not be

in breach of its obligations hereunder for not satisfying delivery requests that

are in excess of the Delivery Commitment.

 

            6.7 In the event that any Delivery Commitment is [**], then KMC

reserves the right to [**]. Such [**] with any such [**], and which such [**].

KMC will apply best efforts to avoid and/or minimize such [**] arrangements

[**]. [**] materials will be [**] delivered against open purchase orders on a

pro-rata basis.

 

            6.8 Extensions due to Materials. The arrangement presented under

this Agreement for delivery scheduling, and the timing of purchase order

authorizations by NX and actual manufacture of Instruments by KMC, is predicated

upon a maximum material lead-time of less than [**] and the delivery schedule

under the forecasts. In the event that material is identified for the Instrument

that requires a longer lead-time, or KMC identifies that its material purchase

orders may not suffice due to its delivery of Instruments in excess of its

Delivery Commitment, KMC and NX will make appropriate arrangements, including if

necessary for advance material procurement authorizations, as needed to preserve

KMC's ability to meet its Delivery Commitment under this Agreement.

 

      7.     UNIT TRANSFER PRICE FOR COMMERCIAL PRODUCT UNITS

 

             7.1 Unit Transfer Price. Except as set forth in the next sentence,

the unit transfer price for each Instrument manufactured hereunder by KMC (the

"UNIT TRANSFER PRICE") during the Initial Term is set forth in Attachment 5. The

Unit Transfer Price for any purchase order that includes the [**] units of the

Initial Term, and for purchase orders to be provided during any Extension Term,

shall be negotiated in good faith between the parties. Such good faith

negotiations shall commence not later than [**] prior to such purchase order

during the Initial Term and any Extension Team.

 

            7.2 Adjustments to Unit Transfer Price. For each purchase order

hereunder:

 

                  (a) Within [**] of a request by NX, KMC shall provide to NX a

      current costed Bill of Materials for the Instrument.

 

                  (b) KMC shall have the right to adjust the Unit Transfer Price

      to reflect increases in its costed Bill of Materials for the Instrument,

      provided that any such adjustments shall be limited to an amount equal to

      the product of the increase in Material Cost [**].

 

                  (c) In the event the cost of raw materials is decreased for

      any reason, the then Unit Transfer Price shall be decreased by KMC by an

       amount equal to [**] of the product obtained by multiplying the reduction

      in the cost of raw materials and [**].

 

                  (d) The parties acknowledge and agree that the Unit Transfer

      Price takes into account the cost of labor for the continuous production

      of units of the

 

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      Instrument at a minimum consecutive monthly run-rate of [**] units. In the

      event such agreed upon minimum number of units per month is not produced

      in each month of any [**] due to NX's decision, action or omission, then

      the Unit Transfer Price shall be increased to reflect the additional

      direct or indirect costs incurred by KMC, which increase shall be mutually

      agreed upon by the parties in good faith.

 

                  (e) Notwithstanding anything to the contrary, the Unit

      Transfer Price may not be increased pursuant to Sections 7.2(b) and 7.2(d)

      to reflect increases in the Material Cost or the cost of labor, if a

      production delay charge has been paid by NX pursuant to Section 6.7, and

      such increase in the Material Cost or to the cost of labor is due to the

      same production delay.

 

            7.3 Disposition of Spare Parts and Obsolete Materials.

 

                  (a) All materials consumed by NX as spare parts shall be

      purchased by NX from KMC at the following mark-up structure:

 

            Spare Part Cost = Total Cost [**];

 

            Total Cost = (Manufacturing Cost + Material Cost) [**];

 

            Manufacturing Cost = Direct Manufacturing Cost (actual labor cost

incurred by KMC)[**]; and

 

            Material Cost = Direct Material Cost (actual raw material cost

incurred by KMC)[**].

 

                  (b) Any pre-paid materials that have become obsolete shall be

      returned to NX. Within [**] of such return NX shall pay for such obsolete

      materials according to the following mark-up structure: ((Material Cost

      [**]).

