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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________.
COMMISSION FILE NUMBER 333-93069
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UTSTARCOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1782500
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1275 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(510) 864-8800
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of May 8, 2000, there were 93,497,278 shares of the Registrant's Common
Stock outstanding, par value $0.00125.
This quarterly report on Form 10Q consists of 36 pages of which this is
page 1. The Exhibit Index appears on page 34.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C>
Item 1. Condensed Consolidated Financial Statements..................................................2
Condensed Consolidated Balance Sheet as of March 31, 2000
(unaudited) and December 31, 1999............................................................2
Condensed Consolidated Statement of Operations for the three
month periods ended March 31, 2000 and March 31, 1999 (unaudited)............................3
Condensed Consolidated Statement of Cash Flows for the three
month periods ended March 31, 2000 and March 31, 1999 (unaudited)............................4
Notes to Condensed Consolidated Financial Statements.........................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................10
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................................30
PART II. OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds...................................................32
Item 4. Submission of Matters to a Vote of Security Holders ........................................32
Item 6. Exhibits ...................................................................................34
SIGNATURES ............................................................................................35
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UTSTARCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 261,663 $ 87,364
Short-term investments....................................... 8,566 --
Accounts receivable, net..................................... 89,276 77,823
Receivable from related parties.............................. 46 339
Inventories, net............................................. 78,508 55,204
Other........................................................ 18,511 8,326
---------------- ----------------
Total current assets............................................ 456,570 229,056
Property, plant and equipment, net.............................. 8,620 8,168
Investment in affiliated companies.............................. 4,220 4,460
Intangible assets, net.......................................... 23,908 25,132
Deferred tax assets............................................. 8,728 4,352
Other........................................................... 840 620
---------------- ----------------
Total assets................................................. $ 502,886 $ 271,788
================ ================
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 17,215 $ 21,745
Debt......................................................... 59,652 34,593
Debt to shareholder ......................................... 9,085 8,745
Income taxes payable......................................... 2,778 2,985
Customer deposits............................................ 15,100 5,249
Other........................................................ 23,826 29,102
---------------- ----------------
Total current liabilities....................................... 127,656 102,419
---------------- ----------------
Minority interest in consolidated subsidiaries.................. 3,910 3,649
Stockholders' equity:
Preferred stock: $.00125 par value; authorized: 99,200,000 shares;
issued: 130,013,076; liquidation value of $259,608 at December
31, 1999..................................................... -- 88
Common stock: $.00125 par value; authorized: 250,000,000 shares;
issued and outstanding: 8,929,837 at December 31, 1999 and
93,160,528 at March 31, 2000................................. 118 13
Common stock warrant............................................ -- 389
Additional paid-in capital...................................... 423,782 218,303
Deferred stock compensation..................................... (14,756) (17,792)
Accumulated deficit............................................. (37,804) (34,821)
Notes receivable from shareholders.............................. (544) (555)
Cumulative translation adjustment............................... 524 95
---------------- ----------------
Total stockholders' equity...................................... 371,320 165,720
---------------- ----------------
Total liabilities, minority interest, and stockholders' equity $ 502,886 $ 271,788
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD ENDED
--------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Net sales....................................................... $ 58,759 $ 27,551
Cost of sales (excludes stock compensation expense of $33
and $2)...................................................... 37,866 17,952
----------------- -----------------
Gross profit.................................................... 20,893 9,599
Operating expenses:
Selling, general and administrative expenses (excludes stock
compensation expense of $1,802 and $444)................... 9,262 5,587
Research and development expenses (excludes stock
compensation expense of $4,595 and $155).................. 6,314 4,045
Stock compensation expense................................... 6,430 601
Amortization of intangible assets............................ 1,223 37
----------------- -----------------
Total operating expenses........................................ 23,229 10,270
----------------- -----------------
Operating loss.................................................. (2,336) (671)
Interest income.............................................. 1,354 583
Interest expenses............................................ (757) (898)
Other income (expenses), net................................. 175 95
Equity in net income (loss) of affiliated companies.......... (240) 190
----------------- -----------------
Loss before income taxes and minority interest.................. (1,804) (701)
Income tax expense (benefit).................................... 918 (28)
----------------- -----------------
Loss before minority interest................................... (2,722) (673)
Minority interest in (earnings) loss of consolidated subsidiaries (261) (486)
----------------- -----------------
Loss from continuing operations................................. (2,983) (1,159)
Loss from discontinued operations............................... -- (267)
----------------- -----------------
Net loss........................................................ $ (2,983) $ (1,426)
================= =================
Basic and diluted loss per share:
Loss from continuing operations.............................. $ (0.08) $ (0.14)
Loss from discontinued operations............................ $ -- $ (0.03)
----------------- ----------------
Net loss..................................................... $ (0.08) $ (0.17)
================= =================
Shares used in per-share calculation:
-- Basic and diluted......................................... 35,867 8,528
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (2,983) $ (1,426)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Loss from discontinued operations............................ -- 267
Depreciation and amortization................................ 2,040 739
Net loss on sale and disposal of assets...................... 83 45
Stock compensation expense................................... 6,430 601
Equity in net (income) loss of affiliated companies.......... 240 (190)
Minority interest............................................ 261 486
Changes in operating assets and liabilities:
Accounts receivable and receivable from related parties.... (9,270) 3,771
Inventories................................................ (23,304) 2,693
Other current and non-current assets....................... (9,975) (5,250)
Accounts payable and payable to related parties............ (4,190) (8,960)
Income taxes payable....................................... (207) (41)
Other current liabilities.................................. 4,575 3,753
---------------- ----------------
Net cash used in continuing operations.......................... (36,300) (3,512)
Net cash used in discontinued operations........................ -- (153)
---------------- ----------------
Net cash used in operating activities........................... (36,300) (3,665)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...................... (1,442) (400)
Proceeds from disposal of property.............................. 90 --
Purchase of short-term investments.............................. (8,566) --
---------------- ----------------
Net cash used in investing activities........................... (9,918) (400)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock, net of expenses.............................. 195,448 142
Proceeds (payments) from borrowing, net......................... 25,059 (1,568)
Proceeds (payments) from shareholder notes, net................. 11 2
---------------- ----------------
Net cash (used in) provided by financing activities............. 220,518 (1,424)
Effects of exchange rates on cash............................... (1) 1
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 174,299 (5,488)
Less cash used in discontinued operations....................... -- (153)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 174,299 (5,335)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 87,364 17,626
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 261,663 $ 12,291
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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UTSTARCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended March 31, 2000 and
March 31, 1999 is unaudited)
1. BASIS OF PRESENTATION:
UTStarcom, Inc. (the Company), a Delaware corporation, provides
communications equipment including network access systems, optical transmission
products and subscriber terminal products for service providers that operate
wireless and wireline networks. The Company's operations are conducted primarily
by its foreign subsidiaries that manufacture, distribute, and support the
Company's products in international markets, principally the People's Republic
of China (China).
The accompanying consolidated financial statements include the accounts
of the Company and its wholly and majority (50 percent or more) owned
subsidiaries, except for the Guangdong manufacturing subsidiary (GUTS) which is
accounted for using the equity method as the Company does not have voting
control over all significant matters. All significant intercompany accounts and
transactions have been eliminated in preparation of the consolidated financial
statements. Minority interest in consolidated subsidiaries and equity in
affiliated companies are shown separately in the consolidated financial
statements. Investments in affiliated companies, of which none represent equal
to or greater than 20 percent ownership, are accounted for using the cost
method.
The accompanying financial data as of March 31, 2000 and December 31,
1999, and for the three months ended March 31, 2000 and March 31, 1999, have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The December 31, 1999 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. These condensed consolidated financial
statements should be read in conjunction with the Company's audited December 31,
1999 financial statements including the notes thereto, and the other information
set forth therein included in the Company's Registration Statement on Form S-1.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
Company's financial condition, the results of its operations and its cash flows
for the periods indicated. The results of operations for any interim period are
not necessarily indicative of the operating results for a full year or any
future period.
2. EARNINGS (LOSS) PER SHARE:
Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"). Basic earnings
per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the conversion of
convertible preferred stock (using the "if converted" method) and exercise of
stock options and warrants for all periods. Dilutive potential common shares are
not included during periods in which the Company experienced a net loss, as the
impact would be anti-dilutive.
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<PAGE>
The following table presents the calculation of basic and diluted
earnings (loss) per share (in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Numerator:
Loss from continuing operations............................ $ (2,983) $ (1,159)
Loss from discontinued operations.......................... -- (267)
----------------- -----------------
Net loss................................................... $ (2,983) $ (1,426)
================= =================
Denominator:
Weighted-average shares outstanding........................ 35,867 8,528
================= =================
Basic and diluted loss per share:
Loss from continuing operations............................ $ (0.08) $ (0.14)
Loss from discontinued operations.......................... -- (0.03)
----------------- -----------------
$ (0.08) $ (0.17)
================= =================
</TABLE>
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash paid during the period for:
Interest...................................................... $ 725 $ 1,820
Income taxes.................................................. $ 1,240 $ 207
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Noncash investing and financing activities were:
Distribution of net assets to shareholders.................... $ -- $ 131
Foreign exchange gain......................................... $ 429 $ --
Non-qualified stock option exercise tax benefits.............. $ 4,376 $ --
</TABLE>
4. CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less at the date of purchase to be cash
equivalents. Short-term investments consist primarily of investments with
original maturities of less than twelve months.
Pursuant to Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity Securities"
debt securities that the Company does not have the positive intent and ability
to hold to maturity and all marketable equity securities are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses on securities classified as available-for-sale are carried as a separate
component of stockholders' equity. Unrealized holdings gains and losses on
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<PAGE>
securities classified as available-for-sale are reported as earnings. The
fair value of investments is determined based on quoted market prices. The
cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, interest income,
realized gains and losses and declines in value judged to be other than
temporary are included in interest and other income. The cost of securities
is based on specific identification.
All of the Company's cash equivalents and short-term investments are
classified as available-for-sale. At March 31, 2000, $207 million of
available-for-sale securities were included in cash equivalents and $8.6 million
of available-for-sale securities were included in short-term investments. These
available-for-sale securities consisted of government sponsored entities notes,
commercial paper, floating rate corporate bonds and fixed income corporate
bonds.
5. BALANCE SHEET DETAIL (IN THOUSANDS):
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Raw materials................................................. $ 46,160 $ 31,461
Work in process............................................... 5,452 4,356
Finished goods................................................ 34,111 25,802
---------------- ----------------
85,723 61,619
Less allowance for obsolete inventory......................... 7,215 6,415
---------------- ----------------
$ 78,508 $ 55,204
================ ================
</TABLE>
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Buildings..................................... $ 145 $ 145
Leasehold improvements........................ 1,652 1,640
Automobiles................................... 1,484 1,173
Equipment and furniture....................... 12,207 11,720
---------------- ----------------
15,488 14,678
Less accumulated depreciation................. 6,868 6,510
---------------- ----------------
$ 8,620 $ 8,168
================ ================
</TABLE>
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Excess of purchase price over net assets acquired $ 25,695 $ 25,695
Less accumulated amortization................. 1,787 563
---------------- ----------------
$ 23,908 $ 25,132
================ ================
</TABLE>
Other current liabilities consist of the following:
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<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Accrued contract costs........................ $ 17,629 $ 19,373
Accrued compensation and bonus................ 3,001 3,493
Warranty costs................................ 1,424 1,236
Other......................................... 1,772 5,000
---------------- ----------------
$ 23,826 $ 29,102
================ ================
</TABLE>
6. DEBT TO SHAREHOLDER (IN THOUSANDS):
Payable to related parties and debt to shareholder as of March 31, 2000 and
December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Debt to shareholder-SOFTBANK CORP.(1)......................... $ 9,085 $ 8,745
================ ================
</TABLE>
- -----------
(1) Jitong, a company in China with which the Company had a management
consulting agreement, paid UTSC $9,085 for the repayment of a loan made by
SOFTBANK to Jitong. Repayment of this amount to SOFTBANK is planned for the
second quarter of 2000. This payable is a non interest bearing balance.
7. DEBT (IN THOUSANDS):
The following represents the outstanding borrowings as of March 31, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
NOTE RATE MATURITY 2000 1999
- ------------------------------------- --------------------- ------------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Bank of China(1) From 5.58% to 5.86% From 4/00 to 03/01 $ 35,542 $ 27,108
China Merchants Bank(2) 6.44% 03/01 3,614 --
Commercial Bank of Hangzhou(3) 6.44% 10/00 6,024 6,024
Commercial Bank of Hangzhou(4) 5.86% 03/01 12,048 --
CITIC Industrial Bank(5) 6.14% 06/00 2,410 --
Industrial & Commercial Bank of 6.44% 02/00 -- 1,446
China(6)
Other Various Various 14 15
---------- ----------
Total debt $ 59,652 $ 34,593
========== ==========
</TABLE>
- -----------
(1) Guaranteed by the Company and the minority shareholder of Zhejiang
manufacturing subsidiary (HUTS). This represents drawings on the Company's
line of credit with the bank. This line of credit allows for borrowings of
up to $90,361; therefore, $54,819 is available under this facility at March
31, 2000.
(2) Collateralized by $1,500 deposited with the bank and guaranteed by HUTS.
This line of credit allows for borrowings of up to $3,614 and matures on
March 1, 2001.
(3) Guaranteed by HUTS. This line of credit allows for borrowings of up to
$6,024 and matures on October 28, 2000.
(4) Guaranteed by UTStarcom-China. This line of credit allows for borrowings of
up to $12,048 and matures in March, 2001.
(5) Guaranteed by HUTS. This line of credit allows for borrowings of up to
$2,410.
(6) Collateralized by $1,500 deposited with the bank. This line of credit
allows for borrowings of up to $1,446. As of March 31, 2000, this line has
been paid back in full.
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<PAGE>
8. FORWARD FOREIGN EXCHANGE CONTRACT:
The Company has contracts denominated in Japanese Yen to purchase
portions of its inventories and supplies. As such, it is exposed to adverse
movements in the currency exchange rate for Japanese Yen. The Company enters
into forward foreign exchange contracts to reduce such foreign exchange
exposures.
The Company has adopted Statement of Financial Accounting Standard No.
52 ("SFAS 52"), "Accounting for Foreign Currency Translation" to account for its
forward foreign exchange contract transaction. SFAS 52 states that gains or
losses on forward contracts shall be deferred and included in the measurement of
the related foreign currency transactions. As of March 31, 2000, the Company had
a forward contract to hedge Japanese Yen valued at $10.4 million and deferred
gains and losses related this forward contract were not material.
9. COMPREHENSIVE INCOME (LOSS):
The Company's total comprehensive net income (loss) was as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------------
(UNAUDITED)
<S> <C> <C>
Net income (loss)............................ $ (2,983) $ (1,426)
Change in accumulated translation adjustments 429 --
---------------- ---------------------
Total comprehensive income................... $ (2,554) $ (1,426)
================ =====================
</TABLE>
10. INITIAL PUBLIC OFFERING:
On March 3, 2000, the Company sold 11,500,000 shares of common stock
including the exercise of the underwriters' over-allotment option at $18.00 per
share. The sale of the shares of common stock generated aggregate gross proceeds
of approximately $207.0 million for the Company. The aggregate net proceeds were
approximately $190.6 million, after deducting underwriting discounts and
commissions and related expenses. As of the effective date of the offering, all
of the convertible preferred stock outstanding was converted into 70,377,322
shares of common stock. The net proceeds are expected to be used for general
corporate purposes, including working capital and capital expenditures. A
portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies or product offerings; however, there are
no current material agreements or commitments with respect to any such
activities.
11. RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25". This Interpretation
clarifies the application of Opinion 25 for certain stock compensation issues
including the definition of employee for purposes of applying Opinion 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option, and the accounting for an exchange of stock compensation
-9-
<PAGE>
awards in a business combination. This Interpretation is effective July 1, 2000.
UTStarcom does not expect the adoption of FASB Interpretation No. 44 to have a
significant effect on the financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in the financial statements. All
registrants are expected to apply the accounting and disclosures described in
SAB 101. Because the Company has complied with generally accepted accounting
principles for its historical revenue recognition, a change, if any, in its
revenue recognition policy resulting from SAB 101 will be reported as a
change in accounting principle in the quarter ended June 30, 2000 and may
require a cumulative adjustment in the second quarter of 2000. The Company is
still in the process of assessing the impact if any of SAB 101 on its
financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. UTStarcom will adopt SFAS No. 133 during its year ending December 31,
2001. UTStarcom is unable to predict the impact of adopting SFAS No. 133.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which reflect the
Company's current views with respect to future events, which may impact the
Company's results of operations and financial condition. In this report, the
words "anticipates", "believes", "expects", "intends", "future" and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
without limitation those set forth below under the caption "Factors Which May
Affect Future Results," which could cause actual future results to differ
materially from historical results or those described in the forward-looking
statements. The forward-looking statements contained in this report should be
considered in light of these and other factors. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
OVERVIEW
We provide communications equipment for service providers that operate
wireless and wireline networks in rapidly growing communications markets. Our
integrated suite of network access systems, optical transmission products and
subscriber terminal products allows service providers to offer efficient and
scalable voice, data and Internet access services. Service providers can easily
integrate our standards-based systems into their existing networks and deploy
our systems in new broadband, IP-based and wireless network rollouts. To date,
substantially all of our sales have been to service providers in China.
We incorporated in Delaware as Unitech Industries Inc. in 1991. Since
our incorporation, we have focused our resources on developing products for
China's communications market. We shipped our first network access products in
1993. In 1994, we changed our name to Unitech Telecom, Inc. In 1995, we acquired
StarCom Network Systems, Inc. and changed our name to UTStarcom, Inc. During
1996, we introduced our advanced, V5.1 and V5.2 compliant, multi-service network
access product, the AN-2000. Late
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<PAGE>
in 1996, we introduced our Airstar wireless access system. In December 1999, we
completed the acquisition of Wacos, Inc., a research and development subsidiary
that develops IP-based switching systems. As part of our business operations in
China, we have established a wholly owned subsidiary and two joint ventures in
that country.
To date, we have derived substantially all of our revenues from sales
of communications equipment to service providers in China. Each of the Post and
Telecommunication Bureaus (PTBs) to whom we sell our equipment in China is part
of the China Telecom system and subject to its ultimate control. However,
equipment purchasing decisions are generally made at the individual PTB level.
Our customers often make a large initial purchase of our equipment followed by
supplemental purchases of enhancements and upgrades. As a result, our largest
revenue-producing customers typically vary from period to period.
Over 99% of our sales for the three months ended March 31, 2000 were
made in China. Accordingly, our business, financial condition and results of
operations may be influenced by the political, economic and legal environment in
China, and by the general state of China's economy. Our operations in China are
subject to special considerations and significant risks not typically associated
with companies in the United States. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. Our results may be adversely affected by, among other things, changes
in the political, economic and social conditions in China, and by changes in
governmental policies with respect to laws and regulations, changes in China's
telecommunications industry and regulatory rules and policies, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation.
Specifically, remittances from China which are of a capital nature,
such as the repayment of bank loans denominated in foreign currencies, require
approval from appropriate governmental authorities before Renminbi can be used
to purchase foreign currency. Although the payment of cash dividends is
permitted so long as our subsidiaries have sufficient reserves and adequate
amounts of Renminbi to purchase foreign currency, regulations restrict the
ability of our subsidiaries to transfer funds to us through intercompany loans
and advances.
We sell our products in China through a direct sales force. The
evaluation period for our products may span a year or more. Revenue from product
sales is recognized when title is passed and all significant contractual
obligations have been satisfied and collection of the resulting receivable is
reasonably assured. Title passes on customer acceptance.
Cost of sales consists primarily of material costs, third party
commissions, costs associated with assembly and testing of products, costs
associated with installation and customer training and overhead and warranty
costs. Cost of sales also includes import taxes on components.
Our gross profit has been affected by material costs, product mix,
average selling prices, and the type of distribution channel through which we
sell our products. Our gross profit, as a percentage of net sales, varies among
our product families. The gross profits, as a percentage of net sales, on our
mobile phone handsets are very low. We expect that our overall gross profit, as
a percentage of net sales, will fluctuate from period to period as a result of
shifts in product mix, anticipated decreases in average selling prices and our
ability to reduce product costs.
Selling, general and administrative expenses include compensation and
benefits, professional fees, sales commissions, provision for uncollectible
accounts receivable and travel and entertainment costs. We intend to pursue
aggressive selling and marketing campaigns and to expand our direct sales
organization and, as a result, our sales and marketing expenses will increase in
future periods. We also expect that in support of our continued growth and our
operations as a public company general and administrative expenses will continue
to increase for the foreseeable future.
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Research and development expenses consist primarily of salaries and
related costs of employees engaged in research, design and development
activities, the cost of parts for prototypes, equipment depreciation and third
party development expenses. We believe that continued investment in research and
development is critical to our long-term success. Accordingly, we expect that
our research and development expenses will increase in future periods.
In connection with the grant of stock options to some of our employees,
we recorded deferred stock compensation of $15.9 million during 1999 and $3.6
million during the three months ended March 31, 2000, representing the
difference between the deemed fair value of common stock for accounting purposes
and the option exercise price for these options at the date of grant. In
connection with grants to non-employees during 1999, we recorded deferred
compensation of $7.4 million. Deferred stock compensation is presented as a
reduction of stockholders' equity, with amortization recorded over the vesting
period of the option, which is generally four years. We recorded stock
compensation expense of approximately $5.6 million during 1999 and $6.4 million
during the three months ended March 31, 2000. At March 31, 2000, approximately
$14.7 million remained to be amortized.
Amortization of intangible assets consists primarily of the
amortization of intangible assets associated with acquisitions in China and our
acquisition of the minority interest in our Wacos, Inc. subsidiary.
Consolidated equity in net income (loss) of affiliated companies
comprises our share of the earnings from our Guangdong manufacturing subsidiary.
Under current regulations in China, foreign investment enterprises that
have been accredited as technologically advanced enterprises are entitled to
additional tax incentives. These tax incentives vary in different locales and
could include preferential national enterprise income tax treatment at 50% of
the usual rates for different periods of time. All of our active subsidiaries in
China were accredited as technologically advanced enterprises.
Minority interest in (earnings) loss of consolidated subsidiaries
represents the share of earnings in our Zhejiang manufacturing subsidiary that
is owned by our subsidiary partner.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET SALES. Our net sales increased 113.2% from $27.6 million for the
three months ended March 31, 1999 to $58.8 million for the corresponding period
in 2000. This increase was primarily due to an increase in sales volume of our
Airstar system. For the three months ended March 31, 2000, sales to Hangzhou PTB
accounted for 39.6% of our net sales. For the three months ended March 31, 1999,
sales to Baoding PTB and Jinan PTB accounted for 23.4% and 12.2% of our net
sales, respectively.
GROSS PROFIT. Gross profit increased 117.7% from $9.6 million for the
three months ended March 31, 1999 to $20.9 million for the corresponding period
in 2000. Gross profit, as a percentage of net sales, increased from 34.8% for
the three months ended March 31, 1999 to 35.6% for the three months ended March
31, 2000. The increase in gross profit, as a percentage of net sales, was
primarily due to increases in sales of higher margin Airstar systems.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 65.8% from $5.6 million for the three months
ended March 31, 1999 to $9.3 million for the corresponding period in 2000. The
increase in selling, general and administrative expenses was primarily due to
increased sales and administrative personnel and related expenses associated
with the growth in net sales and the
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expansion of our overall level of business activities. Selling, general and
administrative expenses as a percentage of net sales decreased from 20.3% for
the three months ended March 31, 1999 to 15.8% for the corresponding period in
2000. The decrease in selling, general and administrative expenses as a
percentage of net sales was primarily due to economies of scale associated with
the significant increases in net sales. We expect our selling, general and
administrative expenses to increase in absolute dollar amounts in future periods
as sales and marketing activities increase and we further invest in
infrastructure and incur additional expenses related to anticipated growth of
our business and operation as a publicly held company.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
56.1% from $4.0 million for the three months ended March 31, 1999 to $6.3
million for the corresponding period in 2000. The increase in research and
development expenses was primarily due to the hiring of additional technical
personnel and increased prototype expenses and licensing fees to support our
research and development efforts. As a percentage of net sales, research and
development expenses decreased from 14.7% for the three months ended March 31,
1999 to 10.7% for the corresponding period in 2000. The decrease in research and
development expenses as a percentage of sales was primarily due to economies of
scale associated with the significant increases in net sales. We expect our
research and development expenses to increase in absolute dollar amounts in
future periods as we expand our research and development organization to support
new product development.
STOCK COMPENSATION EXPENSE. Stock compensation expense increased from
$0.6 million for the three months ended March 31, 1999 to $6.4 million for the
corresponding period in 2000. The expense is related to certain stock option
grants to employees and non-employees which we are amortizing over the vesting
periods of the applicable options.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased from $37,000 for the three months ended March 31, 1999 to $1.2 million
for the corresponding period in 2000. The increase in amortization of intangible
assets was due to our December 1999 acquisition of the portion of our Wacos,
Inc. subsidiary owned by the minority shareholders.
INTEREST INCOME (EXPENSES), NET. Net interest expenses were $0.3
million for the three months ended March 31, 1999 and net interest income was
$0.6 million for the corresponding period in 2000. The increase was primarily
due to increased interest income from higher average cash balances.
OTHER INCOME (EXPENSES), NET. Other income was $0.1 million for the
three months ended March 31, 1999 and $0.2 million for the corresponding period
in 2000. The increase was primarily due to dividend income from our investment
in affiliated companies.
EQUITY IN INCOME (LOSS) OF AFFILIATED COMPANIES. Consolidated equity in
net income of affiliated companies was $0.2 million for the three months ended
March 31, 1999 and consolidated equity in net loss of affiliated companies was
$0.2 million for the corresponding period in 2000. The change between the two
periods was primarily due to the decrease of net income at our Guangdong
manufacturing subsidiary.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $28,000 for the
three months ended March 31, 1999 and income tax expenses were $0.9 million for
the corresponding period in 2000. The increase in the income tax expenses was
due to our increasing income.
MINORITY INTEREST IN (EARNINGS) LOSS OF CONSOLIDATED SUBSIDIARIES.
Minority interest in earnings of consolidated subsidiaries was $0.5 million for
the three months ended March 31, 1999 and $0.3 million for the corresponding
period in 2000. The change between the two periods was primarily due to the
decreased profitability at our Zhejiang subsidiary.
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LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through the sales of preferred stock,
bank lines of credit and our initial public offering in March 2000. In November
and December 1999, we secured private equity financing totaling $55.0 million.
In March, 2000, we raised $190.6 million in net proceeds from our initial public
offering. As of March 31, 2000, we had working capital of $328.9 million,
including $261.7 million in cash and cash equivalents and $59.7 million of
Renminbi-denominated bank borrowings.
We plan to invest $13.0 million in an investment fund to be established
by SOFTBANK focused on investments in Internet companies in China. Our
investment will constitute 10% of the funding for the SOFTBANK investment fund,
with SOFTBANK contributing the remaining 90%. We will be a passive investor and
have no decision-making authority with respect to investments by the fund. The
fund will have a separate management team, and none of our employees will be
employed by the fund. One of our directors will serve as the Chief Executive
Officer of the fund, and our Chief Executive Officer will be chairman of the
board of the fund. We will not be obligated to pay, nor will we receive, any
fees in connection with services provided to the fund. We do not know what
material fees will be paid to or by SOFTBANK or any other parties in connection
with services provided to the fund. We have not yet entered into written
agreements with SOFTBANK for the creation and operation of the fund.
Net cash used in operations for the three months ended March 31, 2000
of $36.3 million was primarily due to an increase in inventories, accounts
receivable and other current and non-current assets of $23.3 million, $9.3
million and $10.0 million, respectively, and a decrease in accounts payable of
$4.2 million. The uses of cash were partially offset by depreciation and
amortization expense of $2.0 million, increase in other current liabilities of
$4.6 million and stock compensation expense of $6.4 million.
Net cash used in investing activities for the three months ended March
31, 2000 of $9.9 million was primarily due to the acquisition of property, plant
and equipment of $1.4 million and the purchase of short-term investments of $8.6
million.
Net cash provided by financing activities for the three months ended
March 31, 2000 of $220.5 million was primarily due to net proceeds of $190.6
from the issuance of common stock through our initial public offering and net
proceeds of $25.1 million from borrowing under our lines of credit.
Our international sales are generally denominated in local currencies.
