To: Mr. John Alexander, Jr.

From: George Handy

Re: Proposed Production Project in Japan

Date: February 25, 1995

___________________________________________________________

This Memorandum is in response to your request for our recommendations concerning the operational aspects of the proposed production base in Japan. As you know, Operations intends for the fiscal elements of the proposed plant to follow the model which we used in the establishment of our plant in England, although on a somewhat larger scale. As indicated by the Finance, the costs of the operation will be considerably greater than the plant in England. However, Operations does not expect any problem with the fiscal construction.

Thus, the concerns of operations focus on two principal areas. The first set of issues concern the problem of locating a suitable site for the plant and obtaining the land or a long-term lease therefor. As you know, buying land in Japan is extremely expensive. We therefore believe that it might be useful to seek a long-term lease. We are looking into that possibility now although we are finding it difficult to be seriously considered by Japanese lessors because of the fact that we are a relatively unknown foreign company in Japan. Perhaps our proposed Joint Venture partner could help us in this regard. They may even have land available which we could purchase or rent.

The second set of problems concerns technology licensing for the joint venture. The joint venture will need to be licensed with our basic precision tool manufacturing production and finishing technologies. The principal issues here will be at what rate royalty rate such technology should be licensed to the joint venture, and territorial limitations for product sold which are produced using license technology. We wish to be able to sell products produced using our technology and manufactured by the joint venture throughout Asia. However, because of our marketing and sales plans, we will wish (within Antimonopoly constraints) to ensure that such products do not end up being sold to our markets in the United States or Europe. In addition, since sales and marketing wish to develop UTís distribution system in Asia, we may wish that the joint venture have an exclusive sales and distribution arrangement with our wholesalers in Asia.

With respect to royalty rate, as you know, we are getting 4% of net sales from our operations in England. We should try to get at least that level in the Japanese joint venture. Depending on how Yasuda views this issue, we may wish to try to obtain a 5 to 7% royalty or a royalty based on a different type of formulation. A royalty of 6% of net sales would be ideal.

Another issue is whether we license our MIPIT technology to the joint venture. As we have discussed, we eventually will wish to have the joint venture produce products using the MIPIT technology at the Japan production facilities. On the other hand, since this is highly proprietary technology, we will need to have some protections on use of the technology at the joint venture facility, and obtain an appropriately high royalty rate to recover our substantial investment in technology. The royalty for MIPIT technology products should be 2% to 3% over that for our regular technology. Also, we should ensure a delay in production of MIPIT technology products at the joint venture of 2 to 3 years in order that our products using this technology are brought to market and established in the United States first.

Finally, I understand that we are considering trying to obtain JOBOT technology for our industrial machine tool production division as part of the ìdealî in this joint venture. This would be very helpful technology for our efforts to retain market share in this area and I would be willing to pay up to 6% of net sales to be able to use it. However, I would prefer a royalty rate of between 3% and 5% of net sales.

Doc