 

      8.     WORK SCOPE CHANGES AND ECOS

 

             8.1 Work Scope Changes. Either NX or KMC may, from time to time,

propose a change in, or an addition to, the work scope in accordance with this

Section. Such proposed change or addition may be a change in the TDP or

additional work that is required or recommended to satisfy the overall goals and

requirements of NX.

 

            8.2 Process for Work Scope Changes. If NX proposes such change or

elects to proceed with consideration of any proposed change by KMC, KMC will

prepare and submit to NX a written Work Request. After its receipt of the Work

Request, NX, in its sole discretion, will determine whether or not to approve

the Work Request. If NX determines to proceed with the changes detailed in the

Work Request, then within [**] after its receipt of the Work Request, NX will

notify KMC of that determination by signing and returning to KMC the subject

Work Request. Failure to respond to KMC within such [**] shall constitute a

rejection of the Work Request. KMC will implement changes approved by NX in

accordance with the Work Request

 

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and the provisions of Section 8.3 below. All changes to TDP will be affected by

ECO prepared by KMC and approved by NX.

 

            8.3 Invoicing for Services Rendered under Work Request. Unless

otherwise stated on the Work Request, KMC will submit invoices to NX on a

monthly basis for actual expenses incurred, and for services rendered by KMC, in

implementing an approved Work Request. If the Work Request results in a change

in the Unit Transfer Price, once the change has been implemented, the change in

Unit Transfer Price will be reflected by amendment to the applicable NX purchase

orders and all subsequent invoices issued by KMC will reflect the amended Unit

Transfer Price.

 

             8.4 Reimbursement for Unapproved Work Requests. If NX requests KMC

to prepare a Work Request that is expected to require an unusually large amount

of estimating effort, then KMC may ask NX to agree to reimburse KMC for the

actual cost of the estimating effort in the event that the Work Request is not

approved by NX. KMC may also ask NX to agree to reimburse KMC for the actual

costs associated with preparing routine estimates for NX solicited and

unapproved Work Requests if NX has requested and disapproved more than one such

Work Request per calendar quarter. Absent any such agreement by NX, KMC shall

not be obligated to prepare such Work Request.

 

            8.5 Processing of ECOs. At the request of NX, KMC shall absorb the

cost of and not charge NX for non recurring work for processing ECOs up to the

aggregate amount of [**] Dollars ($[**]) per calendar year (calculated based on

KMC's rates as provided in Attachment 6). Any non recurring work required for

the processing of ECOs after KMC has absorbed the aggregate cost of [**] Dollars

($[**]) per calendar year, shall be billed by KMC to NX at KMC's rates as

provided in Attachment 6 and invoiced on a monthly basis. Notwithstanding the

foregoing, NX may at times request that a particular ECO not be absorbed by KMC

as part of the above [**] Dollars ($[**]), but shall be billed by KMC to NX at

KMC's rates as provided in Attachment 6.

 

      9.     INVOICING

 

            9.1 Invoicing.

 

                  (a) KMC shall invoice NX for the Instruments manufactured

      hereunder upon shipment thereof, at the then Unit Transfer Price.

 

                  (b) Upon placement of orders approved by NX for tooling and

      test equipment, NX shall pay KMC an amount equal to [**] percent ([**]%)

      of the submitted order to the suppler. The balance of the purchase price

      for such tooling and test equipment shall be paid to KMC, together with a

      material handling charge equal to [**] percent ([**]%) of the purchase

      price, upon KMC's receipt of the subject tooling and test equipment.