Due to the limitations on converting Renminbi, we are limited in our ability to
engage in currency hedging activities in China. Although the impact of currency
fluctuations of Renminbi to date has been insignificant, we cannot guarantee
that fluctuations in currency exchange rates in the future will not have a
material adverse effect on revenues from international sales and,
correspondingly, on our business, financial condition and results of operations.
We also have contracts negotiated in Japanese Yen for purchasing portions of our
inventories and supplies. We have entered into foreign currency hedging
transactions to reduce exposure to foreign exchange risks. As of March 31, 2000,
we had a forward contract to hedge Japanese Yen valued at $10.4 million. The
contract was entered into on February 22, 2000.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
OUR FUTURE SALES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY
Our quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate in the future due to a variety of factors, some of
which are outside of our control. As a result, period to period comparisons of
our operating results are not necessarily meaningful or indicative of future
performance. Furthermore, it is likely that in some future quarters our
operating results will fall below the expectations of securities analysts or
investors. If this occurs, the trading price of our common stock could decline.
Factors that may affect our future operating results include:
- the timing, number and size of orders for our products, as well as
the relative mix of orders for each of our products, particularly
the volume of lower margin telephone handsets;
- the evolving and unpredictable nature of the economic, regulatory
and political environments in China and other countries in which
we market or plan to market our products;
- aggressive price reductions by our competitors;
- currency fluctuations;
- market acceptance of our products and product enhancements;
- the lengthy and unpredictable sales cycles associated with sales
of our products combined with the impact of this variability on
our suppliers' ability to provide us with components on a timely
basis; and
- longer collection periods of accounts receivable in China and
other countries.
The limited performance history of some of our products, our limited
forecasting experience and processes and the emerging nature of our target
markets make forecasting our future sales and operating results difficult. Our
expense levels are based, in part, on our expectations regarding future sales,
and these expenses are largely fixed, particularly in the short term. In
addition, to enable us to promptly fill orders, we maintain inventories of
finished goods, components and raw materials. As a result, we commit to
considerable costs in advance of anticipated sales. In the past, a substantial
portion of our sales in each quarter resulted from orders received and shipped
in that quarter, and we have operated with a limited backlog of unfilled orders.
Accordingly, we may not be able to reduce our costs in a timely manner to
compensate for any unexpected shortfall between forecasted and actual sales. Any
significant shortfall of sales may require us to maintain higher levels of
inventories of finished goods, components and raw materials than we require,
thereby increasing our risk of inventory obsolescence and corresponding
inventory write-downs and write-offs. Although we have reserved against
inventory obsolescence, we cannot guarantee that these reserves will be adequate
to offset all write-downs or write-offs.
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WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT
As of March 31, 2000, we had an accumulated deficit of approximately
$37.8 million. We anticipate continuing to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to generate higher
revenues to sustain profitability. Numerous factors could negatively
impact our results of operations, including a decrease in sales, price pressures
and a fixed cost structure which could limit our ability to respond to declining
revenues. Although our sales have grown in recent quarters, our past results
should not be relied on as indications of our future performance. We cannot
assure you that we will be able to remain profitable in future periods.
COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES, REVENUES AND MARKET SHARE
We face intense competition in our target markets and expect
competition to increase. Increased competition in our target markets may result
in price reductions, reduced gross profit as a percentage of net sales and loss
of market share. Our principal competitors for our different product lines
include the following:
- AIRSTAR SYSTEM: Alcatel Alsthom CGE, S.A.; Ericsson LM Telephone
Co.; Huawei Technology Co., Ltd.; Lucent Technologies, Inc.;
Motorola, Inc.; NEC Corporation; Siemens AG; and Zhongxing
Telecommunications Equipment.
- AN-2000 AND OMUX: Advanced Fibre Communications, Inc.; Alcatel;
Bosch Telecom GmbH; ECI Telecom Ltd.; Ericsson; Fujitsu Limited;
Huawei; Lucent; NEC; Nokia Corporation; Shanghai Bell Alcatel
Mobile Communication; Siemens; and Zhongxing.
- WACOS SYSTEM: Alcatel; Cisco Systems, Inc.; Clarent Corporation;
Ericsson; Huawei; Lucent; Motorola; Nokia; Nortel Networks
Corporation; Nuera Communications, Inc.; Siemens; Tachion
Networks, Inc.; and Vienna Systems Corp.
We are increasingly facing competition from domestic companies in China
and believe that our strongest competition in the future may come from these
companies, many of which operate under lower cost structures and more favorable
governmental policies and with much larger sales forces than we do. Furthermore,
other companies not presently offering competing products may also enter our
target markets. Many of our competitors have significantly greater financial,
technical, product development, sales, marketing and other resources than we do.
Additionally, some competitors may be able to offer significant financing
arrangements to service providers, in some cases facilitated by favorable
government policies. Moreover, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties, including our current customers, to increase their ability to
produce products that address the needs of service providers in our target
markets.
THE SUCCESS OF OUR BUSINESS DEPENDS ON A RELATIVELY SMALL NUMBER OF LARGE SYSTEM
DEPLOYMENTS, AND ANY CANCELLATION, REDUCTION OR DELAY IN THESE DEPLOYMENTS COULD
HARM OUR BUSINESS
Our business is characterized by large system deployments for a
relatively small number of service providers. In the three months ended March
31, 2000, one customer accounted for 39.6% of our net sales. Our dependence on
large system deployments makes our ability to provide systems in a timely and
cost-effective manner critically important to our business. We have in the past
experienced delays and encountered other difficulties in the installation and
implementation of our systems. Various factors could cause future delays,
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including technical problems and the shortage of qualified technicians. Any
delays or difficulties in deploying our systems, or the cancellation of any
orders by service providers, could significantly harm our business.
WE DO NOT HAVE SOME OF THE LICENSES WE REQUIRE TO SELL OUR NETWORK ACCESS
PRODUCTS IN CHINA
Beginning January 1, 1999, China's government required that all
telecommunications equipment connected to public or private telecommunications
networks within China be approved by the Ministry of Information Industry and
the manufacturer of the equipment obtain a network access license for each of
its products. Sellers are prohibited from selling or advertising for sale
equipment for which its manufacturer has not obtained a network access license
and may be liable for penalties in an amount up to three times earnings from the
sale of any equipment sold beginning January 1, 1999 without a license. In
addition, any unlicensed equipment may be required to be removed from the
network. Failure to obtain the required licenses could require us to remove
previously installed equipment and would prohibit us from making further sales
of the unlicensed products in China, which would substantially harm our
business.
The regulations implementing these requirements are not very detailed,
have not been applied by a court and may be interpreted and enforced by
regulatory authorities in a number of different ways. Accordingly, we have
obtained an opinion from our counsel in China as to which licenses we are
required to obtain. Based upon this counsel's advice, we believe that we have
obtained the required network access licenses for our AN-2000 system and bundled
OMUX product. We have applied for a network access license for our Airstar
system. The evaluation group for access networks under the Ministry of
Information Industry has recommended that the Ministry of Information Industry
issue a license for our Airstar system. However, we do not yet have this network
access license and we cannot provide any assurance that a license will be issued
for our Airstar system. We have also applied for network access licenses for our
stand-alone OMUX product and for other products which we are no longer
manufacturing but had previously sold to service providers in China. Network
access licenses will be required for any additional products that we may develop
for sale in China, including our WACOS system. Based upon verbal inquiries made
by our counsel in China to the Ministry of Information Industry, we believe that
for products which we sold before January 1, 1999, such as the Airstar system,
no penalties will be imposed by the Ministry of Information Industry for sales
we have made or will make during the period an application is pending. However,
our counsel in China has advised us that China's governmental authorities may
interpret or apply the regulations with respect to which licenses are required
and the ability to sell a product while an application for the product license
is pending differently, either of which could have a material adverse effect on
our business and financial condition.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO COLLECT PAYMENTS FROM OUR CUSTOMERS
ON A TIMELY BASIS
Our customers often must make a significant commitment of capital to
purchase our products. As a result, any downturn in a customer's business that
affected the customer's ability to pay us could harm our financial condition.
Moreover, accounts receivable collection cycles historically tend to be much
longer in China than in other markets. The failure of any of our customers to
make timely payments could require us to write-off accounts receivable or
increase our accounts receivable reserves, either of which could adversely
affect our financial condition.
DECLINE IN BUSINESS ACTIVITY DURING CHINA'S LUNAR NEW YEAR MAY RESULT IN
DECREASED SALES DURING OUR FIRST QUARTER
Business activity in China declines considerably during the first
quarter of each year in observance of the Lunar New Year. As a result, sales
during the first quarter of our fiscal year have in the past typically been
lower than sales during the fourth quarter of the preceding year and we expect
this trend to continue in the
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future. We will continue to face this seasonally in the future and do not have
the ability to forecast with any degree of certainty the impact of the decreased
business activity during the Lunar New Year on our sales and operating results.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY,
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
The emerging market for communications equipment in developing
countries is characterized by rapid technological developments, frequent new
product introductions and evolving industry and regulatory standards. Our
success will depend in large part on our ability to enhance our network access
and switching technologies and develop and introduce new products and product
enhancements that anticipate changing service provider requirements and
technological developments. We may need to make substantial capital expenditures
and incur significant research and development costs to develop and introduce
new products and enhancements. If we fail to timely develop and introduce new
products or enhancements to existing products that effectively respond to
technological change, our business, financial condition and results of
operations could be materially adversely affected.
From time to time, we or our competitors may announce new products or
product enhancements, services or technologies that have the potential to
replace or shorten the life cycles of our products and that may cause customers
to defer purchasing our existing products, resulting in inventory obsolescence.
Future technological advances in the communications industry may diminish or
inhibit market acceptance of our existing or future products or render our
products obsolete.
Even if we are able to develop and introduce new products, we cannot
assure you that they will gain market acceptance. Market acceptance of our
products will depend on various factors including:
- our ability to obtain necessary approvals from regulatory
organizations;
- the perceived advantages of the new products over competing
products;
- our ability to attract customers who have existing relationships
with our competitors;
- product cost relative to performance; and
- the level of customer service available to support new products.
Specifically, sales of our AN-2000 system outside of China depend, in
part, on the adoption of the V5.2 standard in these markets. Additionally, sales
of our Personal Access System, or PAS, the mobile component of our Airstar
wireless system, will depend in part upon consumer acceptance of the mobility
limitations of this service. The introduction of inexpensive wireless telephone
service or other competitive services in China may have a material adverse
effect on sales of our Airstar systems in China. If our existing or new products
fail to achieve market acceptance for any reason, our business could be
seriously harmed.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO DELIVER QUALITY PRODUCTS ON A
TIMELY AND COST EFFECTIVE BASIS
Our operating results depend on our ability to manufacture products on
a timely and cost effective basis. In the past, we have experienced reductions
in yields as a result of various factors, including defects in component parts
and human error in assembly. If we experience a deterioration in manufacturing
performance or a delay in production of any of our products, we could experience
delays in shipments and cancellations of
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orders. Moreover, networking products frequently contain undetected software or
hardware defects when first introduced or as new versions are released. In
addition, our products are often embedded in or deployed in conjunction with
service providers' products which incorporate a variety of components produced
by third parties. As a result, when a problem occurs, it may be difficult to
identify the source of the problem. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relation problems or loss of customers, any one of which could harm our
business.
If future demand for our products requires additional manufacturing
capacity, we may invest in and build additional manufacturing facilities, most
likely in China. However, we cannot assure you that the new manufacturing
facilities will attain the same quality or level of efficiencies as our existing
facilities. Alternatively, or in addition, we may contract with third party
manufacturing facilities over which we may be unable to exercise the same degree
of quality control as we can over our own facilities. We currently have no
arrangements with any independent manufacturing facility, and we may not be able
to obtain independent manufacturing sources on commercially attractive terms if
and when needed.
WE DEPEND ON SOME SOLE SOURCE AND OTHER KEY SUPPLIERS FOR COMPONENTS AND
MATERIALS USED IN OUR PRODUCTS, AND IF THESE SUPPLIERS FAIL TO PROVIDE US WITH
ADEQUATE SUPPLIES OF HIGH QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION
AND BUSINESS COULD BE HARMED
Some components and materials used in our products are purchased from a
single supplier or a limited group of suppliers. If any supplier is unwilling or
unable to provide us with high quality components and materials in the
quantities required and at the costs specified by us, we may not be able to find
alternative sources on favorable terms, in a timely manner, or at all. Our
inability to obtain or to develop alternative sources if and as required could
result in delays or reductions in manufacturing or product shipments. Moreover,
these suppliers may delay product shipments or supply us with inferior quality
products. If any of these events occur, our competitive position, reputation and
business could suffer.
OUR ABILITY TO SOURCE A SUFFICIENT QUANTITY OF HIGH QUALITY HANDSETS AND OTHER
COMPONENTS USED IN OUR PRODUCTS MAY BE LIMITED BY CHINA'S IMPORT RESTRICTIONS
AND DUTIES AS WELL AS OUR ABILITY TO OBTAIN SUFFICIENT DOMESTIC MANUFACTURING
CAPACITY
We require a significant number of imported components to manufacture
our products in China. Imported electronic components and other imported goods
used in the operation of our business are subject to a variety of permit
requirements, approval procedures and import duties. Failure to obtain necessary
permits or approvals, administrative actions by China's government to limit
imports of certain components, or non-payment of required import duties could
subject us to penalties and fines and could adversely affect our ability to
manufacture and sell our products in China. In addition, import duties increase
the cost of our products and may make them less competitive.
In particular, an integral component of our Airstar PAS system is the
handset used by subscribers to make and receive mobile telephone calls. Our
inability to obtain a sufficient number of high quality handsets could severely
harm our business. Currently, a worldwide shortage of handsets exists. Although
we have contracted with Japanese vendors to manufacture handsets under the
UTStarcom label, we cannot assure you that they will be able to supply adequate
quantities of handsets. Moreover, we must pay an import duty on each handset
that we import into China, which may result in a competitive cost advantage for
our competitors who produce handsets in China. As a result, we are evaluating
various manufacturing alternatives within China. Currently, we are in the early
stages of negotiations with third parties to manufacture handsets for us in
China. We may be unable to enter into arrangements with third parties who are
capable of producing adequate
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quantities of high-quality handsets. We also intend to develop the capacity to
manufacture our own handsets. However, we may be unsuccessful in our efforts to
do so. Additionally, to comply with manufacturing regulations in China we will
need to obtain components for our handsets from local sources. These sources may
not be able to produce adequate quantities of components that meet our quality
standards.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION IN CHINA AND INDIRECT
DISTRIBUTION CHANNELS ELSEWHERE OR SUCCESSFULLY MANAGE OUR EXPANDED SALES
ORGANIZATION, OUR OPERATING RESULTS MAY SUFFER
Our distribution strategy focuses primarily on developing and expanding
our direct sales organization in China and our indirect distribution channels
outside of China. We may not be able to successfully expand our direct sales
organization in China and the cost of any expansion may exceed the revenue
generated from these efforts. Even if we are successful in expanding our direct
sales organization in China, we may not be able to compete successfully against
the significantly larger and better-funded sales and marketing operations of
current or potential competitors. In addition, if we fail to develop
relationships with significant international resellers or manufacturers'
representatives, or if these resellers or representatives are not successful in
their sales or marketing efforts, we may be unsuccessful in our expansion
efforts outside China.
WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE
OUR REVENUES, AND, AS A RESULT, WE MUST INTRODUCE NEW PRODUCTS AND REDUCE OUR
COSTS IN ORDER TO MAINTAIN PROFITABILITY
The average selling prices for communications access and switching
systems and subscriber terminal products, such as handsets, in China have been
declining as a result of a number of factors, including:
- increased competition;
- aggressive price reductions by competitors;
- rapid technological change; and
- price and performance enhancements.
We have in the past experienced and expect in the future to experience
substantial period-to-period fluctuations in operating results due to declining
average selling prices. We anticipate that average selling prices of our
products will decrease in the future in response to product introductions by us
or our competitors or other factors, including price pressures from customers.
Therefore, we must continue to develop and introduce new products and
enhancements to existing products that incorporate features that can be sold at
higher average selling prices. Failure to do so could cause our revenues and
gross profit, as a percentage of net sales, to decline.
Our cost reduction efforts may not allow us to keep pace with
competitive pricing pressures or lead to improved gross profit, as a percentage
of net sales. In order to be competitive, we must continually reduce the cost of
manufacturing our products through design and engineering changes. We may not be
successful in redesigning our products or delivering our products to market in a
timely manner. We cannot assure you that any redesign will result in sufficient
cost reductions to allow us to reduce the prices of our products to remain
competitive or to improve or maintain our gross profit, as a percentage of net
sales.
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SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGIN PERCENTAGE OF
NET SALES
Our gross profit margin percentage of net sales varies among our
product families. Our gross margin percentage of net sales is generally
higher on our access network system products and our gross margin percentage
of net sales is significantly lower on our handset products. We also
anticipate that the gross margin percentage of net sales may be lower for our
newly developed products due to start-up costs and may improve as unit
volumes increase and efficiency can be realized. Our overall gross margin
percentage of net sales has fluctuated from period to period as a result of
shifts in product mix, the introduction of new products, decreases in average
selling prices for older products and our ability to reduce product costs. As
a result of a growth in sales of handset products over the past few quarters,
we have experienced a sustained product shift toward a greater percentage of
handset products resulting in a decline in overall gross margin percentage of
net sales. In addition, we expect to introduce new products in the future
periods. As a result of these recent trends, a potential decrease in overall
gross margin percentage of net sales may be experienced over the next few
quarters.
SERVICE PROVIDERS SOMETIMES EVALUATE OUR PRODUCTS FOR LONG AND UNPREDICTABLE
PERIODS WHICH CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE
UNPREDICTABLE
The period of time between our initial contact with a service provider
and the receipt of an actual purchase order may span a year or more. During this
time, service providers may subject our products to an extensive and lengthy
evaluation process before making a purchase. The length of these qualification
processes may vary substantially by product and service provider, making our
results of operations unpredictable. We may incur substantial sales and
marketing expenses and expend significant management effort during this process,
which ultimately may not result in a sale. These qualification processes often
make it difficult to obtain new customers, as service providers are reluctant to
expend the resources necessary to qualify a new supplier if they have one or
more existing qualified sources.
OUR INABILITY TO EXERCISE COMPLETE CONTROL OVER OUR SUBSIDIARIES MAY BE
DETRIMENTAL TO OUR BUSINESS
A considerable portion of our operations is and will continue to be
conducted through direct and indirect subsidiaries. For example, we own an 88%
interest in a joint venture which operates the Zhejiang manufacturing facility
and a 51% interest in a joint venture which operates the Guangdong manufacturing
facility. Even though we may own a majority interest in these joint ventures, we
do not have sole power to control all of the policies and decisions of these
jointly-owned subsidiaries.
Under Chinese law governing Sino-foreign joint ventures, equity holders
exercise rights primarily through the board of directors, which constitutes the
highest authority of the joint venture. Although we own a majority of the
Guangdong joint venture, we are only entitled to appoint a minority of the
directors to the joint venture's board of directors, which prevents us from
controlling the actions of the board. Moreover, even though we hold a majority
of the board seats in the Zhejiang joint venture, China law requires unanimous
approval of the board of directors for some significant corporate actions,
including:
- amendment of the Articles of Association of the joint venture;
- liquidation or dissolution of the joint venture;
- any increase, decrease or transfer of equity interests of any
party to the joint venture; and
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- a merger of the joint venture with another economic entity.
Our operating results and cash flow depend on the operating results and
cash flow of our subsidiaries and the payment of funds by those subsidiaries to
us. These subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay dividends or otherwise provide
financial benefits to us. Moreover, with respect to our Guangdong manufacturing
joint venture, any payment of dividends to us must be agreed to by our joint
venture partner, whose interests in receiving dividend distributions may not
coincide with ours. In addition, applicable law in some countries including
China limits the ability of a subsidiary to pay dividends for various reasons
including the absence of sufficient distributable reserves. In the event of any
insolvency, bankruptcy or similar proceedings, creditors of the subsidiaries
would generally be entitled to priority over us with respect to assets of the
affected subsidiary. In addition, because our joint venture partners in both
Zhejiang and Guangdong provinces are affiliated with the provincial Posts and
Telecommunications Administrations that operate the telecommunication
networks in these areas, if we fail to maintain these joint ventures, sales to
our customers located in these areas may decrease.
OUR MULTI-NATIONAL OPERATIONS SUBJECT US TO VARIOUS ECONOMIC, POLITICAL,
REGULATORY AND LEGAL RISKS
We market and sell our products in China and other markets. The
expansion of our existing multi-national operations and entry into additional
international markets will require significant management attention and
financial resources. Multi-national operations are subject to inherent risks,
including:
difficulties in designing products that are compatible with varying
international communications standards;
longer accounts receivable collection periods and greater difficulty in
accounts receivable collection;
- unexpected changes in regulatory requirements;
- changes to import and export regulations, including quotas,
tariffs and other trade barriers;
- delays or difficulties in obtaining export and import licenses;
- potential foreign exchange controls and repatriation controls on
foreign earnings;
- exchange rate fluctuations and currency conversion restrictions;
- the burdens of complying with a variety of foreign laws and
regulations;
- difficulties and costs of staffing and managing multi-national
operations;
- reduced protection for intellectual property rights in some
countries;
- potentially adverse tax consequences; and
- political and economic instability.
Multinational companies are required to establish intercompany pricing
for transactions between their separate legal entities operating in different
taxing jurisdictions. These intercompany transactions are subject to audit by
taxing authorities in the jurisdictions in which multinational companies
operate. An additional tax
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liability may be incurred if it is determined that intercompany pricing was not
done at arm's length. We believe we have adequately estimated and recorded our
liability arising from intercompany pricing, but we cannot assure you that an
additional tax liability will not result from audits of our intercompany pricing
policies.
In markets outside of China, we rely on a number of original equipment
manufacturers, or OEMs, and third-party distributors and agents to market and
sell our network access products. If these OEMs, distributors or agents fail to
provide the support and effort necessary to service developing markets
effectively, our ability to maintain or expand our operations outside of China
will be negatively impacted. We cannot assure you that we will successfully
compete in these markets, that our products will be accepted or that we will
successfully overcome the risks associated with international operations.
Our international sales are generally denominated in local currencies.
Due to the limitations on converting Renminbi, we are limited in our ability to
engage in currency hedging activities in China. Although the impact of currency
fluctuations of Renminbi to date has been insignificant, fluctuations in
currency exchange rates in the future may have a material adverse effect on our
results of operations. We also have contracts negotiated in Japanese Yen for
purchasing portions of our inventories and supplies. We have entered into
foreign currency hedging transactions to reduce exposure to foreign exchange
risks. As of March 31, 2000, we had a forward contract to hedge Japanese Yen
valued at $10.4 million.
OUR FAILURE TO MEET INTERNATIONAL AND GOVERNMENTAL PRODUCT STANDARDS COULD BE
DETRIMENTAL TO OUR BUSINESS
Many of our products are required to comply with numerous government
regulations and standards, which vary by market. As standards for products
continue to evolve, we will need to modify our products or develop and support
new versions of our products to meet emerging industry standards, comply with
government regulations and satisfy the requirements necessary to obtain
approvals. Our inability to obtain regulatory approval and meet established
standards could delay or prevent our entrance into or force our departure from
markets.
OUR RECENT GROWTH HAS STRAINED OUR RESOURCES, AND IF WE ARE UNABLE TO MANAGE AND
SUSTAIN OUR GROWTH, OUR OPERATING RESULTS WILL BE NEGATIVELY AFFECTED
We have recently experienced a period of rapid growth and anticipate
that we must continue to expand our operations to address potential market
opportunities. If we fail to implement or improve systems or controls or to
manage any future growth and expansion effectively, our business could suffer.
Our expansion has placed and will continue to place a significant
strain on our management, operational, financial and other resources. Many of
the members of our management team have limited experience in the management of
rapidly growing companies. To manage our growth effectively, we will need to
take various actions, including:
- enhancing management information systems and forecasting
procedures;
- further developing our operating, administrative, financial and
accounting systems and controls;
- maintaining close coordination among our engineering, accounting,
finance, marketing, sales and operations organizations;
- expanding, training and managing our employee base; and
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- expanding our finance, administrative and operations staff.
OUR SUCCESS IS DEPENDENT ON CONTINUING TO HIRE AND RETAIN QUALIFIED PERSONNEL,
AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, OUR
BUSINESS WOULD BE HARMED
The success of our business depends in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. In particular, our success depends in
large part on the knowledge, expertise and services of Hong Liang Lu, our
President and Chief Executive Officer, and Ying Wu, our Executive Vice President
and Chief Executive Officer of China Operations. The loss of any key employee,
the failure of any key employee to perform satisfactorily in his or her current
position or our failure to attract and retain other key technical and senior
management employees could have a significant negative impact on our operations.
To effectively manage our recent growth as well as any future growth,
we will need to recruit, train, assimilate, motivate and retain qualified
employees. Competition for qualified employees is intense, and the process of
recruiting personnel with the combination of skills and attributes required to
execute our business strategy can be difficult, time-consuming and expensive. We
are actively searching for research and development engineers and sales and
marketing personnel, who are in short supply. Additionally, we have a need for
and have experienced difficulty in finding qualified accounting personnel
knowledgeable in U.S. and China accounting standards. If we fail to attract,
hire, assimilate or retain qualified personnel, our business would be harmed.
Competitors and others have in the past and may in the future attempt
to recruit our employees. In addition, companies in the communications industry
whose employees accept positions with competitors frequently claim that the
competitors have engaged in unfair hiring practices. We may be the subject of
these types of claims in the future as we seek to hire qualified personnel. Some
of these claims may result in material litigation and disruption to our
operations. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE OUR STOCKHOLDERS AND HARM OUR OPERATING RESULTS
We recently acquired Wacos, Inc., a research and development
subsidiary, through a merger. We continually evaluate additional acquisition
prospects that would complement our existing product offerings, augment our
market coverage, enhance our technological capabilities, or that may otherwise
offer growth opportunities. Acquisitions of other companies may result in
dilutive issuances of equity securities, the incurrence of debt and the
amortization of expenses related to goodwill and other intangible assets. In
addition, acquisitions involve numerous risks, including difficulties in the
assimilation of operations, technologies, products and personnel of the acquired
company, diversion of management's attention from other business concerns, risks
of entering markets in which we have no direct or limited prior experience, and
the potential loss of key employees of ours and the acquired company.
WE MAY EXPERIENCE DIFFICULTY IN IDENTIFYING, FORMING AND MAINTAINING NEW
BUSINESS VENTURES THAT ARE IMPORTANT TO THE DEVELOPMENT OF OUR BUSINESS
We have invested, and expect to continue to invest, significant capital
in new business ventures. We cannot assure you that we will be able to continue
to identify suitable parties for new ventures in the future. The failure to form
or maintain new ventures could significantly limit our ability to expand our
operations. Moreover, these new ventures or investments require significant
management time, involve a high degree of risk
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and will present significant challenges. We cannot assure you that these
activities will be successful or that we will realize appropriate returns on
these activities. Additionally, if any venture or investment fails, our business
could be negatively impacted.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND MAY BE
SUBJECT TO CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY OF OTHERS, EITHER
OF WHICH COULD SUBSTANTIALLY HARM OUR BUSINESS
We rely on a combination of patents, copyrights, trade secret laws and
contractual obligations to protect our technology. Although we have applied for
several patents in the United States, one of which has issued, as well as in
other countries, we cannot assure you that any additional patents will issue as
a result of pending patent applications or that our issued patents will be
upheld. Moreover, we have not yet obtained patents in China. We can give no
assurance that we will be able to obtain patents in China on our products or the
technology that we use to manufacture our products. Our joint ventures in China
rely upon our trademarks, technology and know-how to manufacture and sell our
products. We cannot guarantee that these and other intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to ours. In addition, the legal
systems of many foreign countries, including China, do not protect intellectual
property rights to the same extent as the legal system of the United States. If
we are unable to adequately protect our proprietary information, our business,
financial condition and results of operations could be materially adversely
affected.
The increasing dependence of the communications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. In the future we may be
subject to litigation to defend against claimed infringements of the rights of
others or to determine the scope and validity of the proprietary rights of
others. Future litigation also may be necessary to enforce and protect our trade
secrets and other intellectual property rights. Any intellectual property
litigation could be costly and could cause diversion of management's attention
from the operation of our business. Adverse determinations in any litigation
could result in the loss of our proprietary rights, subject us to significant
liabilities or require us to seek licenses from third parties which may not be
available on commercially reasonable terms, if at all. We could also be subject
to court orders preventing us from manufacturing or selling our products.
RISKS RELATING TO CHINA
Sales in China account for substantially all of our sales.
Approximately $102.9 million, or 97.9%, of our sales in 1998, $186.1 million, or
99.3% of our sales in 1999, and $58.4 million, or 99.4% of our sales in the
first quarter of 2000 occurred in China. Additionally, a substantial portion of
our fixed assets are located in China. Of our total fixed assets, approximately
46.4% as of December 31, 1998, 53.7% as of December 31, 1999 and 54.8% as of
March 31, 2000 were in China. We expect to make further investments in China in
the future. Therefore, our business, financial condition and results of
operations are to a significant degree subject to economic, political and social
events in China.
DEVALUATION IN THE VALUE OF THE RENMINBI AND FLUCTUATIONS IN EXCHANGE RATES
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Exchange rate fluctuations could have a substantial negative impact on
our financial condition and results of operations. We purchase substantially all
of our materials in the United States and Japan and a significant portion of our
cost of goods sold is incurred in U.S. dollars and Japanese yen. A significant
portion of our operating expenses are incurred in U.S. dollars. At the same
time, most of our sales are denominated in Renminbi. The value of the Renminbi
is subject to changes in China's governmental policies and to international
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economic and political developments. Although the official exchange rate for the
conversion of Renminbi to U.S. dollars has remained stable, with the Renminbi
appreciating slightly against the U.S. dollar since 1994, the exchange rate
experienced significant volatility prior to 1994 including periods of sharp
devaluation. There can be no assurance that exchange rates will not become
volatile or that the Renminbi will not devalue again against the U.S. dollar.
In the past, financial markets in many Asian countries have experienced
severe volatility and, as a result, some Asian currencies have experienced
significant devaluation from time to time. The devaluation of some Asian
currencies may have the effect of rendering exports from China more expensive
and less competitive and therefore place pressure on China's government to
devalue the Renminbi. Any devaluation of the Renminbi could result in an
increase in volatility of Asian currency and capital markets. Future volatility
of Asian financial markets could have an adverse impact on our ability to expand
our product sales into Asian markets outside of China. Moreover, due to the
limitations on the convertibility of Renminbi, we are limited in our ability to
engage in currency hedging activities in China and do not currently engage in
currency hedging activities with respect to international sales outside of
China.
CURRENCY RESTRICTIONS IN CHINA MAY LIMIT THE ABILITY OF OUR SUBSIDIARIES AND
JOINT VENTURES IN CHINA TO OBTAIN AND REMIT FOREIGN CURRENCY NECESSARY FOR THE
PURCHASE OF IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN AND REMIT
FOREIGN CURRENCY IN EXCHANGE FOR RENMINBI EARNINGS
China's government imposes controls on the convertibility of Renminbi
into foreign currencies and, in certain cases, the remittance of currency out of
China. Under the current foreign exchange control system, sufficient foreign
currency may not be available to satisfy our currency needs. Shortages in the
availability of foreign currency may restrict the ability of our Chinese
subsidiaries to obtain and remit sufficient foreign currency to pay dividends to
us, or otherwise satisfy their foreign currency denominated obligations such as
payments to us for components which we export to them and for technology
licensing fees. We may also experience difficulties in completing the
administrative procedures necessary to obtain and remit needed foreign currency.
Moreover, we cannot assure you that China's government will continue the policy
of making the Renminbi convertible under current accounts. Our inability to
convert and remit our sales received in Renminbi into U.S. dollars and make
necessary remittances could have a material adverse effect on our business,
financial condition and results of operations.
Our business could be substantially harmed if we are unable to convert
our sales received in Renminbi into U.S. dollars. Under existing foreign
exchange laws, Renminbi held by our China subsidiaries can be converted into
foreign currencies and remitted out of China to pay current account items such
as payments to suppliers for imports, labor services, payment of interest on
foreign exchange loans and distributions of dividends so long as the
subsidiaries have adequate amounts of Renminbi to purchase the foreign currency.
Expenses of a capital nature such as the repayment of bank loans denominated in
foreign currencies, however, require approval from appropriate governmental
authorities before Renminbi can be used to purchase foreign currency and then
remitted out of China. This system could be changed at any time by executive
decision of the State Council to impose limits on current account convertibility
of the Renminbi or other similar restrictions. Moreover, even though the
Renminbi is intended to be freely convertible under the current account, the
State Administration of Foreign Exchange, which is responsible for administering
China's foreign currency market, has a significant degree of administrative
discretion in implementing the laws. From time to time, the State Administration
of Foreign Exchange has used this discretion in ways which effectively limit the
convertibility of current account payments and restrict remittances out of
China. Furthermore, in many circumstances the State Administration of Foreign
Exchange must approve foreign currency conversions and remittances. Under the
current foreign exchange control system, sufficient foreign currency may not be
available at a given exchange rate to satisfy our currency demands.
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CHANGES WITHIN CHINA'S COMMUNICATIONS MARKET COULD HARM OUR BUSINESS
We derive substantially all of our sales from local telecommunications
service providers in China which utilize network access equipment in the
continued expansion and upgrading of China's communications infrastructure. The
continued development of the communications infrastructure in China
correspondingly depends, in part, on the demand for voice and data services in
China and China's governmental policy. Although this industry has grown rapidly
in the past, we cannot assure you that it will continue to grow in the future.
Any reduced demand for voice and data services, any other downturn or
other adverse changes in the China communications industry or the adoption or
enforcement of government policies that limit or prohibit our ability to
manufacture, market or sell our products could severely harm our business.
CHINA'S TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION AND HAS RECENTLY BEEN RESTRUCTURED, WHICH HAS LED TO UNCERTAINTY
China's telecommunications industry is heavily regulated by the
Ministry of Information Industry. The Ministry of Information Industry controls
the 33 provincial Posts and Telecommunications Administrations that exercise
regulatory responsibility over the telecommunications industries in their
respective provinces. The Ministry of Information Industry has broad discretion
and authority to regulate all aspects of the telecommunications and information
technology industry in China including managing spectrum bandwidths, setting
network equipment specifications and standards and drafting laws and regulations
related to the electronics and telecommunications industries.
As part of the Chinese government's industry restructuring initiatives,
the regulatory functions of the Ministry of Information Industry and the Posts
and Telecommunications Administrations will be separated from the operational
functions of the state-owned companies under their control. Following this
separation, it is expected that the Ministry of Information Industry will act
exclusively as the industry regulator and will no longer manage the day-to-day
operations of telecommunications service providers in China. The separation of
the regulatory and operational functions of the Ministry of Information Industry
and the Posts and Telecommunications Administrations has not been completed. As
a result, the Ministry of Information Industry continues to exercise
administrative control over the operational goals and policies of
telecommunications service providers formerly under the control of the China
Telecom system. In addition, the provincial Posts and Telecommunications
Administrations continue to operate the fixed line telephone systems in their
respective provinces. We cannot predict when complete separation of the
regulatory and operational functions of the Ministry of Information Industry and
the provincial Posts and Telecommunications Administrations will be achieved.
China does not yet have a national telecommunications law. The Ministry
of Information Industry, under the direction of the State Council, is currently
preparing a draft of the Telecommunications Law of the People's Republic of
China for ultimate submission to the National People's Congress for review and
adoption. It is unclear if and when the Telecommunications Law will be adopted.
If the Telecommunications Law is adopted, we expect it to become the basic
telecommunications statute and the source of telecommunications regulations in
China. Although we expect that a Telecommunications Law would have a positive
effect on the overall development of the telecommunications industry in China,
we do not know the nature and scope of regulation that it would create.
Accordingly, we cannot predict whether it will have a positive or negative
effect on us or on some or all aspects of our business.
The Ministry of Information Industry has broad discretion to apply
standards in deciding what types of equipment may be connected to the national
telecommunications networks, the forms and types of services that may be offered
to the public and the content of material available in China over the Internet.
If the Ministry of
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Information Industry sets standards with which we are unable to comply, our
ability to sell product in China may be limited, resulting in substantial harm
to our operations.
CHINA CLOSELY RESTRICTS ACTIVITIES OF FOREIGN INVESTORS IN THE
TELECOMMUNICATIONS INDUSTRY
China's government and its agencies, including the Ministry of
Information Industry and the State Council, regulate foreign investment in the
telecommunications industry through the promulgation of various laws and
regulations and the issuance of various administrative orders and decisions.
Foreign investment enterprises, companies and individuals are prohibited from
investing and participating in the operation and management of
telecommunications networks without special approval by the State Council. In
addition, they are restricted from manufacturing analog mobile communications
systems, including wireless telephones. We cannot assure you that China will not
promulgate new laws or regulations, or issue administrative or judicial
decisions or interpretations, which would further restrict or bar foreigners
from engaging in telecommunications-related activities. The promulgation of laws
or regulations or the issuance of administrative orders or judicial decisions or
interpretations restricting or prohibiting telecommunications activities by
foreigners could have a substantial impact on our ongoing operations.
OUR CUSTOMERS IN CHINA ARE PART OF THE CHINA TELECOM SYSTEM AND ARE SUBJECT TO
ITS ULTIMATE CONTROL. WE UNDERSTAND THAT CHINA TELECOM RECENTLY PROHIBITED ALL
POSTS AND TELECOMMUNICATIONS BUREAUS IN CHINA FROM PURCHASING LOW-MOBILITY
WIRELESS ACCESS SYSTEMS, SUCH AS OUR PAS SYSTEM, FOR IMPLEMENTATION IN LARGE
CITIES
Each of the local Posts and Telecommunications Bureaus in China which
comprise our existing or potential customers is part of the China Telecom system
and subject to its ultimate control. Accordingly, China Telecom may issue policy
statements or make other decisions which govern the equipment purchasing
decisions of all of our customers in China. For example, we understand that
China Telecom recently prohibited all Posts and Telecommunications Bureaus from
purchasing low-mobility wireless access systems, such as our PAS system, for
implementation in large cities. While to date we have not marketed or sold our
PAS systems in large cities, we may wish to do so in the future. As the majority
of our sales are generated from our operations in China, this decision of China
Telecom or other decisions by China Telecom could cause substantial harm to our
business.
CHINA'S GOVERNMENT POLICIES COULD IMPACT OUR BUSINESS
Since 1978, China's government has been and is expected to continue
reforming its economic and political systems. These reforms have resulted in and
are expected to continue to result in significant economic and social
development in China. Many of the reforms are unprecedented or experimental and
may be subject to change or readjustment due to a number of political, economic
and social factors. We believe that the basic principles underlying the
political and economic reforms will continue to be implemented and provide the
framework for China's political and economic system. New reforms or the
readjustment of previously implemented reforms could have a significant negative
effect on our operations. Changes in China's political, economic and social
conditions and governmental policies which could have a substantial impact on
our business include:
- new laws and regulations or the interpretation of those laws and
regulations;
- the introduction of measures to control inflation or stimulate
growth;
- changes in the rate or method of taxation;
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- the imposition of additional restrictions on currency conversion
and remittances abroad; and
- any actions which limit our ability to develop, manufacture,
import or sell our products in China, or to finance and operate
our business in China.
CHINA'S ECONOMIC POLICIES COULD IMPACT OUR BUSINESS
The economy of China differs from the economies of most countries
belonging to the Organization for Economic Cooperation and Development in
various respects such as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources,
self-sufficiency, rate of inflation and balance of payments position. In the
past, the economy of China has been primarily a planned economy subject to one-
and five-year state plans adopted by central government authorities and largely
implemented by provincial and local authorities which set production and
development targets.
Since 1978, increasing emphasis had been placed on decentralization and
the utilization of market forces in the development of China's economy. Economic
reform measures adopted by China's government may be inconsistent or
ineffectual, and we may not in all cases be able to capitalize on any reforms.
Further, these measures may be adjusted or modified in ways which could result
in economic liberalization measures that are inconsistent from time to time or
from industry to industry or across different regions of the country. China's
economy has experienced significant growth in the past decade. This growth,
however, has been accompanied by imbalances in China's economy and has resulted
in significant fluctuations in general price levels, including periods of
inflation. China's government has implemented policies from time to time to
increase or restrain the rate of economic growth, control periods of inflation
or otherwise regulate economic expansion. While we may be able to benefit from
the effects of some of these policies, these policies and other measures taken
by China's government to regulate the economy could also have a significant
overall impact on economic conditions in China with a resulting negative impact
on our business.
CHINA'S EXPECTED ENTRY INTO THE WTO CREATES UNCERTAINTY AS TO THE FUTURE
ECONOMIC AND BUSINESS ENVIRONMENTS IN CHINA
China has been attempting to join the World Trade Organization and
recently signed a bilateral trade agreement with the United States which has
enabled China to gain the support of the United States in China's attempt to
enter the WTO. With this agreement concluded, and subject to the support of
other member countries, China is expected to enter into the WTO as early as some
time in 2000. Although China has been reducing tariff levels over the past
several years, entry into the WTO will require China to further reduce tariffs
and eliminate other trade restrictions. While China's entry into the WTO and
related relaxation of trade restrictions may lead to increased foreign
investment, it may also lead to increased competition in China's markets from
international companies. Whether or not China is accepted into the WTO, the
impact on China's economy and our business is uncertain.
IF TAX BENEFITS AVAILABLE TO OUR SUBSIDIARIES LOCATED IN CHINA ARE REDUCED OR
REPEALED, OUR BUSINESS COULD SUFFER
Our subsidiaries located in China enjoy tax benefits in China which are
generally available to foreign investment enterprises, including full exemption
from national enterprise income tax for two years starting from the first
profit-making year and/or a 50% reduction in national income tax rate for the
following three years. In addition, local enterprise income tax is often waived
or reduced during this tax holiday/incentive period. Under current regulations
in China, foreign investment enterprises that have been accredited as
technologically advanced enterprises are entitled to additional tax incentives.
These tax incentives vary in different locales and could include preferential
national enterprise income tax treatment at 50% of the usual rates for different
periods of time. All of our active subsidiaries in China were accredited as
technologically advanced enterprises. These
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tax incentives may be repealed or reduced in the future. If these tax incentives
are abolished before our subsidiaries in China can take full advantage of them,
the tax liability of these subsidiaries will increase, which will negatively
impact our financial condition and results of operations.
CHINA'S LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD NEGATIVELY IMPACT OUR
BUSINESS
China has a civil law legal system. Although often used by judges for
guidance, decided court cases do not have binding legal effect on future
decisions. Since 1979, many new laws and regulations covering general economic
matters have been promulgated in China. Despite this activity to develop the
legal system, China's system of laws is not yet complete. Even where adequate
law exists in China, enforcement of existing laws or contracts based on existing
law may be uncertain and sporadic and it may be difficult to obtain swift and
equitable enforcement, or to obtain enforcement of a judgment by a court of
another jurisdiction. The relative inexperience of China's judiciary in many
cases creates additional uncertainty as to the outcome of any litigation.
Further, interpretation of statutes and regulations may be subject to government
policies reflecting domestic political changes.
China has adopted a broad range of related laws, administrative rules
and regulations that govern the conduct and operations of foreign investment
enterprises and restrict the ability of foreign companies to conduct business in
China. These laws, rules and regulations provide some incentives to encourage
the flow of investment into China, but also subject foreign companies, and
foreign investment enterprises including our subsidiaries in China, to a set of
restrictions which may not always apply to domestic companies in China. Although
China is increasingly according foreign companies and foreign investment
enterprises established in China the same rights and privileges as Chinese
domestic companies in anticipation of China's entry into the WTO, these special
laws, administrative rules and regulations governing foreign companies and
foreign investment enterprises may still place us and our subsidiaries at a
disadvantage in relation to Chinese domestic companies and may adversely affect
our competitive position. Moreover, as China's legal system develops, the
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors and
companies.
Many of our activities and products in China are subject to
administrative review and approval by various national and local agencies of
China's government. Because of the changes occurring in China's legal and
regulatory structure, there can be no assurance that we will be able to secure
the requisite governmental approval for our activities and products. Failure to
obtain the requisite government approval for any of our activities or products
could substantially harm our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
UTStarcom is exposed to the impact of interest rate changes and changes
in foreign currency exchange rates.
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The fair value of our
investment portfolio or related income would not be significantly affected by
either a 10% increase or decrease in interest rates due mainly to the short term
nature of our investment portfolio. Our interest income is sensitive to changes
in the general level of U.S. interest rates, particularly since the majority of
our funds are invested instruments with maturities less than one year.
UTStarcom's policy is to limit the risk of principal loss and ensure the safety
of invested funds by limiting market risk. Funds in excess of current operating
requirements are invested in government sponsored entities notes, commercial
paper, floating rate corporate bonds and fixed income corporate bonds.
-30-
<PAGE>
The table below represents carrying amounts and related
weighted-average interest rates of maturity of UTStarcom's investment portfolio
at March 31, 2000:
<TABLE>
<CAPTION>
2000
----
<S> <C>
(In thousands, except interest rates)
Cash and cash equivalents 261,663
Average interest rate 5.1%
Short-term investments 8,566
Average interest rate 6.7%
Total investment securities 270,229
Average interest rate 5.1%
</TABLE>
Foreign Exchange Rate Risk. We are exposed to foreign exchange rate
risk because our sales to China are denominated in Renminbi and portions of our
accounts payable are denominated in Japanese Yen. Due to the limitations on
converting Renminbi, we are limited in our ability to engage in currency hedging
activities in China. The impact of currency fluctuations of Renminbi to date has
been insignificant. We have contracts negotiated in Japanese Yen for purchasing
portions of our inventories and supplies. We have entered into foreign currency
hedging transactions to reduce exposure to foreign exchange risks. As of March
31, 2000, we had a forward contract to hedge Japanese Yen valued at $10.4
million. The contract was entered into on February 22, 2000.
-31-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company completed its initial public offering ("IPO") on March 3,
2000 pursuant to a Registration Statement on Form S-1 (File No. 333-93069). In
the IPO, the Company sold an aggregate of 11,500,000 shares of common stock
(including an over-allotment option of 1,500,000 shares) at $18.00 per share.
The managing underwriters of the offering were Merrill Lynch & Co.,
Banc of America Securities LLC, U.S. Bancorp Piper Jaffray, Merrill Lynch
Japan Inc., and E-TRADE Securities Co., Ltd. The sale of the shares of common
stock generated aggregate gross proceeds of approximately $207.0 million for
the Company. The aggregate net proceeds were approximately $190.6 million,
after deducting underwriting discounts and commissions of approximately $14.5
million and expenses of the offering of approximately $1.9 million. None of
such amounts were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning 10 percent or more of any
class of equity securities of the Company or to affiliates of the Company.
As of the effective date of the offering, all of the convertible
preferred stock outstanding was converted into 70,377,322 shares of common
stock. The net proceeds are expected to be used for general corporate purposes,
including working capital and capital expenditures. The amounts actually
expended for such purposes may vary significantly and will depend on a number of
factors, including the Company's future revenues and cash generated by
operations and the other factors described under "Factors Affecting Future
Operating Results". Accordingly, the Company retains broad discretion in the
allocation of the net proceeds of the offering. A portion of the net proceeds
may also be used to acquire or invest in complementary businesses, technologies
or product offerings. As of March 31, 2000, the Company has not used any of the
net proceeds and the entire amounts of net proceeds remains in our cash and cash
equivalents and short-term investments accounts. In addition, at March 31,2000,
there are no material agreements or commitments with respect to any acquisition
or investment activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 11, 2000, the Annual Meeting of Stockholders of the Company
was held in Alameda, California.
A nomination and election of directors was held with the following
individuals being elected to the Board of Directors of the Company:
Hong Lu
Chauncey Shey
Thomas Toy
Ying Wu
Charles Xue
Larry Horner
Masayoshi Son
Yoshitaka Kitao
The stockholders approved the appointment of PricewaterhouseCoopers,
L.L.P. as independent public accountants of the Company for December 31, 2000.
The stockholders approved the Indemnification Agreements.
-32-
<PAGE>
The stockholders approved amendments to the Certificate of
Incorporation and Bylaws, collectively referred to as the Charter Documents, in
connection with the closing of the Company's proposed initial public offering.
The stockholders approved the Amended 1997 Stock Plan and the increase
in the number of shares reserved for issuance to a total of 10,524,575 shares in
connection with the closing of the Company's proposed initial public offering.
The stockholders approved the 2000 Employee Stock Purchase Plan and the
reservation of 2,000,000 shares in connection with the closing of the Company's
proposed initial public offering.
A nomination and election of the Classified Board of Directors was held
with the following individuals being elected to the Classified Board of
Directors of the Company:
Tom Toy
Charles Xue
Chauncey Shey
Yoshitaka Kitao
Larry Horner
Ying Wu
Masayoshi Son
Hong Lu
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
-33-
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
10.1(1) Manufacturing License Agreement between Himachal Futuristic Communications Ltd. and
UTStarcom, Inc., undated.
10.2(2) Sales Agreement between Japan Radio Company and UTStarcom, dated March 16, 2000.
10.3(3) Technical Collaboration Agreement between Sharp Corporation and UTStarcom, Inc., dated March
31, 2000.
10.4(4) Parts Supply Agreement between Sharp Corporation and UTStarcom, Inc., undated.
27.1 Financial Schedule Data.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
- -----------------------
1 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
2 SEE FOOTNOTE 1.
3 SEE FOOTNOTE 1.
4 SEE FOOTNOTE 1.
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000
UTSTARCOM, INC.
(Registrant)
BY
/s/ Hong Liang Lu
________________________________
Hong Liang Lu
President, Chief Executive Officer and
Director
/s/ Michael J. Sophie
________________________________
Michael J. Sophie
Vice President of Finance, Chief Financial
Officer and Assistant Secretary
-35-
<PAGE>
Exhibit 10.1
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
MANUFACTURING LICENSE AGREEMENT
THIS AGREEMENT DATED THIS DAY OF 1999 IS MADE
BETWEEN:
HIMACHAL FUTURISTIC COMMUNICATIONS LTD, a company incorporated under the
Companies Act, 1956, having its principal office at No. 8, Commercial Complex
Masjid Moth, Greater Kailash II, New Delhi 110048, India (hereinafter referred
to as "HFCL"), which expression shall unless repugnant to the context or meaning
hereof, mean and include its successors and permitted assigns of the one Part;
AND
UTSTARCOM, INC. a company established under laws of Delaware in the United
States of America, having its principal office at 1275 Harbor Bay Parkway, Suite
100, Alameda, California 94502, USA (hereinafter referred to as "UTStarcom"),
which expression shall unless repugnant to the context or meaning hereof, mean
and include its successors and permitted assigns of the other Part.
HFCL and UTStarcom are hereinafter collectively referred to as the "Parties",
and individually as a "Party".
WHEREAS:
A. UTStarcom designs, develops, manufactures, markets and sells digital loop
carriers, including the Product, (hereinafter defined);
B. HFCL is in the business of manufacturing and supplying telecommunications
equipment and wishes to manufacture and distribute the Product;
C. HFCL wishes to offer the Product as part of its bid in response to a tender
which the Department of Telecommunications (the "DOT") has issued for
Tender No. [*] dated 9th July 1999 for the supply of [*] (the "Tender").
D. HFCL wishes to obtain from UTStarcom a license to manufacture and sell the
Product in India to DOT pursuant to the award by DOT to HFCL of the Tender;
E. UTStarcom is willing to license to HFCL the right to manufacture the
Product in India for sale in India to DOT pursuant to the award by DOT to
HFCL of the Tender;
F. HFCL has explained to UTStarcom the need to manufacture the Product [*]
in order to be competitive; and
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
G. The Parties intend that with respect to manufacturing the Product [*] HFCL
will require to obtain components and material from local sources and other
direct sources wherever possible.
For valuable consideration, including the mutual promises contained in this
Agreement, the Parties agree to the following terms and conditions:
1. DEFINITIONS
Unless the context otherwise requires, the following expressions shall have the
following respective meanings, and terms defined in the text of this Agreement
shall have the meanings respectively indicated:
1.1. "AGREEMENT" shall mean this Agreement between HFCL and UTStarcom including
any and all appendices attached to this Agreement.
1.2. "EFFECTIVE DATE" mean the later of:
(A) the date of this Agreement, and
(B) the date on which all consents, licenses, permits and approvals of any
relevant governmental or non-governmental agency or body necessary or
recommended by counsel to consummate the transactions contemplated in this
Agreement have been obtained, released or issued, as the case may be.
1.3. "IMPROVEMENTS" means:
(a) all information, of a nature similar to the Technical Information, that
UTStarcom acquires or puts into use during the term of this Agreement for
purposes of manufacturing the Product ("UTStarcom Improvements"); and
(b) all information of a nature similar to the Technical Information that
HFCL devises or develops in connection with or for purposes of manufacturing the
Product including improvements in terms of Section 6.8 below ("HFCL
Improvements").
1.4. "PRODUCT" means the [*] as more fully described in Exhibit A.
1.5. "TECHNICAL INFORMATION" means such designs, drawings, specifications and
other information that UTStarcom uses for the purposes of manufacturing the
Product, including written documentation and unwritten know-how used by
UTStarcom in the assembly, manufacture, testing, sale, use and maintenance of
the Product, as more fully described in Exhibit B.
1.6. "TERRITORY" shall mean [*].
2. TECHNICAL INFORMATION
2.1. UTStarcom shall, on a time scale mutually agreed by the Parties and
commensurate with the reasonable requirements of HFCL in that behalf, within [*]
of signing this agreement, begin to supply to HFCL such Technical Information as
is reasonable in the opinion of UTStarcom necessary to enable HFCL to assemble
the Product at HFCL's plant(s)
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
in the Territory. Both HFCL and UTStarcom will work together to complete the
transfer of Technical Information in a timely manner.
2.2. UTStarcom shall not be obliged to make any alterations to any document,
extract or copy which it supplies hereunder as part of the Technical Information
or in relation to any UTStarcom Improvement.
2.3. HFCL shall use the Technical Information, know-how and UTStarcom
Improvements only for the manufacture of the Product and only pursuant to award
of the Tender to HFCL by DOT, at the manufacturing plant of HFCL in the
Territory and shall not use any Technical Information, know-how or UTStarcom
Improvements in any manner or for any other purpose not expressly authorized by
this Agreement. HFCL shall not part with or dispose of, whether by sale,
transfer, gift or other disposition, any Technical Information, know-how or
UTStarcom Improvements except as expressly and previously permitted by UTStarcom
in writing.
2.4. In the event that [*] deficiency, inaccuracy, error or other defect
shall [*] become apparent in any Technical Information so supplied by
UTStarcom, UTStarcom shall, upon receiving a written request from HFCL,
promptly use all reasonable endeavors to make and supply the appropriate
corrections.
2.5. If, within [*].
(a) of executing this Agreement; the DOT has not awarded HFCL the contract
to supply products pursuant to the Tender; and
(b) from the date of being awarded the contract to supply products pursuant
to the Tender, HFCL does not commence the manufacturing of the Product;
then UTStarcom shall have the right to deem this Agreement terminated, effective
upon UTStarcom giving written notice to HFCL. Upon receiving such notice, HFCL
shall, in addition to its obligations and liabilities under Sections 12.3, 12.4
and 12.6 of this Agreement and its obligation to pay the technology license fee
in accordance with the terms of this Agreement, cease using and shall have no
right to use any of the Technical Information, know-how and UTStarcom
Improvements.
2.6. Notwithstanding Section 2.5(b), UTStarcom may in its absolute discretion
allow HFCL a reasonable extension to commence manufacturing the Product of up to
[*] term if the failure to start manufacturing the Product arises from a force
majeure or is substantially caused by UTStarcom's failure to provide the
Technical Information in a timely manner, unless such failure on the part of
UTStarcom is attributable to an act or omission of HFCL or is directly caused by
any reason substantially attributable to the DOT.
2.7. The Parties acknowledge that except as specifically licensed to HFCL under
this Agreement, UTStarcom owns or has licenses to, to the exclusion of HFCL, all
rights, title and interest in the Technical Information, UTStarcom Improvements
and the Product, as they exist now and as they may exist in the future, and in
all related know-how and all software that may be provided by UTStarcom as part
of or in connection with the Technical Information, know how or UTStarcom
Improvements for the manufacture of the Product. HFCL warrants that its use of
any of the Technical Information, know-how or UTStarcom Improvements for
manufacture of the Product shall not directly or indirectly create in or for
HFCL any right, title or interest in such Technical Information, know-how or
UTStarcom Improvements, except as expressly specified in this Agreement.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
3. IMPROVEMENTS.
3.1. For [*] after the Effective Date, subject to grant of appropriate export
licenses in the United Stated of America, UTStarcom shall supply HFCL with
Technical Information relating to UTStarcom Improvements that are actually
incorporated by UTStarcom into the Product. Upon request and at the expense of
HFCL, UTStarcom shall furnish engineering personnel to provide the know-how to
allow HFCL to obtain the benefits of the UTStarcom Improvements, upon terms and
conditions to be mutually agreed to in writing. All information contained in
UTStarcom Improvements, including the related know-how, when provided pursuant
to such mutual agreement, shall become a part of the Technical Information.