 

                  (c) If during the Initial Term the available cash on hand of

      NX should ever fall below $[**] Dollars) including, for these purposes,

      monies immediately

 

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      available under any existing NX revolving credit facility, as reflected in

      the books and records of NX, maintained in accordance with GAAP,

      consistently applied, then NX shall immediately provide KMC with written

      notice of such event and within [**] of written notice from KMC, either

      (at NX's option) (i) pay for all production materials on order with

      vendors, as well as any such materials already received by KMC but not yet

      paid for, or (ii) provide KMC with an irrevocable letter of credit to

      secure payment for such materials, issued by a U.S. commercial bank, in

      such amount and in such form and substance reasonably acceptable to KMC.

      Without limiting the generality of the foregoing, during the Initial Term,

      NX shall provide to KMC, promptly following its availability, its balance

      sheet for each calendar quarter of the Initial Term. NX shall provide to

      KMC audited versions of such balance sheets if and when available, and if

      so requested by KMC. KMC shall credit amounts paid by NX for production

      materials to its invoices for the Instruments using such production

      materials on a pro-rata basis.

 

            9.2 Payment. All invoices shall be paid by NX, in full, within [**]

of the date of invoice. Failure to make full payment of KMC invoices within a

[**] period shall constitute a material breach by NX. Furthermore, KMC may

assess NX interest at the rate of one percent (1%) per month for the maximum

rate allowed by applicable law, whichever is lower, on any past due amount,

together with its costs of collection (including, without limitation, attorneys'

fees and expenses). All invoices shall be payable to KMC in Dollars to a bank in

the United States designated by KMC.

 

            9.3 Dispute of Invoices. If NX disputes all or any part of an

invoice, NX shall provide KMC a notice of the dispute within [**] of its receipt

of such invoice, and shall timely pay any undisputed portion of the invoice. NX

and KMC agree to use all commercially reasonable efforts to resolve any disputes

concerning the payment of invoices under Section 9.1 hereof within [**] after NX

has provided such notice of dispute. If the parties are unable to resolve or to

compromise such dispute within such [**] period, each of NX and KMC agrees to

submit the dispute to be settled by expedited, binding arbitration with

J.A.M.S./Endispute in Boston, Massachusetts before a single arbitrator, in

accordance with the rules of such entity. The fees and expenses of the

arbitrator, as between KMC and NX, shall be borne by them in such proportions as

shall be determined by the arbitrator, or if there is no such determination,

then such fees and expenses shall be borne equally by KMC and NX.

 

             9.4 Taxes. NX shall pay all taxes, fees and duties or other amounts,

however designated, including any value added taxes, which are levied or based

upon the fees and other amounts charged by KMC to NX under this Agreement;

provided that the foregoing shall not obligate NX to pay any taxes based on the

income, gross receipts or property of KMC.

 

      10.    SHIPMENT & TRANSPORTATION

 

            10.1 F.O.B. Point. All provides are F.O.B. KMC's shipping dock. NX

shall be responsible for the payment of all transportation charges incurred in

connection with this Agreement, except as otherwise provided under Section 11.2.

 

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            10.2 Shipping Instructions. Normally KMC will ship in accordance

with NX's shipping instructions, including, if requested by NX, drop shipments

to its designated customers. In the absence of specific instructions, KMC

reserves the right to ship by the method it reasonably deems most appropriate to

the NX facility.

 

            10.3 Damage Claims. All claims for loss or breakage and damage,

whether concealed or obvious, must be made to the carrier by NX within a

reasonable time after receipt of the shipment, but in no event shall KMC be

responsible for any such loss, breakage or damage, unless due to KMC's

negligence.

 

            10.4 Shipping of Additional Equipment. If NX wishes KMC to ship NX

equipment together with the Instrument under KMC's drop shipments to NX's

designated customers, the parties shall negotiate a payment by NX to KMC for

such services.

 

      11.    WARRANTY OF KMC

 

            11.1 Warranty. KMC warrants to NX that the Instrument manufactured

hereunder will be free, under normal use and maintenance, from defects in

material and workmanship for the period of twelve (12) months from the date of

shipment by KMC. Any materials provided by NX from a third party vendor or as

customer furnished materials are excluded from this warranty, and shall be the

responsibility of NX. Any defects caused by the misuse or faulty maintenance of

the Instrument by NX, its customers or any other person or entity other than KMC

are also excluded from this warranty and shall be the responsibility of NX.