3.2. Section 3.1 does not apply to [*] products or to [*] options, or [*]
redesigns, modifications, enhancements or refinements to or for the Product.
4. TECHNICAL ASSISTANCE; QUALITY CONTROL; VISITS
4.1. UTStarcom shall, at HFCL's request and prepayment of all applicable charges
and expenses [*] and subject to the availability of UTStarcom personnel, take
all reasonable steps to arrange for UTStarcom engineers and technicians, as
appropriate, to work at the plant in India where HFCL will manufacture the
Product, to establish and bring into operation the manufacturing processes of
the Product and to train HFCL personnel, as may be required by HFCL in
connection with the execution of the Tender. UTStarcom shall determine in its
sole discretion the number, identity and level of expertise of the personnel
required to provide technical assistance to HFCL, and HFCL shall obtain all
necessary prior approvals, including all immigration permits and authorizations,
from the Government of India for UTStarcom engineers and technicians to visit
the plant and shall pay UTStarcom in accordance with UTStarcom's standard
charges then in effect for such services.
4.2. For the purpose of familiarizing HFCL's staff with the methods used by
UTStarcom in relation to the manufacture of the Product, HFCL shall be entitled
during the first one year of this Agreement, on request, but in each case at a
time reasonably convenient to UTStarcom, and subject to payment of UTStarcom's
standard charges then in effect for such services, to send suitably qualified
employees of HFCL, not exceeding two in number, to UTStarcom's facilities for
visits not exceeding in the aggregate 30 man days per annum. HFCL shall be
responsible for all such employees [*] in connection therewith. HFCL shall
indemnify UTStarcom from all damages, losses, claims and expenses of any nature
whatsoever arising from any deliberate act or omission of HFCL's personnel while
with UTStarcom for the purpose of such training. Additionally, HFCL shall cause
all such personnel to execute and abide by any and all confidentiality
agreements and other requirements that UTStarcom may reasonably request.
4.3. All information communicated by UTStarcom to HFCL pursuant to Sections 4.1
and 4.2 shall constitute Technical Information of UTStarcom and HFCL shall keep
all such information confidential as is required by Article 5, whether or not
elsewhere described and whether or not summarized in writing and given by
UTStarcom to HFCL.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
4.4. HFCL shall procure all necessary approvals, licenses, no objection
certificates, sanctions, permits, permissions, waivers, certificates, consents,
and other such items from the concerned governmental authorities as are required
under law or reasonably recommended by UTStarcom's counsel, including as may be
required under the Environmental Protection Act, Factories Act and other such
laws, to enable HFCL to manufacture the Product in accordance with this
Agreement. In manufacturing the Product, HFCL shall observe all applicable laws
in the Territory with respect to manufacturing, labeling and installation of the
Product.
4.5. UTStarcom shall have the right, at its own cost and on reasonable prior
notice to HFCL, to inspect HFCL's premises and the premises of any of HFCL's
permitted sub-contractors from time to time engaged in assembling or testing of
the Product or any parts or components of the Product, for purposes of reviewing
the quality of the HFCL's manufacturing process and of the end product. If at
any time UTStarcom determines that HFCL's process or the end product does not
conform to UTStarcom's requirements, it shall so inform HFCL. Upon receiving
notice of such non-conformance, HFCL shall take all steps required to cause its
processes and the end products to conform to UTStarcom's requirements and
provide a written undertaking to UTStarcom of such compliance.
4.6. HFCL undertakes to conform to UTStarcom's quality standards. In order to
ensure HFCL's compliance with UTStarcom's quality standards, qualitative
specifications, descriptions and directions specified by UTStarcom from time to
time, in relation to the manufacture of the Product. HFCL undertakes to
manufacture the Product in accordance with the Technical Information provided,
the applicable laws of the Territory and as per standards and procedures that
are equivalent to that maintained by UTStarcom in its own manufacture of the
Product. HFCL shall make no change or alteration in the Product manufactured
without the prior written consent of UTStarcom. UTStarcom reserves the right to
access into and inspect the premises of HFCL and of any subcontractors in order
to ascertain that the quality of the Product meets UTStarcom's quality
standards. Upon request of UTStarcom or UTStarcom's designated agents, HFCL
shall furnish UTStarcom with information and copies of documents necessary for
UTStarcom to give UTStarcom assurance that the Product is manufactured using the
Technical Information and know-how in accordance with this Agreement and in
compliance with applicable laws.
4.7. HFCL shall implement such information or regulations as UTStarcom consider
necessary to ensure conformity to UTStarcom's quality standards and to impose
corrective actions as deemed necessary.
5. CONFIDENTIALITY
5.1. UTStarcom discloses the Technical Information, know-how and UTStarcom
Improvements (in this Article collectively referred to as "Confidential
Information") to HFCL pursuant to this Agreement solely on a confidential basis,
conditioned upon HFCL not disclosing any portion of the Confidential Information
to any third party, except to the extent such Confidential Information is needed
by customers of HFCL for use, maintenance or repair of the Product. Disclosure
of any Confidential Information to any officer, director, consultant or employee
of HFCL for the manufacture of the Product will be on "as needed basis" subject
to the execution of a non-disclosure agreement with every such person. HFCL
shall Use the Confidential Information only for the assembly, manufacture,
testing, repair, marketing, sale and
HFCL and UTStarcom Confidential
<PAGE>
use of the Product strictly in accordance with the terms of this Agreement and
for no other purpose.
5.2. HFCL undertakes that it will keep the Confidential Information communicated
to it by UTStarcom confidential.
5.3.
The obligations of HFCL with respect to the Confidential Information shall not
apply to any information which,
(a) is already in HFCL's possession at the date of first communication
by UTStarcom and HFCL can reasonably demonstrate that it was in its rightful
possession at the date of first communication by UTStarcom;
(b) is now or, in the future becomes public knowledge otherwise than by
reason of any breach of this Agreement by HFCL; or
(c) is received by HFCL from any other person in good faith, and who
has no restriction with respect to disclosing such Confidential Information.
5.4. All documents and extracts comprising or containing Technical Information
and Improvements, including the copyright therein (under the common law of the
United States or otherwise), shall be and remain the property of UTStarcom, and
HFCL shall not in any way reproduce such material.
5.5. The provision of confidentiality shall remain into force for a period of
[*] after expiration or termination of this Agreement.
5.6. HFCL understands that disclosure of the Confidential Information may
irreparably harm UTStarcom. In the event of breach or threatened breach of
obligations pertaining to Confidential Information, UTStarcom shall be entitled
to seek injunctive relief and any other remedy available at law or equity.
6. LICENSES
In consideration of the performance of the Parties respective obligations herein
6.1. UTStarcom hereby grants to HFCL a [*] license to use the Technical
Information to assemble, manufacture, and test the Product in the Territory to
DOT only sufficient to fulfill the requirements of the Tender.
6.2. UTStarcom hereby grants to HFCL the [*] license to use, sell, lease,
install, maintain and repair the Product in the Territory to DOT only sufficient
to fulfill the requirements of the Tender.
6.3. UTStarcom hereby grants to HFCL the license to assemble, manufacture, test,
use, sell, lease, install, maintain and repair, in accordance with Sections 6.1
and 6.2, the Product under the Patents owned or controlled by UTStarcom and
under which the UTStarcom has the right to grant such a license.
6.4. UTStarcom hereby grants to HFCL the license to print, copy and distribute
User Documentation in paper, electronic or CDROM media in the Territory to DOT
only sufficient to fulfill the requirements of the Tender.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
6.5. To the extent any of the licenses described in Sections 6.1, 6.2 or 6.3
include software of any nature, the right granted with respect to such software
shall be a non-exclusive license solely with respect to the object code of such
software to sublicense such software only to DOT and only sufficient to fulfill
the requirements of the Tender for use with the Product in the Territory. In
granting this license to HFCL, UTStarcom does not in any way grant any ownership
interest in software referred to in Section 6.4 and does not grant any interest
to utilize, discover or in any way obtain the source code or any human
perceivable version of any such software. UTStarcom reserves all rights not
expressly granted under this Agreement by UTStarcom to HFCL.
6.6. The license and rights granted as above in Sections 6.1, 6.2 and 6.3 shall
at all times be subject to the terms and conditions of this Agreement, shall be
limited to the sole extent required for the purpose for which they are granted
and shall remain in effect only as long as HFCL fully complies with the terms
and conditions of this Agreement.
6.7. Nothing in this Agreement or related to the relationship described in this
Agreement shall in any way restrict UTStarcom from manufacturing, marketing,
distributing or selling or granting to any one else the right to manufacture,
maintain or sell, the Product in India or in any other country, whether or not
the product of any such other person shall come to be manufactured, sold or used
in India.
6.8. HFCL shall not, and shall require and ensure that DOT does not, reverse
compile, reverse engineer, reverse assemble or otherwise attempt in any way to
obtain or create any source code or other humanly perceivable version of the
software. HFCL shall require its customers to enter into such sublicenses with
its customers which shall include, among other things, provisions to safeguard
and keep secret UTStarcom's know-how, Technical Information and all software and
which shall contain such of the terms and conditions as may be agreed from time
to time by UTStarcom and HFCL. In addition, HFCL shall supply or include
UTStarcom's intellectual property notices in all copies made of all of UTStarcom
supplied software. HFCL shall at all times remain fully responsible and jointly
and severally liable under this Agreement with respect to every breach of any
term of any sublicense granted to any HFCL customer and shall hold UTStarcom
harmless and indemnified for every such breach or violation.
6.9. HFCL shall inform UTStarcom immediately upon the creation of any perceived
or actual modification, improvement or other change to the Product or to the
Technical Information conceived, developed, modeled or in any way worked on by
HFCL or any agent, representative, contractor or employee of HFCL (an "HFCL
Improvement").
6.10. HFCL hereby assigns, transfers and coveys to UTStarcom all rights, title
and interest in every HFCL Improvement, and UTStarcom hereby grants to HFCL, and
HFCL accepts, a license, identical in terms to the license that UTStarcom grants
to HFCL pursuant to this Agreement with respect to the Technical Information, to
all HFCL Improvements. HFCL shall take all such further acts and execute and
deliver to UTStarcom all such instruments as may be required, or reasonably
recommended by counsel, to perfect, register or enforce UTStarcom's ownership of
the rights conveyed under this Section 6.9 or to carry out the intent and
purpose of this Agreement.
6.11. Except as specifically permitted by this Agreement or in writing signed by
UTStarcom, HFCL shall not, and shall not have the right to, utilize
sub-contractors for the purposes of assembling or testing the Product.
HFCL and UTStarcom Confidential
<PAGE>
6.12. This Agreement does not grant any right to HFCL, and HFCL shall have no
right, interest or title to use the trademark "UTStarcom" or any other
trademark, trade name, design or logo of UTStarcom, except that HFCL may use the
printed and unstylized name, "UTStarcom, Inc." for the limited use required by
Section 6.12. Furthermore, HFCL shall not use any trademark, trade name, design
or logo that may be confusingly similar to any of the trademarks, trade names,
designs or logos of UTStarcom, nor shall HFCL take any action that would in any
way be detrimental to UTStarcom's rights and ownership in such trademarks, trade
names, designs and logos.
6.13. HFCL shall include written notices in all advertising literature, sales
brochures and the like, as well as on the Product, to the affect that the
Product "is manufactured under license from UTStarcom, Inc.".
7. CONSIDERATION.
7.1. HFCL shall purchase from UTStarcom all application specific integrated
circuits, (ASIC) or field programmable gate arrays (FPGAs) that HFCL
incorporates into a Product, in accordance with the pricing in Exhibit "A" and
terms of Exhibit "C."
7.2. HFCL shall obtain from UTStarcom a [*] license to utilize the network
management system software (the "NMS") for every Product manufactured by HFCL,
in accordance with the pricing in Exhibit "A" and terms of Exhibit "D". It is
expressly agreed that HFCL will not, [*].
7.3. HFCL shall be responsible for applying for and obtaining all approvals
required for remitting to UTStarcom all payments to be made under this
Agreement, including Reserve Bank of India approval, if required. HFCL shall use
all reasonable diligence and expediency to obtain all required approvals for
remitting to UTStarcom all payments to be made under this Agreement. If HFCL is
unable to obtain any required approval including Reserve Bank of India for
remitting payments to UTStarcom in terms of this Agreement or if such approval
is not forthcoming within [*] of HFCL being awarded the Tender by DOT, then this
Agreement shall terminate in terms of Section 12.2(f) and the provisions of
Sections 12.3, 12.4 and 12.7 shall apply.
7.4. Within [*] of the end of each [*] during the term of this Agreement and
thereafter for as long as permitted by the Reserve Bank of India or any other
regulatory authority of India, HFCL shall deliver to UTStarcom a statement of
accounting for all Product sales.
7.5. HFCL shall make all payments under this Agreement [*] to UTStarcom for any
reimbursement, contribution or indemnity. Notwithstanding its obligations
pursuant to the prior sentence, if any income or other similar tax is levied by
the Government of India upon:
(A) any fee or other amount to be paid by HFCL to UTStarcom; or
(B) UTStarcom with respect to any such fee or other amount, or
if any tax is required by the Government of India to be paid by UTStarcom or
withheld by anyone paying to UTStarcom, whether as the result of any payment
under this Agreement or any characterization by the Government of India of any
payment due under this Agreement,
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
then, [*].
7.6. HFCL shall indemnify and hold UTStarcom harmless from any liability with
respect to any tax, including all taxes levied on this Agreement, duties, levies
or other fees of any kind whatsoever, which become payable as a consequence of
this Agreement, inside the Territory.
7.7. UTStarcom shall be responsible for taxes on its net income arising in the
United States as a result of its providing the Technical Information and
assistance in connection with this Agreement.
7.8. The Parties acknowledge that all payments set forth in this Agreement are
not based entirely upon the trade secret nature of the Technical Information or
the anticipation of patent protection, but also reflect the value of [*].
7.9. All payments from HFCL to UTStarcom shall be in [*].
7.10. HFCL shall keep and maintain all appropriate records including records of
every Product manufactured in such form and manner that all payments payable
under this Agreement to UTStarcom may be readily and accurately determined. Such
records shall include, without limitation, all information necessary for HFCL's
auditors to prepare the reports provided for in this section. At all times
during and for [*] after the termination of this Agreement, UTStarcom shall have
the right, [*] to retain independent auditors to review HFCL's records with
respect to every Product manufactured to verify the accuracy of the statements
provided and amounts paid pursuant to this Article 7. If the auditors find an
overpayment or an underpayment, the difference shall be accounted for in the
subsequent statement of accounting and payment. If the auditors determine that
HFCL has not maintained sufficiently appropriate records to conduct a
determinative audit, HFCL shall, in addition to payment of the underpaid amount,
become immediately obligated to pay UTStarcom [*] of the amount, which the
auditors, in their best judgment, determine is the likely amount that HFCL owes
to UTStarcom for all of the periods in question. If the auditor's review
verifies an underpayment in excess of [*] of the amount payable for any [*]
period under review, or if the auditors determine that HFCL has not maintained
sufficiently appropriate records, HFCL shall pay [*].
8. COLLATERAL SUPPLIES.
To the extent necessary to support HFCL in its manufacturing activity, UTStarcom
undertakes, subject to UTStarcom's availability and the parties' agreement on
terms, reasonably to supply HFCL with assembly, and testing tools, equipment and
parts, as the parties determine separately in writing. Except as may be
expressly provided in such other written agreement [*].
9. NOVATION; ASSIGNMENT.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
This Agreement is personal to HFCL and HFCL shall not have any right to dispose
in any way, by lease, transfer, novation or assignment, partially or totally,
any license granted to it under this Agreement, to any third person, in form of
a sub-license or any other form, unless previously authorized in writing by
UTStarcom. Any attempted assignment or delegation in violation of this Article 9
shall be void.
10. PATENTS MARKING.
10.1. UTStarcom shall not be liable to indemnify HFCL against any loss sustained
by it as the result of any claim made, or any action brought by, any third party
for infringement of any letters, patent, registered design, or like instrument
of privilege by reason of the manufacture, assembly, use or sale by HFCL of the
Product using the Technical Information, the Improvements or any other
information supplied or to be supplied to HFCL pursuant to this Agreement. If
any such claim is brought against HFCL, UTStarcom shall take all reasonable
steps to provide HFCL with copies of UTStarcom's documentation to assist HFCL in
defending itself under such claim. UTStarcom confirms that all intellectual
property rights for proprietary software developed by UTStarcom is held by
UTStarcom, except to the extent licensed such as pursuant to this Agreement.
10.2. UTStarcom shall not be bound to take legal proceedings against any third
party in respect of any infringement of letters, patent, registered design or
like instrument of privilege which may now or at any future time be owned by it.
10.3. HFCL shall indemnify and hold UTStarcom, its shareholders, directors,
officers, employees, agents and affiliated companies harmless from and against
all losses, costs, expenses and damages, including reasonable attorneys' fees,
resulting from or in connection with any breach by HFCL of this Agreement or any
claim by third persons resulting from or in connection with HFCL's assembly,
manufacture, marketing, sale or use of any Product, to the extent such third
party claim does not arise from any design, act or omission directly
attributable to UTStarcom, subject to UTStarcom having notified HFCL promptly in
writing of any such claim, tendered to HFCL the defense or settlement of any
such claim at HFCL's expense, and cooperated with HFCL, at HFCL's expense, in
defending or settling such claim.
10.4. HFCL shall defend, indemnify and hold UTStarcom harmless from and against
all claims, causes of action, lawsuits, loss, expenses, obligations, damages,
and liability, including costs of defense and reasonable attorney's fees,
whether in contract or tort, including negligence and strict liability, as a
result of property damage, personal injuries or death of any persons arising out
of, or proximately caused by, in whole or in part, any action or inaction by
HFCL or any defect, including any design defect, attributable, to or involving
the manufacture, use, lease or sale of any Product.
10.5. HFCL shall reproduce in all copies that it makes or causes to be made of
any aspect of the Product all patent, copyright and proprietary notices included
by UTStarcom on any publication, software and firmware provided in connection
with this Agreement so as to continue to maintain UTStarcom's rights therein. If
instructed in writing by UTStarcom, HFCL shall modify such notices in order to
comply with all applicable laws.
11. GOVERNING LAW AND ARBITRATION.
HFCL and UTStarcom Confidential
<PAGE>
11.1. This Agreement shall be governed by and interpreted and construed in
accordance with the laws of India. Each Party consents to the non-exclusive
personal jurisdiction of the courts of India. The Parties specifically exclude
the application of the United Nations Convention on the International Sale of
Goods.
11.2. The Parties shall seek to resolve all disputes arising out of or in
connection with this Agreement, including the construction, validity,
performance or breach of this Agreement, without resorting to litigation or
arbitration. Prior to either Party utilizing the remedies detailed in Section
11.4, it shall first notify the other Party that the notifying Party wishes to
resolve a dispute, controversy or claim that it has with the other Party arising
out of or connected to this Agreement (a "Dispute"). As soon as practical and no
later than one week after the other Party receives a notice of Dispute, each
Party shall appoint a dispute representative ("Dispute Representative") who
shall contact the other Party toward seeking a resolution to the Dispute.
11.3. All discussions, correspondence and negotiations between the Parties
pursuant to their seeking a resolution in accordance with Section 11.1 shall be
exempt from discovery and production, and shall not be admissible in any
litigation or arbitration with respect to the Dispute, without the written
consent of both Parties. Documents identified in or provided with such
communication, which are not prepared for purposes of the Dispute resolution in
accordance with Section 11.2 shall not be so exempted and may, if otherwise
admissible, be admitted in evidence in any such arbitration or litigation.
11.4. If the negotiations taken place pursuant to Section 11.2 do not resolve
the Dispute within 60 days of the other Party's receipt of the notice of
Dispute, either Party may submit the Dispute to binding arbitration to be held
in London, England pursuant to the Rules of Conciliation and Arbitration of the
International Chamber of Commerce (the "ICC") in accordance with the laws of
England, modified as follows:
(a) All proceedings, filings and submissions shall be made solely in
English, the matter shall be heard before a single arbitrator who must be
selected by the mutual consent of both Parties, failing which by the ICC within
60 days of submission of the respondent's answer to the demand for arbitration,
and the arbitrator shall be an attorney experienced in international commercial
transactions and trained in the common law system.
(b) Each Party shall be entitled to pre-hearing depositions of not more
than three percipient witnesses.
(c) Each Party shall identify all witnesses, including experts, and
produce copies of all documents to be used at the hearing at least 90 days prior
to the hearing.
(d) All experts identified under Section 11.4 (c) shall be subject to
deposition by the opposing party at any time prior to the discovery cut-off in
Section 11.4 (e).
(e) All discovery must be completed at least 30 days prior to the
hearing.
(f) The hearing on the matter shall occur within 180 days after
selection of the arbitrator.
(g) The arbitrator's decision shall be in accordance with the law of
England, except that punitive or exemplary damages shall not be awarded.
(h) The arbitrator shall be deemed instructed by this Agreement and the
Parties to issue a written decision within 60 days after completion of the
hearing.
HFCL and UTStarcom Confidential
<PAGE>
(I) The arbitrator may award costs and expenses, including reasonable
legal fees, to the prevailing Party.
(J) Notwithstanding the foregoing procedures in this Section 11.4, the
Parties may modify these procedures by written agreement.
11.5. Notwithstanding the provisions set forth above in this Article 11,
UTStarcom may initiate litigation for the purpose of seeking an injunction or
other relief, or other equitable relief in order to seek enforcement of any
equitable remedy referred to in Section 5.6.
11.6. The Parties shall continue to perform the Agreement during the arbitration
proceedings, and neither Party shall withhold any payment due or otherwise
payable under this Agreement unless any such payment is, or forms a part of, the
subject matter of the arbitration proceeding.
11.7. The Parties shall consent to such extension of time as may be necessary
for the arbitrators to make their award.
12. TERM AND TERMINATION.
12.1. Subject to the following provisions of this Article, this Agreement and
the rights and licenses hereby granted or agreed to, shall continue in force
for [*].
12.2. Without affecting UTStarcom's rights pursuant to Section 2.5, in the event
that HFCL shall at any time during the term of this Agreement:
(A) be in breach of any of its obligations under this Agreement,
including the obligations to purchase the Chips and the NMS in terms of Section
7.1 and 7.2, where such breach is irremediable or, if capable of remedy, is not
remedied within [*] of notice from UTStarcom requiring its remedy;
(B) be or become bankrupt or insolvent, unable to pay its debts as they
fall due;
(C) admit in writing that it is unable to pay its debts, make any
composition with its creditors, have a receiver or manager appointed for the
whole or any part of its undertaking or assets or, otherwise than as a solvent
company for the purpose of and followed by an amalgamation or reconstruction
where-under its successor shall be bound by its obligations hereunder, commence
to be wound up or undergo any analogous act or proceeding under the laws of the
state in which it is registered;
(D) be acquired or otherwise come under the direct or indirect control
of a person or persons other than those controlling it as of the Effective Date,
(E) fail to receive required approvals for remitting payments to
UTStarcom in terms of this Agreement or if such approval is not forthcoming
within [*] of HFCL being awarded the Tender by DOT or failure to make any
payment to UTStarcom as and when due pursuant to this Agreement including
payments under Article 7, provided that UTStarcom will give [*] notice to HFCL
of any payment due to UTStarcom, which has not been paid.
(F) terminate this Agreement for any reason other than the expiration
of this Agreement [*] if the term of this Agreement has not been previously
extended by mutual written agreement, subject to any required regulatory
approvals,
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
then, and in any such event, UTStarcom may forthwith by notice in writing
terminate this Agreement, and thereupon all rights and licenses hereby granted
or agreed to be granted by UTStarcom pursuant to this Agreement shall
immediately terminate.
12.3. Upon termination, HFCL shall immediately cease manufacturing the Product
using the Technical Information, know-how and any Improvement and shall
immediately desist from using the Technical Information, know-how and all
Improvements for any purpose whatsoever. HFCL shall promptly, on UTStarcom's
request and at HFCL's cost, return to UTStarcom or destroy all copies of all
documents and extracts comprising or in any way containing any Technical
Information, know-how or Improvements. HFCL shall procure a declaration from its
board of directors as well as its legal counsel to be delivered to UTStarcom
confirming that all Technical Information and Improvements, including all
designs, drawings, models, samples, plans, documents, specifications and other
information supplied to it by UTStarcom and all copies of such information in
HFCL's possession have been destroyed or returned. The Parties expressly agree
that UTStarcom shall not be liable or responsible to HFCL or to any third party
including the DOT for any claim, damages or cost in any way arising in
connection with any termination of this Agreement.
12.4. Upon termination of this Agreement, all rights and obligations granted
under or imposed by this Agreement shall immediately cease and terminate except
for the rights, duties and obligations which by their nature one would
reasonably expect to survive, including the rights and obligations covered in
such provisions in this Agreement with respect to payments, the sublicensed use
of technology, Confidential Information, trademarks, indemnities, warranties,
remedies and limitations of liability, independent contractors, export controls,
governing law, arbitration and jurisdiction, assignment, severability,
publicity, legal expenses, notices, subject headings, waiver and this Agreement
being the entire agreement of the Parties.
12.5. UTStarcom shall not be in breach of this Agreement or liable for any
damages, losses or expenses whatsoever which occur as the direct or indirect
result of any delay or inability to export the Technical Information, any
know-how or any UTStarcom Improvement, or any item hereunder, due to the action
or inaction of any United States Government Agency.
12.6. If UTStarcom reasonably determines that HFCL has breached in any way any
obligation with respect to the disclosure and use of Confidential Information of
UTStarcom, including the Technical Information, know-how and UTStarcom
Improvements, UTStarcom shall be immediately entitled to exercise all of its
rights under this Agreement and under the law without regard to any notice or
waiting period or any other provision of this Agreement. Notwithstanding the
prior sentence, UTStarcom shall not terminate this Agreement or any of HFCL's
rights to the Technical Information under it unless UTStarcom has first made
inquiry upon HFCL with respect to such breach and allowed HFCL 10 days to
respond to such inquiry. Any failure by HFCL to respond to UTStarcom's inquiry
within 10 days shall constitute sufficient basis for UTStarcom to terminate this
Agreement.
12.7. No termination of this Agreement shall prejudice the accrued rights of
either Party, and the foregoing remedies are in addition to and shall not affect
other remedies available under the governing law of this Agreement.
13. FORCE MAJEURE.
HFCL and UTStarcom Confidential
<PAGE>
14
In the event that UTStarcom shall be delayed or impeded in the performance of
any of its obligations hereunder by industrial disputes, or by any cause beyond
its reasonable control, including but not limited to war, hostilities, disorder,
embargoes or export restrictions, acts of God, fire, earthquakes, storm,
proclamations, regulation, ordinance or any other analogous events, it shall not
be liable to HFCL for any failure to carry out or to observe any of the terms,
provisions or conditions of this Agreement and be entitled to such extension of
time as may be reasonable in all the circumstances.
14. WAIVER.
Failure by either Party to enforce at any time any of the provisions of this
Agreement or any delay in exercising any right, power or remedy under this
Agreement shall not be construed as a waiver by such Party of any such
provisions nor in any way affect the validity of the Agreement or any part
thereof.
15. PUBLICITY.
15.1. Publicity or advertising relating to this Agreement may be released by
either of the Parties hereto only with the prior written approval of the other
Party.
15.2. HFCL shall state in advertisements and publicity relating to the Product
that it is manufactured under license from UTStarcom.
16. NOTICES; SERVICE.
All notices, requests, reports and communications of any type given or
transferred by one party to the other in connection with this Agreement shall be
given in writing and shall be deemed effective when delivered to the other Party
addressed as provided below:
If to HFCL: If to UTStarcom:
Managing Director Paul Berkowitz, VP International Sales
HFCL, 8 Commercial Complex, UTStarcom
Masjid Moth, Greater Kailash - II 33 Wood Ave
Iselin, NJ 08830
New Delhi-110048 India
Fax: +91-11-6217784 Fax: 732-767-5274
Attention: Paul Berkowitz
Either Party may change the address at which it wishes to receive notices under
this article by giving notice to the other Party of the new address.
17. EFFORTS AND QUALITY.
HFCL shall maintain manufacturing standards for the Product to assure that their
quality is at least equal to the Product produced by UTStarcom. In order to
verify quality of the
HFCL and UTStarcom Confidential
<PAGE>
15
Product, HFCL shall permit UTStarcom's representative to inspect and test any
assembled Product at HFCL's facilities prior to shipment.
18. WARRANTY; EXCLUSIONS.
18.1. UTStarcom warrants that:
(a) it has the right to license the Technical Information, the know-how
and the UTStarcom Improvements to HFCL as contemplated by this Agreement; and
(b) the Technical Information, know-how and UTStarcom Improvements
furnished to HFCL under this Agreement are substantially equivalent to what
UTStarcom uses, as of the Effective Date, to manufacture the Product.
18.2. Except as specifically provided in this Article 18, the Technical
Information, know-how and UTStarcom Improvements, including such provided
software, are provided to HFCL and licensed on an "AS IS" basis WITHOUT ANY
WARRANTY WHATSOEVER, AND THE PARTIES EXPRESSLY EXCLUDE ANY AND ALL WARRANTIES,
EXPRESS OR IMPLIED, WITH RESPECT TO THE TECHNICAL INFORMATION, KNOW-HOW AND
UTSTARCOM IMPROVEMENTS, AS WELL AS ANY PRODUCT, AND THE PARTIES EXCLUDE ALL
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE
PARTIES ALSO SPECIFICALLY EXCLUDE ALL WARRANTIES OF NON-INFRINGEMENT WITH
RESPECT TO THIRD PARTY RIGHTS.
18.3. Except as otherwise specifically provided for in this Agreement, each
Party shall be responsible for any and all liability to all third persons based
on claims arising out of such Party's own manufacture, use or sale of any
Product or any other product, whether or not in conformity with the Technical
Information, know-how or UTStarcom Improvements.
18.4. HFCL warrants that:
(a) it shall, upon being awarded an advance purchase order with respect
to the Tender, undertake all commercially reasonable efforts to manufacture and
sell the Product, including having a commercially viable Product within the
requirements of the Tender.
(b) it shall be fully responsible for providing all support,
maintenance and repair for all end users of every Product that it manufactures,
distributes or sells and shall take all commercially reasonable efforts to
ensure that no such end user contacts UTStarcom for any support or other issue
with respect to any Product;
(c) it shall manufacture the Product using only high quality materials
and top class workmanship and that the end product will be free from any defect
in manufacture, misbranding, merchantable and fit for the intended use. HFCL
shall take all reasonable care and skill in manufacturing the Product;
(d) it has the necessary expertise and staffing capabilities to
manufacture the Product and to perform its obligations under this Agreement and
that the Product manufactured will conform in all respect with the
specifications provided by UTStarcom; and
(e) it shall give proper consideration and weight to the interests of
UTStarcom in all dealings and abide by all roles, regulations, standards
methods, procedures and instructions provided to it by UTStarcom.
HFCL and UTStarcom Confidential
<PAGE>
16
19. GOVERNMENT APPROVALS.
19.1. This Agreement is subject to the United States export laws and
regulations, and HFCL acknowledges that no technical data or other information
to be provided pursuant to this Agreement may be exported until UTStarcom has
first obtained all necessary and recommended approvals and licenses, including
from the United States Government and any other entity or person that may have
regulatory or other authority over this Agreement or any activity contemplated
pursuant to this Agreement.
19.2. HFCL shall be responsible for obtaining all approvals of the Government of
India and the DOT that may be needed or recommended for entering into this
Agreement and performing all of the obligations provided for under this
Agreement. Specifically HFCL shall be responsible for obtaining all type
approvals and all other authorizations, licenses and permits connected in any
way to interconnecting or otherwise utilizing the Product in India and with any
existing or future telecommunications system. HFCL shall obtain all such
authorizations, licenses and permits on behalf of and for the benefit of
UTStarcom and shall in no way utilize any such authorization, license or permit
or its rights connected to any of them to block or in any way restrict UTStarcom
from enjoying, directly or indirectly, the rights and privileges obtained
pursuant to any such authorization, license or permit.
20. RELATIONSHIP OF THE PARTIES.
HFCL and UTStarcom are independent contractors. Neither Party nor its employees,
consultants, contractors or agents are agents, employees or joint venturers of
the other Party, nor do they have any authority to bind the other Party by
contract or otherwise to any obligation. Neither Party shall expressly,
implicitly, by appearance or otherwise make any representation contrary to the
relationship described in this Article 20. The Parties do not intend for this
Agreement or any relationship between them to create any aspect of a franchise
in any way or manner.
21. LIMITATION OF LIABILITY.
21.1. EXCEPT FOR LIABILITY ARISING IN CONNECTION WITH A BREACH OF THE
OBLIGATIONS PROVIDED IN ARTICLE 5 OF THIS AGREEMENT, NOTWITHSTANDING ANY OTHER
PROVISION OF THIS AGREEMENT, IN NO CASE SHALL EITHER PARTY, ITS AFFILIATES OR
THEIR EMPLOYEES AND AGENTS, BE LIABLE TO THE OTHER PARTY FOR INDIRECT,
EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR LOSS OF
PROFITS OR CAPITAL REVENUE IN CONNECTION WITH THIS AGREEMENT EVEN IF IT HAS BEEN
ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS APPLY TO ALL
CAUSES OF ACTION AND CLAIMS, INCLUDING WITHOUT LIMITATION, BREACH OF CONTRACT,
NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION AND OTHER TORTS. BOTH PARTIES
UNDERSTAND AND AGREE THAT THE REMEDIES, EXCLUSIONS AND LIMITATIONS IN THIS
AGREEMENT ALLOCATE RISKS BETWEEN THE PARTIES AS ALLOWED BY LAW. THE TERMS AND
CONDITIONS IN THIS AGREEMENT REFLECT, AND ARE SET IN RELIANCE UPON, THIS
ALLOCATION OF RISKS AND
HFCL and UTStarcom Confidential
<PAGE>
17
THE EXCLUSION OF CONSEQUENTIAL DAMAGES AND LIMITATIONS OF LIABILITY SET FORTH IN
THIS PARAGRAPH.
21.2. IN NO EVENT SHALL UTSTARCOM'S LIABILITY TO HFCL OR ANY OTHER PARTY ARISING
UNDER THIS AGREEMENT OR IN CONNECTION WITH ANY PRODUCT EXCEED THE SUM OF ALL
AMOUNTS RECEIVED BY UTSTARCOM FROM HFCL AS OF THE DATE OF THE IMPOSITION OF SUCH
LIABILITY OR [*] WHICHEVER IS LESS.
22. SEVERABILITY.
In the event that any one or more provisions of this Agreement shall be declared
to be illegal or unenforceable under any law, rule, or regulations of any
government having jurisdiction over the Parties hereto, such illegibility or
unenforceability shall not affect the validity and enforceability of the other
provisions of this Agreement, and the parties shall agree upon a modification to
this Agreement with respect to such illegal or unenforceable provisions to
eliminate such invalidity or unenforceability.
23. NO RIGHTS IN THIRD PARTIES.
This Agreement is made for the benefit of HFCL and UTStarcom and not for the
benefit of any third Party individual or entity.
24. HEADINGS AND REFERENCES.
The subject headings of the articles of this Agreement are included for the
purpose of convenience only and shall not affect the construction or
interpretation of any of its provisions.
25. ENTIRE AGREEMENT.
No modification or addition to this Agreement or its enclosures shall be binding
on the two Parties unless specifically agreed upon, in writing, by the Parties
themselves. This Agreement contains the entire agreement between the Parties and
supersedes all agreements, expressions of interest, communications and other
representations, understandings, and agreements, oral or written, between the
Parties with respect to the subject matter of this Agreement. For purposes of
interpretation and performance hereof, the English language version of this
Agreement shall be controlling and binding on the Parties.
26. CONSTRUCTION.
This Agreement has been negotiated by the Parties and their respective counsel
and shall be interpreted fairly in accordance with its terms and without any
strict construction in favor of or against either Party.
27. LOAN OF EQUIPMENT FOR TYPE APPROVAL
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
19
UTStarcom is willing to provide, on a loan basis, certain equipment (the "Test
Equipment"), the exact specifications of which will be agreed to separately by
the Parties, that UTStarcom recommends that HFCL utilize in obtaining type
approval for purposes of HFCL being able to sell similar equipment to be
manufactured pursuant to this Agreement. UTStarcom shall pay for shipping the
Test Equipment to HFCL, and HFCL shall be fully and solely responsible for
importing and securing all licenses for using the Test Equipment in India,
including paying all duties or obtaining all applicable exemptions from the
payment of any duty. HFCL shall take all steps reasonably requested by UTStarcom
in order to secure UTStarcom's interest in the Test Equipment and to ensure that
at all times UTStarcom is deemed the owner of the Test Equipment. Upon
completion of the type approval testing, termination of this Agreement or 15
days after UTStarcom's request, whichever is earliest, HFCL shall cause the Test
Equipment to be returned to UTStarcom and shall pay all costs in connection with
returning the Test Equipment to UTStarcom, unless the Parties otherwise arrange
a mutually agreeable price by which HFCL purchases the Test Equipment from
UTStarcom. For all purposes, the Parties exclude all warranties of any nature
with respect to the Test Equipment, and it will be provided "AS IS" and without
any warranty. All of the disclaimers of warranty applicable to Technical
Information shall apply also to the Test Equipment. HFCL shall make no claim for
indemnification of any nature against UTStarcom with respect to the Test
Equipment for any reason whatsoever. All software included in the Test Equipment
shall be treated as if it were software otherwise provided under this Agreement,
with all of the same limitations, restrictions and other requirements imposed
upon HFCL as with all such other software.
AS WITNESS the hands of the duly authorized representatives of the Parties
hereto, effective as of the day and year first written above.
SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF
HIMACHAL FUTURISTIC UTSTARCOM, INC.
COMMUNICATIONS LTD.
By: By:
------------------------------ -----------------------------------
Name: Dr. R M Kastia Name: Paul Berkowitz
Title: Managing Director Title: VP International Sales
HFCL and UTStarcom Confidential
<PAGE>
20
EXHIBIT "A" PRODUCT ELEMENTS, FPGAS, ASICS, AND PRICING
[*]
HFCL and UTStarcom Confidential
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
21
EXHIBIT "A" PRODUCT ELEMENTS, FPGAS, ASICS, AND PRICING (PAGE 2)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM MODULE DESCRIPTION ASIC UTS BASE QUANTITY UNIT PRICE EXTENDED PRICE NOTES
CODE PART CODE PER MODULE ($US) ($US)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4 E & M Module 4 UT9630 54450153A0 AT89C51-12JC PLCC44 [*] [*] [*]
ports
-----------------------------------------------------------------------------------------------------
UT8632 54450154A0 ACTL 1020B PLCC84 [*] [*] [*]
Total [*]
-----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
5 E1 Interface, 8 UT8624 54450110A0 ACTEL 1010B PLCC68 [*] [*] [*]
ports
-----------------------------------------------------------------------------------------------------
UT8621 54450098A0 ACTEL 1020B PLCC84 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
UT8622 54450099A0 A4MX04-FLP84 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
UT9623 54450100A0 AT89C51-12JC PLCC44 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
Total [*]
- -----------------------------------------------------------------------------------------------------------------------------------
6 BRA-DCD Interface, UT9620 54450084A0 AT89C51-12JC PLCC44 [*] [*] [*]
2 ports BRI, 4
ports DCD
-----------------------------------------------------------------------------------------------------
UT8611 54450045A0 ACTEL 1010B PLCC68 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
UT8612 54450046A0 ACTEL 1020B PLCC84 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
Total [*]
- -----------------------------------------------------------------------------------------------------------------------------------
7 STM-1module, UT7628 54450158A0 29F10-120JC [*] [*] [*]
add-drop
multiplexer,
2 ports
-----------------------------------------------------------------------------------------------------
UT8147 54450160A0 EPM7032LC44 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
UT9632 54450159A1 TN87C251SB16 [*] [*] [*]
-----------------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------------------------------------------
8 Engineering [*] [*]
Orderwire Module
for STM-1
-----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
9 Power supply module [*]
(upper)
-----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
HFCL and UTStarcom Confidential
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
22
EXHIBIT "A" PRODUCT ELEMENTS, FPGAS, ASICS, AND PRICING (PAGE 3)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM MODULE DESCRIPTION ASIC UTS BASE QUANTITY UNIT PRICE EXTENDED PRICE NOTES
CODE PART CODE PER MODULE ($US) ($US)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 Power supply module [*]
(lower)
- -----------------------------------------------------------------------------------------------------------------------------------
11 Power and Ringing [*]
module (upper)
- -----------------------------------------------------------------------------------------------------------------------------------
12 Power and Ringing [*]
module (lower)
- -----------------------------------------------------------------------------------------------------------------------------------
13 Master bus adapter UT8623 54450108A0 EPM7064LC84 [*] [*] [*]
module
---------------------------------------------------------------------------------------------------------------
UT9624 54450109A0 AT89C51-12JC PLCC44 [*] [*] [*]
---------------------------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------------------------------------------
14 Extension bus UT8602 54450027A0 ACTEL 1020B PLCC84 [*] [*] [*]
adapter Module
---------------------------------------------------------------------------------------------------------------
UT8623 54450108A0 EPM7064LC84 [*] [*] [*]
---------------------------------------------------------------------------------------------------------------
UT9624 54450109A0 AT89C5112JC PLCC44 [*] [*] [*]
---------------------------------------------------------------------------------------------------------------
Total [*]
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
15 Remote test module UT8630 54450128A0 ACTEL 1020B PLCC84 [*] [*] [*]
---------------------------------------------------------------------------------------------------------------
UT9627 54450137A0 AT89C51-12JC PLCC44 [*] [*] [*]
---------------------------------------------------------------------------------------------------------------
Total [*]
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
16 Maintenance control UT8628 544501170 EPM7064lc84 [*] [*] [*]
unit
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
HFCL and UTStarcom Confidential
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
22
EXHIBIT "A" PRODUCT ELEMENTS, FPGAS, ASICS, AND PRICING (PAGE 4)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM MODULE DESCRIPTION ASIC UTS BASE CODE QUANTITY UNIT PRICE EXTENDED PRICE NOTES
CODE PART PER MODULE ($US) ($US)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
17 Blank faceplate [*]
for universal slot
- -----------------------------------------------------------------------------------------------------------------------------------
18 Blank faceplate for [*]
lower power slot
- -----------------------------------------------------------------------------------------------------------------------------------
19 Subrack: [*]
backplane+shelf
- -----------------------------------------------------------------------------------------------------------------------------------
20 NMS Software [*] [*] [*] [*]
(Object on CDROM
Licensed)
- -----------------------------------------------------------------------------------------------------------------------------------
21 SCM Software and [*]
Module Firmware
(Object on CDRO
Licensed)
- -----------------------------------------------------------------------------------------------------------------------------------
22 User Documentation [*]
MSWord Files
Licensed)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
23
EXHIBIT "B" TECHNICAL INFORMATION
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
24
EXHIBIT "C" TERMS OF PAYMENT ASICS AND FPGAS
[*]
EXHIBIT "D" TERMS OF PAYMENT NMS SOFTWARE
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
HFCL and UTStarcom Confidential
<PAGE>
Exhibit 10.2
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
UTStarcom JRC
Sales Agreement
between
JAPAN RADIO CO.
and
UTSTARCOM
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. Definitions .........................................................5
2. General .............................................................5
3. Marketing arrangement ...............................................6
4. Forecasts ...........................................................6
5. Deliveries ..........................................................7
6. TERMS OF PAYMENT ....................................................8
7. INSPECTION AND ACCEPTANCE ...........................................9
8. SAFETY STANDARDS AND REGULATIONS ....................................9
9. PRODUCT SPECIFICATIONS .............................................10
10. Support ............................................................11
11. SPARE PARTS ........................................................11
12. WARRANTY ...........................................................12
13. TRADEMARKS .........................................................14
14. PATENTS ETC ........................................................14
15. DURATION OF THE AGREEMENT ..........................................15
16. TERMINATION OF THE AGREEMENT .......................................15
17. COMPENSATION FOR DAMAGES ...........................................17
18. DISCLOSURE OF INFORMATION ..........................................17
19. PUBLICITY ..........................................................18
20. ASSIGNMENT .........................................................18
21. NOTICES.............................................................19
22. EXCEPTIONS .........................................................19
23. ENTIRE AGREEMENT ...................................................20
24. ARBITRATION ........................................................20
25. GOVERNING LAW AND TRADE TERMS ......................................20
26. MISCELLANEOUS ......................................................21
Exhibit A Product Specifications ............................................23
Exhibit B Delivery order rescheduling and cancellation ......................29
Exhibit C PRICE LIST and NRE ................................................31
Exhibit D Support ...........................................................33
Exhibit E Manufacturing Support .............................................35
Exhibit F Schedule ..........................................................37
Exhibit G Inspection standard and procedures ................................39
</TABLE>
<PAGE>
AGREEMENT
This Agreement is made and entered into as of this 16th day of MARCH,
2000, by and between Japan Radio Company, Ltd., a corporation organized under
the laws of Japan, with its principal place of business at Akasaka Twin Tower,
17-22, Akasaka 2 chome, Minato-ku, Tokyo 107-8432, Japan ("JRC" or "THE
COMPANY") and UTStarcom (Hangzhou) Co., Ltd., a China registered corporation
having its principal place of business at 3 Yile Industry Park, No. 129, Wenyi
Road, Hangzhou 310012, Peoples Republic of China ("UTStarcom" or "THE BUYER").
The BUYER desires to purchase from the COMPANY, and the COMPANY is
willing to sell to the BUYER, certain products manufactured by the COMPANY under
the UTStarcom brand and described in Exhibit A attached hereto (the "PRODUCT"),
for resale in certain territories, on the terms and conditions contained in this
Agreement.
In consideration of the foregoing and of the mutual agreements and
covenants contained below, the parties agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the following
respective meanings:
1.1 "DOCUMENTATION" means the explanatory material commonly
distributed by the COMPANY with the PRODUCT and any
modifications, translations or updates thereto.
1.2 "PRODUCTS" means the [*] corresponding SO writer and accompanying
software, and products described in Exhibit A and any
enhancements, updates or all future generations of product
offerings thereto.
1.3 "TERRITORY" means [*].
2. GENERAL
2.1 The parties hereto agree to implement the initial phase of this
Agreement as specified in Exhibit F attached hereto and made an
integral part hereof in respect to the date of delivery and
quantity of prototypes, preproduction samples, first production
units and exchange of documentation, and other matters relating
to the performance of the initial phase of this Agreement.
2.2 The BUYER shall at its own expense direct its vigorous activities
for the sale of the PRODUCTS under the BUYER's name and
trademarks. The BUYER will send to the COMPANY as much market
information as possible useful for the
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
development and manufacture of the PRODUCTS. The COMPANY will
make every effort within its power to meet the BUYER's
requirements in respect of quantities and delivery dates of the
PRODUCTS to be purchased by the BUYER hereunder. Both parties
shall cooperate with each other in good faith to establish a
mutually close and prosperous relationship. If problems should be
encountered with respect to any aspect of marketing or technical
matters concerning the PRODUCTS for any reason whatsoever or if
the parties should encounter any problems not covered by this
Agreement, the COMPANY and the BUYER shall discuss them in a
cooperative and sincere spirit and attempt to arrive at a mutual
understanding in the spirit of building a close collaborative
relationship.
3. MARKETING ARRANGEMENT
3.1 The BUYER shall have the right to sell and distribute the
PRODUCTS only within the TERRITORY. Should the BUYER in the
future desire to market the PRODUCTS outside the TERRITORY, the
BUYER shall so notify the COMPANY for mutual discussion about
such outside marketing. The BUYER shall be responsible for all
losses, damages, expenses or other liabilities incurred or
sustained by the COMPANY arising out of resale or reexport of the
PRODUCTS made directly or indirectly by the BUYER or its
distributors in or to any place outside the TERRITORY in breach
of this Agreement or any applicable laws or regulations.
3.2 The BUYER agrees not to sell, or knowingly allow the resale of
the PRODUCT to military organizations.
3.3 It is expressly understood and agreed that the COMPANY may freely
sell any PRODUCTS, whether identical with or similar to the
PRODUCTS, under any trademarks other than those of the BUYER to
any third party or parties in any country in the world.
4. FORECASTS
4.1 The BUYER agrees to purchase and the COMPANY agrees to sell the
PRODUCTS in the quantities and at the prices set forth in Exhibit
C attached hereto and made an integral part hereof.
4.2 The COMPANY will promptly effect shipment of the PRODUCTS after
the manufacture thereof shall have been completed in each month
of production as agreed. Delivery terms shall be on the basis of
FOB Japan (or country of manufacture).
4.3 The BUYER's good faith forecast for its expected purchases of
PRODUCTS for the twelve month period beginning from April 1, 2000
is [*] Beginning [*] after the first delivery order, the BUYER
shall then deliver to
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
the COMPANY a revised forecast at least once per [*] on a rolling
[*] basis.
4.4 Forecasts provided under the paragraph (4.3) above are for
planning purposes only and do not constitute an order commitment
or obligation on the part of the BUYER or the COMPANY. To the
extent reasonably possible, however, the BUYER agrees to place
orders consistent with such forecasts. The volume ordered by the
BUYER in any given month may be increased or decreased from the
volume included in the forecast and there shall be no fee
associated with such variance. If the BUYER submits any forecast
or places any order in which the quantity of PRODUCTS forecasted
or ordered for any month deviates by more than [*] from the
forecasted quantity of PRODUCTS for such [*] contained in the
most recent prior forecast submitted to the COMPANY, then the
parties shall negotiate in good faith to determine a mutually
agreeable delivery schedule, taking into account BUYER's delivery
requirements and the required lead time for any modifications to
the COMPANY's procurement, manufacturing and testing processes.
4.5 In addition to the formal procedures set forth above, the parties
agree that they will promptly inform each other of any material
change in their expectations or capabilities relating to the
manufacturing, ordering or delivery of PRODUCTS hereunder, such
as altered requirements and difficulties in productions.
5. DELIVERIES.
5.1 Delivery terms are FOB Japan or country of manufacture in
accordance with INCOTERMS 2000. Title and the risk of loss of the
PRODUCTS shall pass to the BUYER when delivered by the COMPANY at
FOB point.
5.2 Lead time for delivery of the first lot of the PRODUCTS is as
specified in Exhibit F. Lead time for deliveries of the second
lot onwards of the PRODUCTS shall not exceed [*] from the
acknowledgement by the COMPANY of the delivery orders of the
BUYER.
5.3 The BUYER shall before the [*] provide the COMPANY with delivery
orders showing the number of the PRODUCT which shall be delivered
in accordance with the delivery lead time as specified in article
5.2, including the PSIDs, country code and operator ID to be
programmed in said PRODUCTS to be delivered, the color or option
configuration of the PRODUCTS and also including whether the
PRODUCT shall be shipped [*] form. The COMPANY shall acknowledge
or reject the delivery orders placed by the BUYER within [*]
after the receipt thereof.
5.4 The BUYER shall have the right to change or terminate delivery
orders within the limits defined in Exhibit B.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
5.5 When the COMPANY has acknowledged the delivery orders, the
COMPANY will send to the BUYER an individual sales contract to
the PRODUCTS (hereinafter called the "Sales Contract"). The BUYER
shall immediately upon receipt of the Sales Contract sign and
return the duplicate copy of it but failure of the BUYER to do so
shall not affect the validity of such Sales Contract. It is
specifically agreed, however, that if any export license or
permission is required for the export of the PRODUCTS the Sales
Contract shall come into effect and the delivery of the PRODUCTS
shall be made only when such export license or permission (if
conditional upon conditions reasonably satisfactory to the
COMPANY) shall have been obtained by the COMPANY. The BUYER
agrees that if due to delays in obtaining such license or
permission the shipping date of PRODUCTS as set forth in the
Sales Contract is delayed, such delay shall not constitute a
breach by the COMPANY of the Sales Contract; provided however
that the COMPANY shall promptly notify the BUYER of such delay
and will ship the PRODUCTS as soon as practicable after obtaining
such license or permission.
5.6 Any terms or conditions printed on the face or the reverse side
of the delivery order sheet and/or the Sales Contract shall not
be part of this Agreement unless both parties expressly agree in
writing otherwise.
6. TERMS OF PAYMENT
6.1 The BUYER [*] establish with a reputable bank satisfactory to the
COMPANY an irrevocable and, if so requested by the COMPANY,
confirmed letter of credit (not restricted, unless otherwise
agreed upon) in the full amount of the purchase price as stated
in the COMPANY's pro forma invoice, in Japanese currency, under
the Sales Contract in favor of the COMPANY available against the
COMPANY's sight draft to de drawn on the said establishing bank,
to reach the COMPANY at least [*] before the last day of the
month of production as set forth in the Sales Contract. The
letter of credit shall be payable to COMPANY [*] after the
Shipment Date and must allow TT reimbursement. A confirming bank
shall be a leading and first class international bank acceptable
to the COMPANY and, unless otherwise agreed upon, be a bank other
than the establishing bank of the letter of credit. Such letter
of credit shall provide for partial shipments and shall remain
valid for not less than [*] after the last day specified for
shipment. In the event that the letter of credit is to be advised
by facsimile, the BUYER shall cause a written confirmation
thereof to be air-mailed to the COMPANY via the advising bank.
6.2 The COMPANY reserves the right to demand compensation from the
BUYER for all losses and damages incurred by the COMPANY if such
losses or damages have been caused by the failure of the BUYER to
establish the letter of credit by the time specified hereinabove.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
7. INSPECTION AND ACCEPTANCE
7.1 The BUYER shall have the right to conduct [*] an incoming
inspection of the PRODUCTS at the destination specified in the
bill of lading in accordance with the inspection standards and
procedures set forth in Exhibit G attached hereto and made an
integral part hereof. The BUYER shall notify the COMPANY of a
result of inspection judgment (acceptance or rejection) in
accordance with the said inspection standards and procedures by
facsimile or email within [*] after the date of arrival of the
PRODUCTS at the said destination. Should the BUYER fail to so
notify the COMPANY within said [*] period, the BUYER's right of
rejection of the PRODUCTS shall then lapse and the said PRODUCTS
shall be deemed to have been accepted by the BUYER.
7.2 If any PRODUCTS are rejected by the BUYER in the said incoming
inspection and such fact is clearly confirmed by the COMPANY,
then the procedure mentioned below shall follow:
The COMPANY will [*]
i) rework the rejected PRODUCTS, or
ii) replace same with the acceptable PRODUCTS, or
iii) request the BUYER to rework the PRODUCTS. In this case, the
COMPANY will furnish to the BUYER repair or replacement
parts necessary for the rework of the rejected PRODUCTS
performed by the BUYER. In case the BUYER conducts a 100%
inspection of the lot in which the rejected PRODUCTS are
included, the COMPANY agrees to pay the BUYER the labor
charge at the rate separately agreed upon between the
parties hereto. There are no other or additional expenses or
liabilities the COMPANY is to assume in connection
therewith.
8. SAFETY STANDARDS AND REGULATIONS
8.1 Upon the BUYER's request, the COMPANY shall, [*] take all
necessary steps so that the PRODUCTS shall pass the safety
standard or regulations in the TERRITORY or part of the TERRITORY
and effective as of the date of this Agreement, in which the
BUYER agrees to render to the COMPANY every possible assistance.
Otherwise, the BUYER shall, [*] take all necessary steps so that
the PRODUCTS shall pass the safety standards or regulations in
the TERRITORY or part of the TERRITORY and effective as of the
date of this Agreement, in which the COMPANY agrees to render to
the BUYER every possible assistance. The standards or regulations
set forth in this paragraph shall be hereinafter collectively
called the "STANDARDS".
8.2 In the event that after the date of this Agreement any of the
STANDARDS should be changed or modified or any other safety
standards applicable to the
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
PRODUCTS under any laws, regulations or official directive having
the force of law in the TERRITORY or any other standards or
requirements applicable to the PRODUCTS which have not the force
of law but the observance of which is in accordance with the
reasonable practice of the industry in the TERRITORY shall be
established (such other safety standards, standards and
requirements being hereinafter collectively called the "OTHER
STANDARDS"), the BUYER shall be responsible to furnish to the
COMPANY such information well in advance and the BUYER agrees to
bear [*] incurred in connection with or arising out of
modifications of the specifications of the PRODUCTS or reworking
the PRODUCTS as well as [*] arising out of or relating to
clearance of or passing such modified STANDARDS or OTHER
STANDARDS or listing the PRODUCTS by a competent organization or
authority under such modified STANDARDS or OTHER STANDARDS.