Upgrades, reconfigurations, testing, repairs, maintenance and integration of an

Instrument by or for NX shall not void any such warranty, provided that any such

work is performed in a workmanlike manner consistent with industry standards. It

is further understood and agreed that NX shall be solely responsible for any and

all regulatory submissions to and approvals by the applicable regulatory

agencies arising out of or related to the aforementioned work.

 

            11.2 Sole and Exclusive Remedy. Subject to Section 11.4, as NX's

sole and exclusive remedy for any defects in the Instrument, KMC will, at is

option, repair or replace without charge, any Instrument manufactured by it,

which is found by KMC to be so defective; provided, however, that (a) the

Instrument, subassembly or part involved is returned by transportation

designated by KMC to a location designated by KMC; and (b) KMC is notified by NX

in writing of the defect within the warranty period set forth in Section 11.1

hereof. Except as otherwise provided in Sections 11.1 and 11.4 hereof, no

allowance will be made for repairs or replacements made without KMC's written

consent. KMC will pay transportation charges from NX to KMC for the returned

Instrument, and from KMC to NX for the repaired Instrument or its replacement.

 

            11.3 Disclaimer. OTHER THAN THE WARRANTY SPECIFIED ABOVE, KMC MAKES

NO OTHER WARRANTIES OF ANY KIND WHATSOEVER, EXPRESSED OR IMPLIED, AND ALL

WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY

DISCLAIMED BY KMC AND EXCLUDED FROM THE TERMS OF THIS AGREEMENT.

 

                                       -11-

 

<PAGE>

 

            11.4 On-Site Warranty Program. In addition to the options for

repairing Instruments set forth above in Sections 11.1 and 11.2 hereof, NX shall

have the right to perform an on-site warranty repair program for the Instruments

in a manner consistent with the standards to be set forth in an Exhibit to be

discussed in good faith and mutually agreed upon by the parties on or about

August 15, 2005. Such Exhibit shall provide that KMC's warranty under Section

11.1 hereof shall remain in full force and effect.

 

      12.    TERM AND TERMINATION

 

            12.1 Term of Agreement. This Agreement will commence as of the

Effective Date and, unless sooner terminated as herein provided, will continue

in effect until the delivery of the [**] unit of the Instrument ordered under

this Agreement (the "INITIAL TERM"). The Term shall automatically extend for

additional one (1) year periods ("EXTENSION TERM(S)") unless either party

provides the other party with written notice of termination not later than [**]

prior to the end of the Initial Term or any Extension Term. KMC's exclusive

manufacturing rights shall only apply during the Initial Term, subject to the

limitations set forth herein. KMC shall have no exclusive manufacturing rights

during any Extension Term.

 

            12.2 Termination by Either Party. This Agreement may be terminated

at any time by notice in writing to the other party upon the occurrence of one

or more of the following events:

 

                  (a) In the event of a material breach hereunder, then the

      non-breaching party may terminate this Agreement upon not less than [**]

      prior written notice, setting forth the alleged breach, unless the breach

      is cured prior to the expiration of such notice period.

 

                  (b) In the event that NX and its affiliates permanently

      discontinue the marketing of the Instrument, NX shall have the right to

      terminate this Agreement upon not less than [**] prior written notice to

      KMC; provided, however, if the marketing of the Instrument is reinstated

      by NX or any of its affiliates prior to delivery of the [**] unit of the

      Instrument ordered under this Agreement, then KMC shall have the right to

      have this Agreement reinstated. If KMC shall elect to so reinstate this

      Agreement after such termination, then the Initial Term shall continue

      until the [**] unit is delivered under this Agreement.

 

                  (c) If either party shall file a petition in bankruptcy, or