8.3 If the COMPANY suffers damages due to the delay in the COMPANY's
shipment of the PRODUCTS caused by the PRODUCTS failure to pass
the STANDARDS, modified STANDARDS or OTHER STANDARDS for a cause
attributable to the BUYER, the BUYER shall indemnify the COMPANY
from such damages; however, the parties specifically agree that
such damages shall not exceed [*].
8.4 No PRODUCTS shall be shipped unless and until the PRODUCTS have
cleared or passed the STANDARDS, modified STANDARDS or OTHER
STANDARDS or have been listed by a competent organization or
authority thereunder; provided, however, that the COMPANY shall
be entitled to ship, if the BUYER so directs or gives consent,
any portion of the PRODUCTS, without incurring any liability on
the part of the COMPANY, before such clearance or listing is
final.
9. PRODUCT SPECIFICATIONS
9.1 All PRODUCTS supplied to the BUYER by the COMPANY shall be
manufactured in conformance to the specifications described in
Exhibit A. If either party requests the other for a change of the
specification or standards or for special specifications of the
PRODUCTS, such matters shall be determined upon mutual
discussions of the parties. If any such change or special
specifications result, in the reasonable judgment of the COMPANY,
in an increase in the cost of the PRODUCTS or in the length of
time required for the manufacture or shipment to the BUYER, then
a price increase of the PRODUCTS due to said cost increase shall
be accordingly charged to the BUYER and an extension of the time
for shipment agreed. Similarly, if any such change or special
specifications result, in the reasonable judgment of the BUYER
after consultation with the COMPANY, in a decrease in the cost of
the PRODUCTS or in the length of time required for the
manufacture or shipment to the BUYER, then a price decrease of
the PRODUCTS due to said cost decrease shall be accordingly
applied to the BUYER and a reduction of the time for shipment
agreed.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
9.2 No changes shall be made by the COMPANY in the form, fit, or
function of the PRODUCT to be purchased hereunder without BUYER's
prior written approval. The BUYER will in good faith attempt to
respond to the COMPANY's proposed change within [*] of notice of
such proposed change. No changes shall be deemed approved by
BUYER unless and until the COMPANY receives written notice of
BUYER's acceptance thereof. If no response is given by BUYER
within [*] of notice of the change then the change will be deemed
accepted.
10. SUPPORT
10.1 TECHNICAL SUPPORT. The COMPANY agrees to provide reasonable
technical support as defined in Exhibit D. The COMPANY represents
that it presently has adequately trained technical personnel to
provide the support set forth in Exhibit D.
10.2 DEVELOPMENT SUPPORT. The COMPANY shall provide the BUYER with
technical specifications, hardware interface documentation and
other technical assistance concerning the PRODUCTS as reasonably
required by the BUYER.
10.3 PRODUCT PACKAGING. The COMPANY will ship tangible items of
PRODUCT to the BUYER in bulk packaging consistent with industry
standards and sufficient to avoid damage to the Product during
shipment. The COMPANY will supply labeling information of bulk
packaging to the BUYER.
10.4 MANUFACTURING SUPPORT DOCUMENTATION, The COMPANY will provide to
the BUYER manufacturing support documentation as described in
Exhibit E.
11. SPARE PARTS
11.1 In lieu of spare parts, the COMPANY shall include at no
additional cost to the BUYER an extra [*] of units for each
delivery order, rounded down to the next lowest unit quantity.
11.2 The BUYER's subsidiary shall be entitled to place an order with
the COMPANY for spare parts in conformity with the provisions of
this Agreement. The BUYER's subsidiary, as used in this Agreement
shall mean the company or entity 50% or more of the shares or
equity of which is owned or controlled by the BUYER.
11.3 The COMPANY shall be prepared to supply to the BUYER the
following parts for the PRODUCTS for the following period from
the time of the last production or of discontinuance of
production, of each model of the PRODUCTS:
i) [*] for appearance or cosmetic parts
ii) [*] for mechanical parts
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
iii) [*] for electrical parts
In this connection, the BUYER shall place the last order with the
COMPANY for any spare parts required by the BUYER for the future
at least [*] before the expiration of each period stated above.
If such requirements have been shipped out, the COMPANY may
thereafter cease to supply any spare parts for the relevant
PRODUCTS. However, if the supply of repair parts becomes
infeasible for the COMPANY for some inevitable reason during
aforementioned period, the period may be altered subject to prior
notice of at least [*] to the effect by the COMPANY to the BUYER.
12. WARRANTY
12.1 The COMPANY warrants that title to the PRODUCTS when conveyed to
the BUYER on an FOB basis is good, that the transfer is lawful
and that the PRODUCTS are delivered free from any security
interest or encumbrance except as otherwise agreed upon between
the parties in writing.
12.2 The COMPANY further warrants that the PRODUCTS do not have any
software or hardware components that incorrectly process date
and/or time data or calculations after 31 December 1999.
12.3 The warranty of the PRODUCTS to be given under this Agreement
shall be the following:
If, within a period of [*] after shipment by the
COMPANY of the PRODUCTS, any of the PRODUCTS or component parts
thereof exhibit defects of the same kind and nature at the same
place in the PRODUCTS and at an unusual frequency of not less
than [*] of the total quantity of the PRODUCTS sold by the BUYER
in the TERRITORY and such defects are the result of faulty
workmanship on the part of the COMPANY or defects in materials
arising from any cause for which the COMPANY is responsible, then
the COMPANY agrees to give compensation, and render assistance,
to the BUYER to such extent as is specified below,
i) Free supply (freight prepaid) by the COMPANY of replacement
component parts for the component parts found to be
defective [*] of the COMPANY's verification of such defect,
to be done in [*] upon written notice to the COMPANY by the
BUYER of such defect, and
ii) Rendition of technical assistance or advice to the BUYER in
repairing such defective PRODUCTS or component parts thereof
as may be decided by the COMPANY from time to time within
[*] of the COMPANY's verification of such defect to be done
in [*] upon written notice to the COMPANY by the BUYER of
such defect.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
12.4 The foregoing warranty shall apply to PRODUCTS repaired or replaced under
paragraph 12.3 for the longer of (i) [*] from the date of repair or
replacement, or (ii) [*] applicable to the PRODUCT being repaired or
replaced.
12.5 Provided, however, that the foregoing BUYER's remedy shall only be
available subject always to the following conditions being met, and in the
event of failure of the BUYER to so meet, the BUYER's right to claim remedy
as provided in subparagraphs i) and ii) of paragraph 12.3 above shall
lapse:
i) any particulars as to the PRODUCTS or the component parts thereof
alleged or found to be defective shall be furnished to the COMPANY in
writing within [*] of discovery by the BUYER of such defect.
ii) the contents of defects stated in i) above shall be subject to the
COMPANY's verification
iii) no PRODUCTS or component parts alleged or found to be defective shall
be disposed of by the BUYER until it receives the COMPANY's
directions, and
iv) such defective PRODUCTS or component parts shall forthwith be returned
to the COMPANY by the BUYER, freight payable at destination, if the
COMPANY so requests.
Except as provided in this article, THERE IS NO WARRANTY THAT THE PRODUCTS SOLD
HEREUNDER SHALL BE MERCHANTABLE OR FIT FOR ANY PARTICULAR PURPOSE. NOR IS THERE
ANY OTHER WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE PRODUCTS. NEITHER PARTY'S
RESPONSIBILITY FOR LOSSES OR LIABILITIES ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE PRODUCTS SOLD AND SOFTWARE LICENSED HEREUNDER SHALL EXCEED 1.0
TIMES THE AGGREGATE PURCHASE PRICE PAID BY THE BUYER FOR THE PRODUCTS. IN NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL
OR PUNITIVE DAMAGES, LOST PROFITS, REVENUES OR COSTS OF CAPITAL, ARISING OUT OF
OR RELATING IN ANY WAY TO THIS AGREEMENT, REGARDLESS OF WHETHER THE OTHER PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES. NOTWITHSTANDING ANYTHING TO
THE CONTRARY CONTAINED HEREIN OR ELSEWHERE, INCLUDING THE CAP ON LIABILITY SET
FORTH ABOVE, EACH PARTY WILL BE RESPONSIBLE FOR ALL DAMAGES INCURRED BY THE
OTHER PARTY AS A RESULT OF ANY DAMAGE OR INJURY CAUSED BY OR RESULTING FROM THE
FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE OTHER PARTY.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
13. TRADEMARKS
13.1 The products shall in accordance with instructions of the BUYER bear
the trade name of "UTStarcom" owned by the BUYER which shall be a
registered trademark in Japan or other countries where the products
are offered for sale. The BUYER agrees that any disputes or troubles
filed by any third party with respect to the said trademark or other
trademarks directed by the BUYER for use onto the PRODUCTS shall be
settled at the BUYER's sole responsibility and expense. Where it is
required by any laws or regulations in the TERRITORY to manifest the
name of the manufacturers of PRODUCTS, the COMPANY may place the name
or symbol of the COMPANY or any contraction, abbreviation or
simulation thereof or other necessary marks onto the PRODUCTS in such
a manner as determined after consultation with the BUYER.
14. PATENTS ETC.
14.1 The COMPANY warrants that the importation, sale or distribution, or
use of the PRODUCTS will not infringe on any patent rights, utility
model rights, design rights, copyrights or any other intellectual
property rights of whatever kind (hereinafter referred to as the
"Intellectual Property Rights") of any third party. The COMPANY shall
be responsible and liable to the BUYER in respect to any such claim of
infringement and the COMPANY agrees to defend, indemnify and hold
harmless the BUYER, its successors, assigns, officers, employees and
agents from (X) any and all such claims, provided the COMPANY is given
authority and such reasonable assistance and information from the
BUYER as the COMPANY requests in writing for the defense of such
claims and from (Y) reasonable costs and expenses incurred by the
BUYER in defense of such claims, if the COMPANY does not undertake the
defense thereof.
14.2 Notwithstanding the foregoing, the COMPANY will not be liable for any
damages or costs resulting from any claim or suit that arises from:
(A) the COMPANY's compliance with the detailed designs dictated by the
BUYER; (B) use of any Software in combination with products not
supplied by the COMPANY, to the extent the infringement is caused by
such combination; or (C) a manufacturing or other process carried out
by or through the BUYER and using any Software, to the extent the
infringement is caused by such manufacturing or other process, (such
claims being collectively referred to herein as "OTHER CLAIMS"). The
BUYER agrees to defend, indemnify and hold harmless the COMPANY, its
successors, assigns, officers, employees and agents from (X) any and
all such OTHER CLAIMS, provided the BUYER is given authority and such
reasonable assistance and information from the COMPANY as the BUYER
requests in writing for the defense of such OTHER CLAIMS and from (Y)
reasonable costs and expenses incurred by the COMPANY in defense of
such OTHER CLAIMS, if the BUYER does not undertake the defense
thereof.
<PAGE>
14.3 The BUYER shall promptly notify the COMPANY of any and all
infringements, imitations or illegal use of the COMPANY's Intellectual
Property Rights, and of any statements or actions made or done by any
third party disputing or impairing the COMPANY's interest in and title
to any of the above rights. Whenever in the opinion of the COMPANY,
any action is necessary or advisable to insure the protection or
prevention against such infringements, imitations or illegal use of
any of the COMPANY's Intellectual Property Rights, the COMPANY may
take such action in the courts, administrative agencies or otherwise,
but shall not be obligated to take any such action and shall have no
liability to the BUYER for failure to do so. The BUYER shall only upon
the request of the COMPANY and subject to the COMPANY's agreement to
reimburse the BUYER for any expense to be incurred by the BUYER, take
whatever action is deemed necessary by the COMPANY to insure such
protection or prevention.
15. DURATION OF THE AGREEMENT
15.1 This agreement shall be deemed to come into force on the effective
date and unless earlier terminated in accordance with the provisions
of this Agreement shall continue in force and effect for [*]. This
Agreement shall be automatically renewed for [*] and thereafter from
year to year unless either of the parties hereto gives the other party
at least [*] prior written notice to terminate this Agreement before
the expiration of the initial or any renewed term of this Agreement.
If such prior written notice is made by either party then this
Agreement shall terminate on the initial or, as the case may be, duly
renewed expiry date hereof.
16. TERMINATION OF THE AGREEMENT
16.1 In the event of the occurrence of any of the following events to
either party, the other party may forthwith terminate, wholly or
partly, this Agreement and/or Sales Contract and/or any other contract
concluded under or in connection with this Agreement by forthwith
sending a written notice to the first party by registered airmail:
i) if either party hereto continues in default of any material
obligation imposed on it herein and/or therein for more than [*]
after written notice has been dispatched by registered airmail by
the other party requesting the party in default to remedy such
default;
ii) if either party hereto is subjected to compulsory execution,
public auction, coercive collection for its arrearage of taxes or
public imposts, or suspension of business by public authorities,
or appointment of any receiver or trustee of itself or any
substantial portion of its property, or if an application or
petition is submitted for bankruptcy, corporate arrangement or
commencement of corporate reorganization, or if either
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
party hereto files voluntarily against it an application or
petition for bankruptcy, corporate arrangement or commencement of
corporate reorganization or composition, or if either party
hereto adopts a resolution for discontinuance of its business or
transfer to another company of all or important parts of its
assets or business or for a substantial decrease of its capital
or for dissolution or merger into another company, or makes
general assignment for the benefit of creditors or if either
party hereto becomes unable to pay debts, or if either party is
declared in default of any material contract between it and any
third party and such contract is canceled or its payment
obligation under such contract is accelerated;
iii) if, in the reasonable judgment of the COMPANY, there exists or is
any ground to suspect the existence of obstacles to effectively
continue this Agreement in any aspect of technological
development, manufacture, sales or marketing of the PRODUCTS
including but not limited to failure by the BUYER to achieve any
agreed upon minimum requirement or targeted volume or the case
where such failure is expected in the reasonable judgment of the
COMPANY; or
iv) if there is any other material cause justifying either party to
terminate this Agreement, such as material and irreparable injury
to goodwill or reputation of the other party, commission by the
other party of a fraud on or betrayal of confidence in or
criminal act against the first party or disclosure or divulgence
by the other party of the first party's confidential information.
16.2 In the event of termination or cancellation of this Agreement for any
reason whatsoever:
i) The COMPANY may at its sole discretion cancel any Sales Contract
for the PRODUCTS which have not been shipped at the date of such
termination or cancellation. If any Sales Contract is canceled
for any reason whatsoever, the COMPANY may sell or otherwise
dispose, of the PRODUCTS covered under the Sales Contract so
canceled elsewhere in any manner by removing, at the COMPANY's
costs and expenses, all of the BUYER's signs, marks and labels
from the PRODUCTS. If the COMPANY is unable to sell or otherwise
dispose of the PRODUCTS, the BUYER shall pay that portion of the
purchase price within the limits defined in Exhibit B.2, and
ii) Each party hereto shall promptly return to the other party any
materials or property in its possession or custody supplied by
and belonging to the other party in connection with this
Agreement.
16.3 Except as otherwise clearly provided herein, any termination of this
Agreement shall be without prejudice to any rights which shall have
accrued to either party hereunder prior to such termination.
<PAGE>
16.4 The parties shall enter into a separate agreement where the COMPANY
grants to the BUYER to use complete and current design and
manufacturing information for the products upon the COMPANY's
inability to deliver PRODUCTS to the BUYER due to the COMPANY's
acquisition, break-up or bankruptcy.
17. COMPENSATION FOR DAMAGES
17.1 Any defaulting or breaching party hereto or a party terminated
pursuant to the provisions of Article 16 (termination) hereof shall
pay all reasonable compensation for losses and damages incurred by the
other party as a result of default of its obligations or termination
of this Agreement. In any event, neither party shall be liable for any
incidental, consequential or punitive damages as a result of default
on its obligation or termination of this Agreement.
17.2 Any defaulting or breaching party hereto shall defend, indemnify and
hold harmless the other party from and against any and all actions,
claims, demands, suits, losses, damages, costs, expenses and judgments
(including attorney's fees) by whomever made, brought or prosecuted
and in any manner based upon, arising out of, related to, occasioned
by or attributable to any breach by any defaulting or breaching party
of any provisions of this Agreement or any negligence or fault on the
part of any defaulting or breaching party, its employees or agents in
the performance thereof.
17.3 In the event of any delay by the BUYER in taking delivery of the
PRODUCTS, the BUYER agrees to pay to the COMPANY, i) interest on any
overdue payment of the purchase price of the relevant PRODUCTS at the
rate of twelve (12) percent per annum for the period of such delay,
ii) the additional storage charges of the relevant PRODUCTS in Japan
or any other country where such PRODUCTS are stored for the period of
such delay and iii) any other expenses and damages sustained by the
COMPANY due to such delay. The foregoing provisions of this article
shall not prejudice the right of the COMPANY to terminate this
agreement and/or Sales Contract on account of breach by the BUYER of
its obligation to take delivery of the relevant PRODUCTS as agreed and
any other rights and remedies of the COMPANY contained herein or in
the Sales Contract.
18. DISCLOSURE OF INFORMATION
18.1 All information, suggestions or ideas transmitted by either party to
the other party in connection with this Agreement or the performance
hereunder and designated by the transmitting party as secret or
confidential shall be treated as secret or confidential by the
receiving party and shall not be divulged or disclosed to any third
party, person, firm or agency, governmental or private, without the
prior written consent of the disclosing party except to the extent
that such information
<PAGE>
is: (a) known at the time of its receipt as documented in written
records; (b) properly in the public domain; (c) subsequently disclosed
to the receiving party, without any obligation to keep such
information confidential, by a third party that may lawfully do so;
(d) required to be disclosed by law, including but not limited to any
requirements imposed by either United States Securities and Exchange
Commission or any other security and exchange commission on BUYER; or
(e) disclosed to potential financing or insurance sources, as long as
any such third parties agree to be bound by the provisions of this
section.
18.2 "Confidential Information" may include: business or marketing plans,
strategies, concepts, and data (including costs and pricing); research
and development activities; products, product plans, technical
specifications, technology, hardware, software, systems, and designs;
trade secrets, formulas, copyrighted materials, packaging, and
trademarks; manufacturing processes and methods (including line
speeds, manning requirements and layout); existing or potential
customers, suppliers, methods, and techniques; and other accumulated
technical knowledge or information, which is disclosed by one party to
the other and is identified as confidential when disclosed. It is
specifically agreed that any technical know-how and marketing
information (such as price and other sales conditions) shall be hereby
regarded as secret and confidential PER SE without making such
designation.
19. PUBLICITY
19.1 The COMPANY and the BUYER will jointly discuss and agree, on the
release of any statement to the public regarding the execution and the
subject matter of this Agreement, subject in each case to disclosure
otherwise required by law or regulation. The parties will work
together on a joint statement announcing their relationship and the
execution and subject matter of this Agreement as soon as practicable
following the execution hereof. Either party may disclose the
execution of this Agreement to any third parties that are subject to a
confidentiality and non-disclosure agreement with such disclosing
party that is at least as restrictive as the provisions in Article 18.
20. ASSIGNMENT
20.1 Neither party shall assign, transfer or otherwise dispose of this
Agreement in whole or in part or any right hereunder to any third
party without the prior written consent of the other party.
<PAGE>
21. NOTICES
21.1 Except as otherwise provided herein all notices to be given or made
under this Agreement shall be in writing and hand-delivered in person
or sent by facsimile followed by mail or courier services and
addressed to the principal office of the parties as indicated above in
this Agreement or to such other address as either party may hereafter
furnish to the other party in writing.
21.2 All notices shall be deemed to have been given (a) when delivered
personally, (b) upon confirmation of receipt if sent via telecopy or
electronic mail, (c) 3 days after being deposited in the United States
mail or Japanese mail, registered or certified with return receipt
postage prepaid, or (d) 1 day after being sent by courier or overnight
delivery service requiring proof of receipt.
22. EXCEPTIONS
22.1 FORCE MAJEURE The COMPANY shall not be liable for any delay in
shipment or delivery, non-delivery, or destruction or deterioration,
of all or any part of the PRODUCTS, or for any other default in
performance of this Agreement or Sales Contract or any other contract
concluded under or in connection with this Agreement, which arises
from any lockout, strike, labor trouble or other industrial
disturbance, inevitable accident, export cartel by governmental
authorities or industry or trade associations of whatever nature to
limit its export of the PRODUCTS, fire, explosion, transportation
difficulty, or from any cause beyond the control of the COMPANY,
including without limitation, war, blockade, embargo, governmental,
administrative or public direction or guidance or order of any country
including any reasonably anticipated direction or guidance or order
thereof, legal restriction imposed in any country, including any
reasonably anticipated restriction thereof, riot, civil commotion,
warlike condition, prolonged failure or shortage of electric power,
gas or oil, epidemic, earthquake, flood, typhoon or other Act of God.
22.2 In the event of any delay or failure due to the cause or causes given
in the preceding paragraph 22.1, the COMPANY shall send by fax, email
or otherwise a written notice stating the reason therefor to the BUYER
as promptly as possible. The performance of the COMPANY shall be
deemed suspended as long as and to the extent that any such cause(s)
continue, but with this Agreement and/or Sales Contract and/or any
other contract concluded under or in connection with this Agreement
then executory shall not be regarded as terminated, frustrated or
canceled simply as a result of such delay or failure and the parties
hereto shall continue once more with its performance when the cause or
causes of such delay or failure have ceased or have been eliminated,
provided, however, that if such delay or failure extends or is
reasonably anticipated to extend for a period of more than 3 months,
the COMPANY may without any liability on its part terminate or cancel
this Agreement and/or the said Sales Contract and/or any other
contracts
<PAGE>
concluded under or in connection with this Agreement by sending a
written notice to the BUYER to the extent that the COMPANY's
performance has been prevented or delayed.
22.3 It is specifically understood and agreed that if the COMPANY cancels
any Sales Contract pursuant to paragraph 22.2 above, the COMPANY may
sell the PRODUCTS elsewhere and in any manner by removing, at the
COMPANY's cost and expense, all of the BUYER's signs, marks and labels
on the PRODUCTS destined for the BUYER. In such event, the COMPANY
shall bear all the expenses and costs incurred by the COMPANY in
connection with changing or remodeling the PRODUCTS as the COMPANY
deems fit for the purpose of sale elsewhere, as well as the costs for
signs, marks, labels, packages and other printing materials having
then already been prepared in accordance with the BUYER's directions.
23. ENTIRE AGREEMENT
23.1 This Agreement constitutes the entire and only agreement between the
parties hereto and supersedes all previous understandings, commitments
and agreements, whether oral or written, relating to the subject
matter hereof, and no modification, amendment supplement of this
Agreement shall be binding upon the parties hereto except by mutual
express written consent of subsequent date signed by an authorized
representative or officer of each of the parties hereto.
24. ARBITRATION
24.1 Any dispute arising from the execution of or in connection with this
Agreement shall be settled through friendly consultation between the
parties. If the dispute cannot be settled within 60 days from the
first date of consultation, the dispute shall be settled by consulting
of 3 arbitrators, Arbitration shall be held in San Francisco,
California under the International Arbitration Rules of the American
Arbitration Association if initiated by the COMPANY, and shall be held
in Tokyo, Japan under the Commercial Arbitration Rules of the Japan
Commercial Arbitration Association if initiated by the BUYER. The
award rendered by the arbitration shall be final and binding upon the
parties and may be entered by any court having jurisdiction.
25. GOVERNING LAW AND TRADE TERMS
25.1 It is mutually agreed that, except as otherwise required by mandatory
provisions of applicable laws of the TERRITORY, the terms of this
Agreement and the performance hereunder shall in all respects be
governed and interpreted by and
<PAGE>
under the laws of the State of California, USA, excluding its
provisions regarding conflict of laws.
25.2 If applicable, the trade terms used in this Agreement shall have the
meaning given to such terms in the Incoterms 2000.
26. MISCELLANEOUS
26.1 AMENDMENTS: This Agreement may only be amended or modified by an
instrument in writing executed by both parties.
26.2 WAIVER: a waiver by a party hereto of any particular provision hereof
shall not be deemed to constitute a waiver in the future of the same
or any other provision of this Agreement.
26.3 SEPARABILITY: The parties hereto agree that, in the event of one or
more of the provisions hereof being subsequently declared invalid or
unenforceable by court or administrative decision, such invalidity or
unenforceability of any of the provisions shall not in any way affect
the validity or enforceability of any other provisions hereof except
those invalidated or unenforceable provisions which comprise an
integral part of or are otherwise clearly inseparable from such other
provisions.
26.4 APPLICABLE LANGUAGE: This Agreement has been executed by the parties
hereto in the English language and no translated version of this
Agreement into any other language shall be controlling and binding
upon any of the parties hereto.
26.5 TITLES: The Article titles in this Agreement have been inserted for
convenience only and shall in no way be used in the interpretation
hereof.
26.6 EXPENSES: Unless otherwise expressly agreed herein or otherwise in
writing by the parties hereto, each party shall bear all expenses and
disbursements incurred or made by itself or any other investment made
by itself in connection with or in pursuance of this Agreement, and
neither party shall be entitled to compensation from the other party
for said expenses, disbursements or investment whether on termination
of this Agreement for any reason whatsoever or otherwise unless
otherwise expressly agreed upon in writing by the other party.
26.7 PARTIES INDEPENDENT: In making and performing this Agreement, the
parties are acting and shall act as independent contractors, and
nothing contained in this Agreement shall be construed or implied to
create any agency, partnership or employer and employee relationship
between the COMPANY and the BUYER.
26.8 CAPACITY TO ENTER INTO AGREEMENT: Both parties represent and warrant
that, irrespective of any other contractual commitment of any kind to
any
<PAGE>
other third party, the parties hereto possess the capacity and right
to enter into this Agreement, and to substantially perform the
material obligations contained within the terms of this Agreement. If
any other contractual commitments to any other third party cause
either of the parties to fail to substantially perform their material
obligations pursuant to this Agreement (as determined in the
reasonable judgment of the aggrieved party), the aggrieved party shall
be indemnified for and held harmless against any third-party claims,
actions or lawsuits pursuant to Section 17.1 and 17.2 of this
Agreement, in addition to any other remedies provided for in this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective representatives or officers duly authorized thereunto as of
the date first above written,
Japan Radio Company, Ltd. UTStarcom (Hangzhou) Co., Ltd.
Authorized Signature Authorized Signature
By: /s/ KIYOMI SHINTANI By: /s/ illegible
---------------------------------- ---------------------------
Name printed: KIYOMI SHINTANI Name printed: illegible
------------------------ -----------------
Title: DIVISION EXECUTIVE
COMMUNICATIONS EQUIPMENT DIV. Title: CHAIRMAN
------------------------------ ------------------------
Date: MARCH 16, 2000 Date: 8 FEB 2000
---------------------------------- --------------------------
<PAGE>
EXHIBIT A PRODUCT SPECIFICATIONS
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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THIS PAGE LEFT BLANK INTENTIONALLY.
<PAGE>
EXHIBIT B DELIVERY ORDER RESCHEDULING AND CANCELLATION
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
EXHIBIT C PRICE LIST AND NRE
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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THIS PAGE LEFT BLANK INTENTIONALLY.
<PAGE>
EXHIBIT D SUPPORT
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT E MANUFACTURING SUPPORT
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
<PAGE>
EXHIBIT F SCHEDULE
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY.
<PAGE>
EXHIBIT G INSPECTION STANDARD AND PROCEDURES
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
Exhibit 10.3
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
TECHNICAL COLLABORATION AGREEMENT
BETWEEN
SHARP CORPORATION
AND
UTSTARCOM INC.
<PAGE>
INDEX
ARTICLE
1. Definitions
2. Grant of Right
3. Disclosure of KNOW-HOW and other Technical Information;
Technical Assistance & Services
4. Training of HUTS's Engineers at the FACTORY
5. Despatch of SHARP's Technical Instructor
6. Secrecy
7. Machines, Equipment & Testers
8. Supply Parts
9. Improvements
10. Royalty
11. Records and Auditing
12. Validity and Infringement
13. Approval of Government
14. Duration of Agreement
15. Termination
16. Assignment
17. Notices
18. Entire Agreement
19. Force Majeure
20. Arbitration
21. Governing Law
22. Miscellaneous
EXHIBIT A, B & C
<PAGE>
TECHNICAL COLLABORATION AGREEMENT
THIS AGREEMENT made and entered into this 31st day of March, 2000, by and
between:
SHARP CORPORATION, a Japanese corporation, having its principal place of
business at 22-22, Nagaike-cho, Abeno-ku, Osaka 545-8522, Japan (hereinafter
referred to as "SHARP")
and
UTSTARCOM INC., a Delaware corporation, having its principal place of business
at 1275 Harbor Bay Parkway, Suite 100, Alameda, CA 94502, U.S.A. (hereinafter
referred to as "UTSTARCOM")
WITNESSETH
WHEREAS, SHARP is now and has for a long time been engaged in the manufacture
and sale of SHARP's brand electric and electronic products and is the owner of
certain technical know-how and intellectual property rights relating to the
PRODUCTS (as hereinafter defined) and manufacture thereof; and
WHEREAS, UTSTARCOM is desirous of obtaining a right (i) to have EASTCOM (as
hereinafter defined), by the good office of HUTS (as hereinafter defined),
assemble and manufacture the PRODUCTS in the TERRITORY (as hereinafter defined)
under said technical know-how and intellectual property rights, and (ii) to have
HUTS sell or distribute the PRODUCTS in the TERRITORY so assembled and
manufactured by EASTCOM; and
WHEREAS, SHARP is willing to grant to UTSTARCOM a right (i) to have EASTCOM, by
the good office of HUTS, assemble and manufacture the PRODUCTS in the TERRITORY
under said technical know-how and intellectual property rights and render to
HUTS technical assistance, which are necessary for the assembly and manufacture
of the PRODUCTS in the TERRITORY for distribution by HUTS of the PRODUCTS in the
TERRITORY, and (ii) to have HUTS sell or distribute the PRODUCTS in the
TERRITORY so assembled and manufactured by EASTCOM.
NOW, THEREFORE, the parties hereto hereby agree as follows:
-continued-
<PAGE>
ARTICLE 1. DEFINITIONS
Whenever used in this Agreement, unless otherwise clearly required by the
context, the following terms shall have the meanings set forth in this Article
and no other.
(a) The term "TERRITORY" means [*]
(b) The term "PRODUCTS" means only such models of the products, which are:
i) specified in the EXHIBIT-A attached hereto and made a part hereof; and
ii) carrying the trademark "UTStarcom" or other marks owned by UTSTARCOM
or other marks designated by UTSTARCOM upon prior written consent of
SHARP. SHARP will not refuse the use of such designated marks without
a reasonable reason.
It is expressly agreed that products which do not satisfy both of the above
two conditions shall in no way be included in the meaning of the term
PRODUCTS.
(c) The term "SUPPLY PARTS" means any or all materials and component parts for
the PRODUCTS supplied in any form from SHARP, its subsidiary, related or
affiliated company or designated factory.
(d) The term "KNOW-HOW" means any or all secret processes, secret formulae and
confidential technical data, confidential manufacturing procedures and
methods, which SHARP has as of the date of this Agreement and/or may during
the term of this Agreement have as a result of SHARP's scientific research
or practical experience through its assembly and manufacture of the
equivalent model to the PRODUCTS.
(e) The term "INTELLECTUAL PROPERTY RIGHTS" means any or all rights in the
TERRITORY under patents, utility models, designs, and copyrights, which
SHARP owns as of the date of this Agreement in connection with the
PRODUCTS. For the avoidance of doubt, INTELLECTUAL PROPERTY RIGHTS does not
include any rights of trademark.
(f) The term "HUTS" means UTSTARCOM (HANGZHOU) TELECOM CO., LTD, a corporation
of People's Republic of China, and a subsidiary of UTSTARCOM, having its
principal place of business at 3 Yile Industrial Park, Bldg. 2/3 19 WenYi
Road, Hangzhou, 310012, People's Republic of China and doing business of
manufacturing, sales or distribution, and after-sales service of the
communication related products.
(g) The term "EASTCOM" means EASTERN COMMUNICATIONS CO., LTD, a corporation of
People's Republic of China, and having its principal place of business at
No.398. Wen San Road, Hangzhou, Zhe Jiang, People's Republic of China and
doing business of assembly and manufacture of the mobile communication
products.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-continued-
<PAGE>
ARTICLE 2. GRANT OF RIGHT
(a) SHARP hereby agrees to grant to UTSTARCOM [*] right (i) to have EASTCOM, by
the good office of HUTS, assemble and manufacture the PRODUCTS for sale
or distribution thereof in the TERRITORY under the KNOW-HOW and
INTELLECTUAL PROPERTY RIGHTS, and (ii) to have HUTS sell or distribute the
PRODUCTS in the TERRITORY so assembled and manufactured by EASTCOM.
UTSTARCOM agrees that it shall have [*] right (i) to manufacture or
(distribute the PRODUCTS and ii) to sublicense to any third party the
right granted hereby except with the prior written consent of SHARP, and
it shall cause HUTS and EASTCOM to abide by the terms and conditions as
set forth hereunder. In case UTSTARCOM desires to appoint another party to
assemble and manufacture the PRODUCTS, both parties shall discuss and
agree the terms and conditions for such appointments.
(b) The KNOW-HOW and INTELLECTUAL PROPERTY RIGHTS granted to UTSTARCOM
hereunder shall be used by EASTCOM for the sole purpose of the assembly and
manufacture, and by HUTS for the sole purpose of the sale of the PRODUCTS
in the TERRITORY in accordance with the terms and conditions hereof and if
UTSTARCOM, HUTS or EASTCOM uses the KNOW-HOW and/or INTELLECTUAL PROPERTY
RIGHTS for any other purposes, SHARP shall have the right, without
prejudice to SHARP's rights and remedies under this Agreement or applicable
laws, to demand the royalties as specified in the EXHIBIT-B attached hereto
and made a part hereof.
It is specifically understood between the parties hereto that the use
thereof by UTSTARCOM, HUTS or EASTCOM for any other purposes shall be
deemed to be a material breach of this Agreement.
(c) In the event that UTSTARCOM desires to have EASTCOM assemble or manufacture
the PRODUCTS for export from the TERRITORY, it shall submit to SHARP such
information relating to the export as SHARP may reasonably require
including but not limited to the final destination, buyer, quantity, price
and specifications of the PRODUCTS. Both parties shall thereupon mutually
discuss the terms and conditions regarding such export.
(d) No technical assistance relating to the assembly and manufacture of any
component parts of the PRODUCTS is rendered by SHARP hereunder.
(e) SHARP hereby only warrants to UTSTARCOM that the KNOW-HOW and other
technical information disclosed and furnished to HUTS by SHARP hereunder
shall be sufficient to permit competent persons utilizing the appropriate
parts, materials, equipment and skills to assemble and manufacture the
PRODUCTS intended hereunder; SHARP shall not be responsible for the
PRODUCTS thus assembled and manufactured hereunder, nor shall SHARP be
liable for damages arising out of or resulting from anything made available
hereunder or the use thereof or SHARP's approval, consent, certification or
confirmation given to UTSTARCOM (and/or HUTS through UTSTARCOM, as the case
may be)
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
hereunder nor shall SHARP be liable to UTSTARCOM, HUTS and/or EASTCOM for a
loss of profit or any consequential damages under any circumstances.
(f) If SHARP determines to discontinue the assembly, manufacture or
distribution of any equivalent models of the PRODUCTS in Japan or elsewhere
for any reason whatsoever, or if UTSTARCOM fails to (i) have EASTCOM
assemble and manufacture or (ii) have HUTS sell or distribute any models of
the PRODUCTS in the TERRITORY for three months or more, SHARP may, in its
sole discretion and by giving [*] prior written notice to UTSTARCOM,
exclude such models of the PRODUCTS from among the PRODUCTS.
Article 3. DISCLOSURE OF KNOW-HOW AND OTHER TECHNICAL INFORMATION: TECHNICAL
ASSISTANCE & SERVICES
Upon the written request of UTSTARCOM or HUTS and to the extent then available
at SHARP and SHARP thinks fit, SHARP shall disclose and furnish to HUTS the
KNOW-HOW and other technical information as specified in sub-paragraph i)
through iii) below and HUTS shall, at its own costs and responsibility, disclose
and furnish to EASTCOM said KNOW-HOW and other technical information so
disclosed and furnished by SHARP. SHARP shall also render to HUTS, technical
assistance and services as specified in sub-paragraph iv) below.
i) For the setting-up of EASTCOM's plant:
a- Layout drawings for each process in the plant;
b- Advice on the process layout of EASTCOM's plant (if
necessary) and advice on procurement of the machines,
equipment, testers and tools required for the assembly and
manufacture of the PRODUCTS;
c- Layout drawings for the installation of the machines and
equipment;
d- Advice on total required electricity, gas and/or water in the
plant;
e- Plans of required number of personnel;
ii) For each model of the PRODUCTS to be newly introduced by UTSTARCOM
from SHARP from time to time:
a- Specifications of the PRODUCTS;
b- List for the SUPPLY PARTS (including kit price list), and
component parts list for studying the local procurement
(including the information of name of parts supplier, parts
name, and parts specifications if available)
c- Material on required standard production time by each
production process and working instruction manual;
d- Schematic diagrams;
e- Draft of instruction manual (written in Japanese);
f- Advice on method and/or standard of quality control (key
point and standard)
g- Process flow chart;
h- Proposal or idea of inspection procedure of the PRODUCTS
i- Advice on procurement and/or use of exclusive testers and
tools
j- Advice on the after-sales service for the PRODUCTS (if
necessary)
k- Assistance for field test of the PRODUCTS (if necessary)
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
l- LCD artwork (the cost shall be separately borne by UTSTARCOM.)
m- Floppy disk including the software (data, program, etc.) to be
written into EEPROM for the PRODUCTS
iii) For the continuous assembly and manufacture of each model of the
PRODUCTS:
a- Advice on production engineering
b- Advice on improvement of production method;
c- Advice and/or guidance on quality control; and
iv) Despatch of SHARP's technical instructor to HUTS and/or EASTCOM,
and/or training of HUTS's engineers at SHARP's factory or its
designated factory (hereinafter collectively called the "FACTORY")
pursuant to Articles 4 and 5 hereof to facilitate the disclosure and
provision of the KNOW-HOW and other technical information.
ARTICLE 4 TRAINING OF HUTS'S ENGINEERS AT THE FACTORY
(a) Upon UTSTARCOM's prior written request and to the extent then available at
SHARP and as SHARP thinks fit, SHARP agrees to give a reasonable number of
HUTS's engineers (hereinafter called the "TRAINEE") such technical training
as SHARP thinks appropriate at the FACTORY for a reasonable period of time
in relation to the assembly and manufacture of the PRODUCTS.
(b) [*] expenses [*] to be incurred in this connection shall, unless otherwise
specifically agreed upon between the parties hereto in writing, be for the
account of UTSTARCOM. It is expressly agreed that SHARP shall be under no
liability to the TRAINEE, UTSTARCOM and/or HUTS for any injuries and
damages to the TRAINEE's health in mind and body and property which he may
suffer regardless of whether he is in the premises of SHARP or not.
(c) UTSTARCOM shall give SHARP at least [*] prior notice before the TRAINEE
leaves the TERRITORY for the FACTORY, stating: the name, number, position,
brief curriculum vitae, leader of the TRAINEE in case of plural TRAINEE
being sent; subject of training; time of TRAINEE's arrival; and the period
of stay desired of each TRAINEE.
(d) Training hours, holidays and other conditions and regulations of work for
the TRAINEE to be trained by SHARP at the FACTORY shall be based on such
FACTORY's working conditions and regulations. No TRAINEE shall be
considered for any purpose to be an employee of SHARP or FACTORY.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
ARTICLE 5. DESPATCH OF SHARP'S TECHNICAL INSTRUCTOR
(a) Upon UTSTARCOM's prior written request or SHARP's written recommendation
made from time to time during the term of this Agreement and where both
parties concurrently deem it appropriate and necessary, SHARP agrees to
despatch to HUTS and/or EASTCOM (by the good office of HUTS) designated by
UTSTARCOM and SHARP agrees, for a reasonable period of time a reasonable
number of engineer(s) and/or specialist(s) (hereinafter called the
"INSTRUCTOR") to more effectively and efficiently disclose and furnish the
KNOW-HOW and other technical information and to give technical guidance and
instructions to HUTS in relation to the assembly and manufacture of the
PRODUCTS hereunder. The time and period of despatch of the INSTRUCTOR shall
be decided by mutual consultation of the parties hereto.
(b) All necessary costs and expenses incurred in connection with the despatch
of the INSTRUCTOR [*] shall be borne and paid by UTSTARCOM.
(c) UTSTARCOM shall cause HUTS to take necessary steps to obtain (or help to
obtain as the case may be) from the authorities concerned the entrance visa
into the TERRITORY of the INSTRUCTOR and UTSTARCOM shall cause HUTS to use
its best efforts to help the INSTRUCTOR in carrying out all customs
clearance procedures for entry into and departure from the TERRITORY of the
INSTRUCTOR and to give all necessary facilities and assistances to the
INSTRUCTOR in the TERRITORY.
(d) All the detailed terms and conditions in connection with all the preceding
paragraphs of this Article and other necessary matters (including a
guarantee of status by UTSTARCOM of the INSTRUCTOR) in relation to the
despatch of the INSTRUCTOR shall be in accordance with a separate agreement
to be executed between the parties hereto.
(e) UTSTARCOM shall obtain from EASTCOM the permission for SHARP or its
representatives to inspect the processes and equipment employed by EASTCOM
in the assembly or manufacture of the PRODUCTS, if SHARP deems it necessary
from time to time.
ARTICLE 6. SECRECY
UTSTARCOM shall, and shall cause HUTS and EASTCOM to, keep strictly confidential
all the KNOW-HOW and all other information furnished or made available by SHARP,
whether in written, oral or any other form or forms, under this Agreement (or
any previous agreement, if any, similar thereto), both during the term hereof
and thereafter. UTSTARCOM agrees that it shall not without the prior written
consent of SHARP cause HUTS and EASTCOM to disclose them in any manner to anyone
other than their own employees who will be using them in the assembly,
manufacture and distribution of the PRODUCTS.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
Notwithstanding the foregoing provisions, SHARP agrees that UTSTARCOM may
disclose the contents of this Agreement as may be required by law, including but
not limited to the disclosure of this Agreement as may be required by the United
States Securities and Exchange Commission.
ARTICLE 7. MACHINES, EQUIPMENT & TESTERS
SHARP will upon the request of UTSTARCOM made from time to time, furnish to
UTSTARCOM (or HUTS, if UTSTARCOM requests so) a list of machines, equipment,
testers and tools (hereinafter collectively or individually, as the case may be,
called the "MACHINES" in this Article) appropriate to the assembly and
manufacture by EASTCOM of the PRODUCTS in the TERRITORY and will be ready to
supply with the MACHINES for the use of EASTCOM under the terms and conditions
agreeable to both parties.
In case UTSTARCOM (or HUTS, as the case may be) wishes to purchase any of the
MACHINES specified by SHARP from sources other than SHARP, UTSTARCOM shall
submit to SHARP in advance full information, and obtain SHARP's confirmation,
with respect to such purchase so that SHARP may make sure that such MACHINES
shall be appropriate to the assembly and manufacture of the PRODUCTS; provided,
however, that such SHARP's confirmation shall in no way be regarded as SHARP's
assumption of any responsibility for the MACHINES. Should troubles with respect
to such MACHINES arise, SHARP will give technical advice to HUTS to the extent
possible.
ARTICLE 8. SUPPLY PARTS
UTSTARCOM wishes to continuously purchase from SHARP all the materials and/or
component parts necessary for the assembly, manufacture and servicing of the
PRODUCTS according to the Parts Supply Agreement separately concluded between
the parties hereto. However, SHARP acknowledges that UTSTARCOM reserves the
right to purchase such materials and/or component parts from other sources,
including but not limited to local sources within the TERRITORY.
ARTICLE 9. IMPROVEMENTS
All the technical information on ordinary improvements in or in connection with
the PRODUCTS made by either party shall be furnished to the other party
(including HUTS [*] during the term of this Agreement.
The foregoing provisions of this Article shall not to any, [*] which shall be
subject to separate good faith negotiation and agreement between the parties to
this Agreement.
Both parties (including HUTS) will make a best effort including every possible
advice or support by SHARP in maintaining the competitiveness of the PRODUCTS on
the market in the TERRITORY. Notwithstanding the items 1 and 2 specified in the
EXHIBIT-C, if HUTS makes certain modifications to the then existing model(s) of
the PRODUCTS
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
8
based on SHARP's advice and support, then the parties to this Agreement will
negotiate in good faith as to a separate agreement relating to such
modifications, which may include the establishment of additional royalties that
may be directly derived from such modifications.
ARTICLE 10. ROYALTY
In consideration of the INTELLECTUAL PROPERTY RIGHTS, the KNOW-HOW and other
technical information granted to UTSTARCOM hereunder, UTSTARCOM shall pay to
SHARP the following royalties in the amount and in the manner specified below.
(a) UTSTARCOM shall pay to SHARP an Initial Payment in such an amount as
specified in the EXHIBIT-B within [*] after the effective date set forth in
Article 14 of this Agreement.
(b) UTSTARCOM shall pay to SHARP a Model Fee in such amounts as specified in
the EXHIBIT-B within [*] following the disclosure of the substantial part
of the KNOW-HOW and/or other technical information relating to the models
specified in the EXHIBIT-B and any new or modified model of the PRODUCTS.
Said disclosure shall be made subject to the written confirmation of
UTSTARCOM to pay the relevant Model Fee. Classification of the new model
or the modified model shall be determined by designation of SHARP on the
basis set forth in the EXHIBIT-C attached hereto and made a part hereof.
(c) Running Royalty
i) UTSTARCOM shall pay to SHARP a Running Royalty at such
rates as are specified in the EXHIBIT-B against the Net Selling
Price (as defined below) of all the PRODUCTS Sold (as defined below)
by HUTS during the term of this Agreement. For the purpose of this
Article, "Net Selling Price" means the gross selling price of the
PRODUCTS sold by HUTS to the sales subsidiaries in the TERRITORY of
UTSTARCOM less only accepted returns from the customers of said
sales subsidiaries hereinabove. The PRODUCTS shall be considered
"Sold" hereunder when billed (or invoiced) out to said sales
subsidiaries, or if not billed out, then when delivered or when paid
for if paid for before delivery.
ii) Running Royalty shall be computed for [*] period terminating on the
[*] UTSTARCOM shall send its statement of royalty due for the
immediately preceding [*] period, together with full evidence which
SHARP may require, to reach SHARP not later than the [*] and
UTSTARCOM shall make payment to SHARP not later than [*] after
receipt by UTSTARCOM of SHARP's telefax acceptance of UTSTARCOM's
royalty statement mentioned above or within [*] after the expiration
of the immediately preceding [*] whichever is the earlier, provided
always that payments made to SHARP before SHARP accepts such royalty
statement shall be on account only.
(d) All the payments due under this Article shall be made in Japanese currency
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
9
strictly in accordance with this Article, converted from Chinese RMB at
the official T.T.S. (Telegraphic Transfer Selling) closed rate of
exchange prevailing in New York Foreign Exchange market on the expiry
date of the immediately preceding [*] period for the calculation of the
royalties hereunder.
(e) All payments made to SHARP hereunder shall be by means of official
telegraphic transfer remittance or mail transfer remittance.
(f) [*] and all payment specified herein shall represent the net amount to be
received by SHARP. However, if UTSTARCOM shall be required under the laws
of the U.S.A. to deduct any income taxes which may be levied against SHARP
from any payments made to SHARP hereunder, then UTSTARCOM shall be entitled
to deduct, subject to prior notification to SHARP and confirmation by SHARP
thereof, such income taxes from the payments to be made, provided that
UTSTARCOM promptly furnishes to SHARP tax receipts or other satisfactory
evidence in a form acceptable to the Japanese Government and its local
government tax administration certifying the fact that such taxes have been
duly paid.
(g) In the event of delay by UTSTARCOM in the making of any payment due under
this Article, all payments overdue to SHARP shall be subject to interest,
which shall accrue on a daily basis, at the rate of [*] per annum until
such payments are made.
(h) In the event new model of the PHS Terminal is agreed in writing by both
parties to be additionally included in the PRODUCTS, each such new model
shall be subject to the separate Model Fee and Running Royalty in such an
amount and at such rates as may be agreed upon by the parties hereto which
shall be payable, unless otherwise agreed upon, in the same manner and upon
the same conditions as set forth in this Article.
ARTICLE 11. RECORDS AND AUDITING
During the term of this Agreement and thereafter for [*] UTSTARCOM shall
cause HUTS to keep true and accurate records, files and books of account
showing all information necessary for the preparation of the royalty
statements stated in paragraph (c) ii) of Article 10 hereof and UTSTARCOM
shall, upon SHARP's request, submit at its own cost and expense to SHARP an
auditor's certificate or report of royalty statement issued by an independent
certified public accountant acceptable to and/or as appointed by SHARP, and
shall cause HUTS to disclose these books to SHARP, its representative or its
agents during its ordinary working hours and shall cause HUTS to make all
explanations thereof requested by SHARP, its representative or its agents for
the sole purpose of checking the accuracy of the royalty statements.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
10
ARTICLE 12. VALIDITY AND INFRINGEMENT
(a) SHARP represents and warrants to UTSTARCOM and HUTS that the KNOW-HOW and
INTELLECTUAL PROPERTY RIGHTS are the original work of SHARP in each and all
aspects.
(b) UTSTARCOM shall have no right to apply for registration of any intellectual
property rights in the TERRITORY or any other country with regard to the
KNOW-HOW and other technical information made available or furnished by
SHARP hereunder, or to apply itself as the registered licensee or user of
any of the INTELLECTUAL PROPERTY RIGHTS.
UTSTARCOM shall cause HUTS and EASTCOM to abide by same obligation above
of UTSTARCOM.
(c) UTSTARCOM shall cause HUTS and EASTCOM to promptly notify UTSTARCOM and
accordingly UTSTARCOM shall promptly notify SHARP in addition to its own
awareness, of any and all infringements, imitations or illegal use of the
INTELLECTUAL PROPERTY RIGHTS and of any statements or action made or done
by any person, firm or corporation disputing or impairing SHARP's interest
in and title to any of the INTELLECTUAL PROPERTY RIGHTS.
(d) Whenever in the opinion of SHARP, any action is necessary or advisable to
insure the protection or prevention against such infringements, imitations
or illegal use of any INTELLECTUAL PROPERTY RIGHTS, (i) SHARP may take any
action in the courts, administrative agencies or otherwise, and (ii) upon
the request of SHARP and subject to and within the scope of SHARP's
agreement to reimburse UTSTARCOM for any expenses to be incurred by
UTSTARCOM, UTSTARCOM shall or shall cause HUTS to take whatever action is
deemed necessary by SHARP to insure such protection or prevention.
SHARP shall not be obligated to take any action against such infringements,
imitations or illegal use and shall have no liability to UTSTARCOM, HUTS
and EASTCOM for failure to do so. UTSTARCOM shall or shall cause HUTS to
take no action with respect to any infringement, imitation or illegal use
of any INTELLECTUAL PROPERTY RIGHTS unless requested by SHARP to do so.
In any circumstances all the proceeds or recovery of any damages awarded
in such action shall accrue to SHARP.
(e) In the event, however, that UTSTARCOM (or HUTS or EASTCOM, as the case may
be) is threatened or involved in any infringement or other like litigation
in the TERRITORY, by reason of its exercise of rights acquired under this
Agreement, SHARP will render to UTSTARCOM (or HUTS or EASTCOM, as the case
may be) such assistance as SHARP, in its sole discretion, deems appropriate
in defending such litigation or threatened litigation at the expense of
UTSTARCOM. SHARP shall, in view of that the amounts of Royalties mentioned
in Article 10 is a consideration only for the INTELLECTUAL PROPERTY RIGHTS,
the KNOW-HOW and other technical information necessary for the assembly
and manufacture of the PRODUCTS, not be held responsible by UTSTARCOM (or
HUTS or EASTCOM, as the case may be) (i) for infringement of any patent,
utility
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<PAGE>
11
model right, design, copyright or other intellectual property rights of
third parties, or damages or cost involved in any proceeding based on such
infringements, (ii) for the validity of any INTELLECTUAL PROPERTY RIGHTS
granted hereunder, or the inability of HUTS (or EASTCOM, as the case may
be) to use such INTELLECTUAL PROPERTY RIGHTS or KNOW-HOW because of any
patent, utility model right, design, copyright or other intellectual
property rights of third parties or (iii) for any additional royalties or
obligations incurred by UTSTARCOM (or HUTS or EASTCOM, as the case may be)
because of any patent, utility model right, design, copyright or other
intellectual property rights of third parties.
(f) In the event that SHARP becomes or is made, whether by judicial
declaration, settlement, agreement of the relevant parties or in any other
manner, responsible for or liable to pay damages, costs, royalties or any
other compensation or consideration or to perform any other obligation,
whether in respect of past, present or future acts or circumstances (the
"Obligation"), to a third party with respect to or arising out of an
infringement or alleged infringement of any patent, utility model right,
design, copyright or any other intellectual property right of the third
party in the TERRITORY resulting from the assembly and manufacture by
EASTCOM or sale or distribution by HUTS of the PRODUCTS hereunder,
UTSTARCOM shall or shall cause HUTS and EASTCOM to indemnify and hold
harmless SHARP in full, or in part as may be determined by SHARP in its
sole discretion, with respect to the Obligation to be paid to or performed
for the benefit of the third party. SHARP may, in its sole discretion,
determine the manner in which such indemnification by UTSTARCOM (or HUTS or
EASTCOM, as the case may be) shall be made. In exercising its discretion
pursuant to this paragraph, SHARP shall give due consideration to the
contribution of each party (including HUTS and EASTCOM, as the case may
be), the particular circumstances of the Obligation and the profit and
other benefits received by each party (including HUTS and EASTCOM, as the
case may be) hereto in respect of the subject matter of this Agreement.
ARTICLE 13. APPROVAL OF GOVERNMENT
Each party shall obtain the official approval of its government on this
Agreement, if such approval is necessary to perform this Agreement. Each party
shall inform the other party of the date of approval of the government together
with a copy of such approval (accompanied by English translation if not provided
in English) immediately after it is obtained.
ARTICLE 14. DURATION OF AGREEMENT
This Agreement shall be deemed to have been come into force on the 1st day of
December, 1999 retroactively, and unless earlier terminated in accordance with
the provisions hereof, shall continue in force and effect for [*] until and
including the [*]. It is understood by the parties hereto that this Agreement
shall be, either automatically or with amendment or modification (if any) and
subject to any necessary government approval, renewed thereafter on a [*]
basis, unless either of the parties hereto gives the other party at least [*]
prior written notice to terminate this Agreement before the expiration of the
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
initial term or any extended term of this Agreement. If such prior written
notice is made by either party, then this Agreement shall terminate on the
initial or as the case may be, duly extended expiration date of this Agreement.
ARTICLE 15. TERMINATION
(a) In the event of the occurrence of any of the following events to either
party (including HUTS and EASTCOM, as the case may be, for the purpose of
this Article), the other party may forthwith terminate this Agreement
and/or any other agreement concluded under or in connection with this
Agreement by sending a written notice to the first party by registered air
mall:
i) If either party hereto continues in default of any material obligation
imposed on it herein and/or therein for more than two(2) months after
written notice has been despatched by registered airmail by the other
party requesting the party in default to remedy such default;
ii) If either party hereto is subjected to compulsory execution, public
auction, coercive collection for its arrearage of taxes or public
imposts, or suspension of business by public authorities, or
appointment of any receiver or trustee of itself or any substantial
portion of its property, or if an application or petition is submitted
against either party for bankruptcy, corporate arrangement or
commencement of corporate reorganization, or if either party hereto
files voluntarily against it an application or petition for
bankruptcy, corporate arrangement or commencement of corporate
reorganization or composition, or if either party hereto adopts a
resolution for discontinuance of its business or for a substantial
decrease of its capital or for dissolution or merger into another
company, or makes general assignment for the benefit of creditors, or
if either party hereto becomes unable to pay debts, or if either party
hereto is declared default of any material contract between it and any
third party and such contract is cancelled or its payment obligation
under such contract is accelerated;
iii) If, due to any substantial change in ownership, management or
effective control of either party or in the objects of the company
stated in the Memorandum of Association or Articles of Incorporation
or a similar document of either party, (1) there exist, or in the
reasonable opinion of the other party there is any ground to suspect
the existence of, any obstacles to the effective continuance of this
Agreement, or (2) there occurs a situation which in the reasonable
opinion of the other party would be detrimental to its interests; or
iv) If there is any other material cause justifying either party to
terminate this Agreement, such as material and irreparable injury to
goodwill or reputation by the other party, commission by other party
of a fraud on or betrayal of confidence in or criminal act against the
first party, disclosure or divulgence by the other party of the first
party's confidential information.
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<PAGE>
(b) In the event of termination of this Agreement for any reason whatsoever:
i) UTSTARCOM shall promptly cause HUTS and EASTCOM to return to SHARP all
specified documents and tangible property supplied by or belonging to
SHARP in connection with this Agreement and shall cause HUTS and
EASTCOM to keep confidential all information received from SHARP
hereunder.
ii) UTSTARCOM shall cause HUTS and EASTCOM to promptly discontinue the use
of the KNOW-HOW and other confidential information and the
INTELLECTUAL PROPERTY RIGHTS and shall cause HUTS to promptly
discontinue the sale of the PRODUCTS assembled and manufactured by
EASTCOM.
iii) All sums including those accrued pursuant to Articles 4, 5 and 10
hereof shall become immediately due and payable. Notwithstanding the
provisions of paragraph (c) of Article 10 hereof, all PRODUCTS the
assembly and manufacture of which have been completed at the date of
the termination of this Agreement shall be deemed Sold, and UTSTARCOM
shall pay the Running Royalty thereof calculated by applying the
average Net Selling Price of the relevant models of the PRODUCTS (or
similar models thereof) during the current royalty period in which the
termination of this Agreement occurs.
(c) Notwithstanding the provisions specified in paragraph (b) ii) of this
Article, unless this Agreement is terminated by a cause or causes which
SHARP deems attributable to UTSTARCOM (or HUTS or EASTCOM, as the case
may be), UTSTARCOM may cause HUTS and EASTCOM to dispose of the PRODUCTS
and the SUPPLY PARTS in the TERRITORY which HUTS and/or EASTCOM have on
hand at the time of termination of this Agreement within such a reasonable
period of time as may be agreed upon by the parties provided that such
sales are made without impairing SHARP's reputation.
(d) In the event that either party (including HUTS and EASTCOM, as the case
may be) defaults in the due performance of its obligations hereunder or
under any agreement made pursuant hereto or in respect hereto, or in the
event that this Agreement is terminated pursuant to paragraph (a) of this
Article, then the other party or the party despatching a notice of
termination pursuant to paragraph (a) of this Article (collectively the
"Affected Party") may demand compensation from the first party for the
losses and damages incurred or suffered by the Affected Party as a result
of any such default or termination.
(e) Except as otherwise provided elsewhere in this Agreement any termination of
this Agreement shall be without prejudice to any right and remedy which
shall have accrued to either party under or in connection with this
Agreement prior to such termination.
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<PAGE>
ARTICLE 16. ASSIGNMENT
Neither party (including HUTS as the case may be) shall assign, transfer or
otherwise dispose of this Agreement in whole or in part or any right or
obligation hereunder to any individual, firm or corporation without the prior
written consent of the other party.
ARTICLE 17. NOTICES
(a) Except as otherwise provided herein all notices to be given or made under
this Agreement shall be in writing and sent by registered airmail and
addressed to the principal office of the parties indicated hereinabove or
to such other address as either party may hereafter furnish to the other
party in writing.
(b) All notices shall be deemed to have been given or made on the day of
despatch.
ARTICLE 18. ENTIRE AGREEMENT
This Agreement constitutes the entire and only agreement between the parties
hereto as to the subject matter contained herein and supersedes all previous
understandings, commitments and agreements whether oral or written relating to
the subject matter hereof, and no modification, amendment or supplement of this
Agreement shall be binding upon the parties hereto except by mutual express
written consent of subsequent date signed by an authorized representative or
officer of each of the parties hereto.
ARTICLE 19. FORCE MAJEURE
Except with respect to any and all payments which are to be made to SHARP
pursuant to Articles 4, 5 and 10 hereof, neither party (including HUTS and
EASTCOM, as the case may be) shall be liable for failure to perform any part of
this Agreement when such failure is due to fire, flood, strikes, labor troubles
or other industrial disturbances, inevitable accidents, war (declared or
undeclared), embargoes, blockades, legal restrictions, governmental regulations,
riots, insurrections, or any cause beyond the control of the parties but this
Agreement shall not be regarded as terminated or frustrated as a result of such
failure of performance and the parties shall continue once more with its
performance when the causes of such non-performance have ceased or have been
eliminated.
ARTICLE 20. ARBITRATION
Any dispute arising from the execution of, or in connection with, this Agreement
shall be settled through friendly consultation between the parties. If the
dispute cannot be settled within sixty (60) days from the first date of
consultation, the dispute shall be settled by arbitration consisting of three
(3) arbitrators. Arbitration shall be held in San Francisco, California under
the International Arbitration Rules of the American Arbitration
-continued-
<PAGE>
Association if initiated by SHARP, and shall be held in Osaka, Japan under the
Commercial Arbitration Rules of the Japan Commercial Arbitration Association if
initiated by UTSTARCOM. The award rendered by the arbitration shall be final and
binding upon the parties and may be entered by any court having jurisdiction.
ARTICLE 21. GOVERNING LAW
It is mutually agreed that the terms of this Agreement and the performance
hereunder shall in all respects be governed, construed and interpreted in
accordance with the laws of Japan, excluding its provisions regarding conflict
of laws.
ARTICLE 22 MISCELLANEOUS
(a) SEPARABILITY: The parties hereto agree that, in the event of one or more of
the provisions hereof being subsequently declared invalid or unenforceable
by court or administrative decisions, such invalidity or unenforceability
shall not in any way affect the validity or enforceability of any other
provisions hereof except those which the invalidated or unenforceable
provisions comprise an integral part of or are otherwise clearly
inseparable from such other provisions.
(b) WAIVER: A waiver by a party hereto of any particular provision hereof shall
not be deemed to constitute a waiver in the future of the same or any other
provision of this Agreement.
(c) EXPENSES: Unless otherwise expressly agreed herein or otherwise in writing
by the parties hereto, each party shall bear all losses, damages, expenses,
disbursements and liabilities incurred or made by itself or any other
investment made by itself in connection with or in pursuance of this
Agreement, and neither party shall be entitled to compensation or remedy of
any kind whatsoever from the other party for the said losses, damages,
expenses, disbursements, liabilities or investment whether on termination
of this Agreement for any reason whatsoever or otherwise unless otherwise
expressly agreed upon in writing by the other party.
(d) INDEMNITY: UTSTARCOM shall defend, indemnify and hold harmless SHARP from
and against any and all actions, claims, demands, suits, losses, damages,
costs, expenses and judgements (including attorney's fee thereof) by
whomever made, brought or prosecuted and in any manner based upon, arising
out of, related to, occasioned by or attributable to any breach by
UTSTARCOM (including HUTS and EASTCOM, as the case may be) of any
provisions of this Agreement or any act or omission by UTSTARCOM (including
HUTS and EASTCOM, as the case may be), its employees or agents in the
performance thereof.
(e) RESTRICTED OBLIGATION: SHARP assumes, by implication or otherwise, no
obligation, liability or responsibility other than those expressly set
forth in this Agreement
-continued-
<PAGE>
(f) OTHER CONDITION: If, after the effective date set forth in Article 14
hereof, any Japanese government approval is further required for SHARP to
perform its obligations under Articles 3, 4, 5, 7, and 8, the performance
of such obligations shall be subject to such government approval.
(g) TITLE: The titles of Articles in this Agreement have been inserted for
convenience only and shall in no way be used in the interpretation hereof.
(h) GUARANTEE OF HUTS AND EASTCOM: UTSTARCOM hereby unconditionally guarantees
to SHARP the due and punctual performance by HUTS and/or EASTCOM of all the
material terms and conditions of this Agreement to be performed by HUTS
and/or EASTCOM hereunder, and indemnifies and holds SHARP harmless from and
against any damages, costs, expenses and other liabilities incurred by
SHARP by reason of failure of HUTS and/or EASTCOM to fully perform and
comply with the material terms and conditions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective representatives or officers duly authorized thereunto as of
the date first noted above.
SHARP CORPORATION UTSTARCOM INC
By: By: /s/ HONG LIANG LU
--------------------------------------- ---------------------------------
Name: Sueyuki Hirooka Name: Hong Liang Lu
Title: Corporate Senior Executive Director Title: President
& Group General Manager, & Chief Executive Officer
International Business Group
Above agreed and accepted:
UTSTARCOM (HANGZHOU) TELECOM CO., LTD
By: /s/ JOHNNY CHOU
----------------------------------
Name: Johnny Chou
Title: Executive Vice President
& Chief Operating Officer
China Operations
<PAGE>
EXHIBIT-A DEFINITION OF THE PRODUCTS Date: 31st March, 2000
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT-B ROYALTY SCHEDULE Date: 31st March, 2000
[*]
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
Exhibit 10.4
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
PARTS SUPPLY AGREEMENT
BETWEEN
SHARP CORPORATION
AND
UTSTARCOM INC.
<PAGE>
INDEX
Article
1. DEFINITIONS
2. PURCHASE AND SUPPLY OF THE SUPPLY PARTS
3. ORDER PROCEDURES
4. PURCHASE PRICE
5. TERMS OF PAYMENT
6. INSPECTION
7. SHIPMENT
8. REMEDY FOR INCOMPLETE SUPPLY OF THE SUPPLY PARTS
9. STOCK OF SPARE PARTS
10. DURATION OF AGREEMENT
11. TERMINATION
12. COMPENSATION FOR DAMAGES
13. ASSIGNMENT
14. NOTICES
15. ENTIRE AGREEMENT
16. EXCEPTIONS
17. ARBITRATION
18. GOVERNING LAW AND TRADE TERMS
19. MISCELLANEOUS
<PAGE>
PARTS SUPPLY AGREEMENT
THIS AGREEMENT made and entered into this ______ day of ______________, 2000, by
and between
SHARP CORPORATION, a Japanese corporation, having its principal place of
business at 22-22, Nagaike-cho, Abeno-ku, Osaka, 545-8522 Japan (hereinafter
referred to as "SHARP")
and
UTSTARCOM INC., a Delaware corporation, having its principal place of business
at 1275 Harbor Bay Parkway, Suite 100, Alameda, CA 94502, U.S.A. (hereinafter
referred to as "UTSTARCOM")
WITNESSETH:
WHEREAS, SHARP has been engaged in the manufacture and sale of PHS terminal in
Japan; and
WHEREAS, UTSTARCOM is planning to cause EASTCOM (as defined below) to assemble
and manufacture the PRODUCTS (as defined below) and to cause HUTS (as defined
below) to distribute the PRODUCTS in the TERRITORY (as defined below). UTSTARCOM
wishes to purchase from SHARP and SHARP is willing to sell to UTSTARCOM
component parts of the PRODUCTS necessary to assemble, manufacture and repair
the PRODUCTS in the TERRITORY shall be purchased from SHARP; and
WHEREAS, UTSTARCOM and SHARP have entered into a technical collaboration
agreement dated , 2000 (hereinafter referred to as "TCA") with
respect to some license of SHARP's intellectual property rights and technical
know-how required to manufacture and distribute the PRODUCTS in the TERRITORY;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Article 1. DEFINITIONS
Whenever used in this Agreement, unless otherwise clearly required by the
context, the following terms shall have the meaning set forth in the Article and
no other.
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(a) The term "TERRITORY" means [*]
(b) The term "PRODUCTS" means only such models of the products, which are:
i) specified in the EXHIBIT-A attached to TCA; and
ii) carrying the trademark "UTStarcom" or other marks owned by
UTSTARCOM or other marks designated by UTSTARCOM upon prior
written consent of SHARP.
(c) The term "SUPPLY PARTS" means any or all materials and component parts for
the PRODUCTS supplied in any form from SHARP, its subsidiary, related or
affiliated company or designated factory.
(d) The term "HUTS" means UTSTARCOM (HANGZHOU) TELECOM CO., LTD, a corporation
of People's Republic of China, a subsidiary of UTSTARCOM, having its
principal place of business at 3 Yile Industrial Park, Bldg. 2/3 19 WenYi
Road, Hangzhou, 310012, People's Republic of China, doing business of
manufacturing, sales or distribution, and after-sales service of the
communication related products.
(e) The term "EASTCOM" means EASTERN COMMUNICATIONS CO., LTD, a corporation of
People's Republic of China, having its principal place of business at
No.398. Wen San Road, Hangzhou, Zhe Jiang, People's Republic of China,
doing business of assembly and manufacture of the mobile communication
products.
Article 2. PURCHASE AND SUPPLY OF THE SUPPLY PARTS
(a) UTSTARCOM agrees to purchase from SHARP and SHARP agrees to sell to
UTSTARCOM the SUPPLY PARTS subject to and upon the terms and conditions
contained herein.
(b) UTSTARCOM shall not, without the prior written consent of SHARP, cause
EASTCOM and/or HUTS to use the SUPPLY PARTS for any purposes other than for
the manufacture and assembly of the PRODUCTS in the TERRITORY or sell or
otherwise dispose of the SUPPLY PARTS, either directly or indirectly, to
any third party in the TERRITORY or elsewhere in the world.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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<PAGE>
Article 3. ORDER PROCEDURES
(a) UTSTARCOM shall place with SHARP monthly purchase orders in writing for the
SUPPLY PARTS at least [*] before the [*] of the production month of the
SUPPLY PARTS thereby ordered or at least [*] before the [*] of the month in
which the SUPPLY PARTS are to be shipped from the relevant port(s) of
shipment, whichever is applicable. By the [*] of each month, non-binding
rolling forecasts for the SUPPLY PARTS order for the period of next [*]
shall be given to Sharp by UTSTARCOM for Sharp's smooth arrangements of the
SUPPLY PARTS. In case the relevant SUPPLY PARTS are to be manufactured
outside Japan, however, the number of months provided above shall be
increased by [*].
(b) The quantity of each model of the SUPPLY PARTS to be ordered by each of
such purchase orders shall be integral multiple of [*].
(c) Such purchase orders shall be deemed only to be offers by UTSTARCOM to
purchase the SUPPLY PARTS on and subject to the terms and conditions of
this Agreement and such other terms and conditions as may be set forth in
any SHARP price-list, estimate or other similar documents in effect at the
date when UTSTARCOM's order is accepted.
(d) SHARP may accept or reject the purchase orders submitted by UTSTARCOM. The
acceptance by SHARP of such purchase orders shall be made only by execution
and delivery by SHARP of the SALES CONTRACT (which form is designated by
SHARP and is subject to revision made from time to time by SHARP at its
sole discretion), thereupon such SALES CONTRACT shall be deemed to be the
final and conclusive contract between the parties for the purchase and sale
of the SUPPLY PARTS therein described. Immediately upon receipt by
UTSTARCOM of the said SALES CONTRACT, UTSTARCOM shall sign and return to
SHARP the duplicate copy of such SALES CONTRACT but failure of UTSTARCOM to
do so shall not affect the validity of such SALES CONTRACT as provided
hereinabove. It is specifically agreed, however, that if any export license
or permission is required for the exportation of the SUPPLY PARTS the SALES
CONTRACT shall come into effect only when such export license or permission
shall have been obtained. UTSTARCOM agrees that due to delay in obtaining
such license or permission the shipping date of the SUPPLY PARTS as set
forth in the SALES CONTRACT may be delayed and that such delay shall not
constitute a breach by SHARP of the SALES CONTRACT; provided, however, that
SHARP will ship the SUPPLY PARTS as soon as practicable after the shipping
date set forth in the SALES CONTRACT. In the event of any conflict or
inconsistency between the terms and conditions
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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<PAGE>
of this Agreement and those of any SALES CONTRACT, the terms and conditions
of this Agreement shall prevail with respect only to such conflicting or
inconsistent provisions, except for such terms and conditions as may be
typewritten on the face of such SALES CONTRACT.
Article 4. PURCHASE PRICE
All SUPPLY PARTS shall be sold to UTSTARCOM at the prices established or
confirmed by SHARP and in effect at the time when UTSTARCOM's purchase order is
accepted by SHARP. All prices for the sale of the SUPPLY PARTS under any SALES
CONTRACT shall be specified in Japanese yen.
Article 5. TERMS OF PAYMENT
(a) At least [*] before the shipping date specified in the relevant SALES
CONTRACT, UTSTARCOM shall establish, [*], with a leading and first class
bank (such bank shall be changed at the request of SHARP to be made from
time to time), an irrevocable and, if so requested by SHARP, confirmed
letter of credit (not restricted, unless otherwise agreed upon) in full
amount specified in the SALES CONTRACT in Japanese yen (unless otherwise
agreed upon) in favour of SHARP available at [*] after the date of the bill
of lading or air waybill for the shipment of Supply Parts to be drawn on
the establishing bank (unless otherwise agreed upon). A confirming bank
shall be a leading and first class international bank acceptable to SHARP
and, unless otherwise agreed upon, be a bank other than the establishing
bank of the letter of credit. Such letter of credit shall provide for
partial shipments and shall remain valid for not less than [*] after the
last day specified for shipment. In the event that the letter of credit is
to be advised by facsimile, UTSTARCOM shall cause a written confirmation
thereof to be air-mailed to SHARP via the advising bank. The said letter of
credit shall also include stipulations to the following effect:
In reimbursement to the negotiating bank by the establishing bank, priority
shall be given to the "debit authorization method" by which the letter of
credit shall have stipulated as a Reimbursement Instruction the following:
"we authorize you to debit our account with you at maturity." If the
foregoing method is not available for some inevitable reason(s), the
"remittance method" will be acceptable, in which case settlement shall be
made by Telegraphic Transfer.
Transfer charge of letter of credit, payment commission, acceptance
commission, confirming
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
4
<PAGE>
charge, reimbursement charge, advising charge and amendment charge, if any,
shall be for the account of UTSTARCOM.
(b) If UTSTARCOM fails to provide such letter of credit as prescribed in
paragraph (a) above, SHARP may at its option postpone the time for shipment
of the SUPPLY PARTS then unshipped or cancel any SALES CONTRACT and resell
the involved SUPPLY PARTS without incurring any liability to UTSTARCOM on
the part of SHARP. UTSTARCOM shall be responsible for any loss or damage to
SHARP caused by such postponement or cancellation or failure to establish
such letter of credit as provided above.
Article 6. INSPECTION
The SUPPLY PARTS shall be inspected before the shipment thereof by SHARP at its
relevant factory whether in Japan or elsewhere. The inspection executed pursuant
to the provisions of this Article shall be deemed to be final and conclusive in
respect of the quantity, quality, performance and other conditions of the SUPPLY
PARTS and SHARP shall be under no liability or obligation (including incidental
loss, products liability or other consequential loss) whatsoever except for
those specifically provided in Article 8 hereof, for any defect in quality or
performance or shortage in quantity of the SUPPLY PARTS which have passed such
inspection. UTSTARCOM shall not be entitled to reject such inspected SUPPLY
PARTS nor to claim any refund of the purchase price nor to suspend the due and
punctual performance of its obligations hereunder or under the relevant SALES
CONTRACT.
Article 7. SHIPMENT
(a) Unless otherwise agreed, shipment shall be effected [*] at any Japanese or
foreign port(s) in one shipment or in installments by any carrier of any
flag subject to the carrier's space being available. The quantity of each
shipping lot of the SUPPLY PARTS shall be from time to time determined by
SHARP.
(b) The date of Bill of Lading or of similar document(s) shall be deemed to be
conclusive evidence of the date of such shipment.
Article 8. REMEDY FOR INCOMPLETE SUPPLY OF THE SUPPLY PARTS
(a) In the event that after inspection executed pursuant to Article 6 hereof
any defect in quality
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
5
<PAGE>
or performance of any SUPPLY PARTS which fails to be repaired or recovered
by UTSTARCOM, HUTS and/or EASTCOM (hereinafter called the "DEFECTIVE
PARTS") or shortage in quantity is found in respect to any shipping lot of
the SUPPLY PARTS, and;
(i) UTSTARCOM shall have notified SHARP in writing to the foregoing effect
in reasonable detail within [*] after the date of the arrival of the
relevant SUPPLY PARTS at the destination specified in the relative
Bill of Lading, accompanied by documentary evidence satisfactory to
SHARP showing that such defect or shortage in quantity is the result
of faulty workmanship or mistake on the part of SHARP, or that such
defect or shortage in quantity arises from any cause for which SHARP
is responsible; and
(ii) UTSTARCOM shall have submitted to SHARP a survey report issued by
first-class sworn authorized surveyor(s) satisfactory to SHARP as well
as the report on form established by SHARP for the purpose of
verification by SHARP or SHARP's representative at EASTCOM's factory,
within [*] after the request of SHARP so to submit; and
(iii) the DEFECTIVE PARTS shall have been held by HUTS being retained
intact for SHARP's inspection for a period of [*] after the
notification made by UTSTARCOM pursuant to condition (i) above or
until UTSTARCOM shall have received instructions from SHARP permitting
UTSTARCOM and/or HUTS to dispose of such DEFECTIVE PARTS, whichever is
the earlier; and
(/ /) UTSTARCOM shall have returned the DEFECTIVE PARTS to SHARP, subject
to the instruction of SHARP set forth in condition (iii) above; and
(/ /) the sum of the quantity of any individual DEFECTIVE PARTS and/or that
of the shortage in any individual component, contained in the shipping
lot of the SUPPLY PARTS which shall have satisfied the foregoing
conditions (i) through (iv) shall exceed [*] of the total quantity of
any such individual component contained in each such shipping lot of
the SUPPLY PARTS;
Then, SHARP shall, as soon as possible after satisfaction of the foregoing
conditions (i) through (v), provide UTSTARCOM free of charge with the
replacement parts or supplementary parts of the relevant SUPPLY PARTS in such
quantity which shall be the balance of the sum set forth in condition (v) above
minus [*] of the total quantity of such individual component contained in such
shipping lot of the SUPPLY PARTS. SHARP shall bear the ocean transportation
charges required for its provision of aforementioned parts.
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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(b) In the event that UTSTARCOM and/or HUTS fail to satisfy any of the
conditions (i) through (v) above in accordance therewith, UTSTARCOM shall
be deemed to have waived all its claims in respect to any defect or
shortage in quantity of such shipping lot of the SUPPLY PARTS.
(c) SHARP agrees to pay the transportation charges reasonably incurred by
UTSTARCOM in respect of sending back the DEFECTIVE PARTS to SHARP pursuant
to paragraph (a) of this Article. Such payment shall be made by SHARP
without delay after the conditions (i) through (v) set forth in paragraph
(a) above shall have been satisfied.
Article 9. STOCK OF SPARE PARTS
(a) In order to satisfy the orders from UTSTARCOM for repair and replacement
parts or their interchangeable parts, as the case may be, which shall be
necessary for HUTS's after-sales service of the PRODUCTS. SHARP shall be
prepared to supply UTSTARCOM with such parts for each model of the PRODUCTS
for the period commencing with the date of the latest shipment of the
relevant SUPPLY PARTS hereunder and ending on such date after the said
shipment as SHARP deems it reasonable. SHARP may and, if requested by
UTSTARCOM in writing, shall from time to time designate at its sole
discretion the length of such period and notify UTSTARCOM of such period.
UTSTARCOM shall, at least [*] before the termination of such designated
period, place with SHARP the last order for purchasing such parts for the
PRODUCTS as may be required for the after-sales service of the relevant
PRODUCTS during the rest of the life of such relevant PRODUCTS. In the
event that UTSTARCOM fails to place orders for purchasing such parts with
SHARP by the time-limit stated above, SHARP's obligations to supply such
parts under this Article shall cease without any compensation or remedy
whatsoever to UTSTARCOM.
(b) In case SHARP determines the discontinuance of any equivalent model to the
PRODUCTS which results in SHARP's inability to supply the SUPPLY PARTS for
that model, SHARP shall, at least [*] before the date from which the supply
of such SUPPLY PARTS becomes unavailable notify UTSTARCOM of such date and
model of the PRODUCTS. UTSTARCOM shall, within [*] of such notification,
place with SHARP the last order for purchasing such parts for the PRODUCTS
as may be required for the after-sales service of the relevant PRODUCTS
during the rest of the life of the relevant PRODUCTS. Notwithstanding
anything to the contrary contained herein or in paragraph(b) of this
Article, in the event that UTSTARCOM fails to place with SHARP orders for
purchasing any parts of the model of the PRODUCTS in respect of which the
manufacture is to be discontinued as aforesaid by the time-limit stated
above, SHARP's obligations to supply such parts shall
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
7
<PAGE>
cease without any compensation or remedy whatsoever to UTSTARCOM.
(c) Purchase and supply of the parts set forth in paragraphs(b) and (c) of this
Article shall, unless otherwise agreed upon by the parties hereto, be made
in compliance with the relevant terms and conditions of this Agreement,
provided, however, that SHARP may not reject such orders to the extent that
the assortment and quantity of such parts are then available to be supplied
by SHARP.
(d) If SHARP deems it necessary or advisable to provide technical information
to UTSTARCOM for assembly and manufacture of the PRODUCTS by using the
SUPPLY PARTS or for after-sales service, sales promotion or the like of the
PRODUCTS, SHARP will do so after consultation with UTSTARCOM subject always
to any necessary license requirements or permission of relevant government
authorities.
Article 10. DURATION OF AGREEMENT
This Agreement shall be deemed to have been come into force on the 1st day of
December, 1999 retroactively, and unless earlier terminated in accordance with
the provision hereof or otherwise shall continue in force and effect until and
including the [*]. It is understood by the parties hereto that this Agreement
shall be, either automatically or with amendment or modification (if any),
renewed hereafter on a [*] basis, unless either of the parties hereto gives to
the other party at least [*] prior written notice to terminate this Agreement
before the expiration of the initial term or any extended term of this
Agreement. If such prior written notice is made by either party, then this
Agreement shall terminate on the initial or, as the case may be, duly extended
expiration date of this Agreement.
Article 11. TERMINATION
(a) In the event of the occurrence of any of the following events to either
SHARP or UTSTARCOM (including HUTS and/or EASTCOM, as the case may be, for
the purpose of this Article), the other party may forthwith terminate this
Agreement by sending a written notice to the first party by registered
airmail:
(i) If either party continues in default of any material obligation
imposed on it herein, in any SALES CONTRACT or any other agreement
concluded hereunder or thereunder or in connection herewith or
therewith for more than two (2) months after written notice has been
despatched by registered airmail by the other party requesting the
party in default to
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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remedy such default;
(ii) If either party hereto is subjected to compulsory execution, public
auction, coercive collection for its arrearage of taxes or public
imposts, or suspension of business by public authorities, or
appointment of any receiver or trustee of itself or any substantial
portion of its property, or if an application or petition is submitted
for bankruptcy, corporate arrangement or commencement of corporate
reorganization, or if either party hereto files voluntarily against it
an application or petition for bankruptcy, corporate arrangement or
commencement of corporate reorganization or composition, or if either
party hereto adopts a resolution for discontinuance of its business or
for a substantial decrease of its capital or for dissolution or merger
into another company, or makes general assignment for the benefit of
creditors or if either party hereto becomes unable to pay debts, or if
either party is declared in default of any material contract between
it and any third party and any such contract is cancelled or its
payment obligation under such contract is accelerated (All the
foregoing shall include the likeliness of each occurrence in the
reasonable opinion of the other party);
(iii) If, due to any substantial change in ownership, management or
effective control of either party or in the objects of the company
stated in the Memorandum of Association or Articles of Incorporation
or a similar document of either party, (1) there exist, or in the
reasonable opinion of the other party there is any ground to suspect
the existence of, any obstacles to the effective continuance of this
Agreement or any SALES CONTRACT, or (2) there occurs a situation which
on the reasonable opinion of the other party would be detrimental to
its interests; or
(/ /) If the TCA is terminated or expired for any reason; or
(v) If there is any other cause justifying either party to terminate this
Agreement, such as material and irreparable injury to goodwill or
reputation of the other party, commission by other party of a fraud on
or betrayal of confidence in or criminal act against the first party,
disclosure or divulgence by the other party of the first party's
confidential information.
(b) Except as otherwise specifically provided elsewhere in this Agreement any
termination of this Agreement shall be without prejudice to any right and
remedy which shall have accrued to either party under or in connection with
this Agreement or the SALES CONTRACT prior to such termination.
(c) Notwithstanding the provisions specified in this Article, unless this
Agreement is terminated by a cause or causes which SHARP deems attributable
to UTSTARCOM, UTSTARCOM
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may dispose of the SUPPLY PARTS in the TERRITORY which UTSTARCOM have on
hand at the time of termination of this Agreement within such a reasonable
period of time as may be agreed upon by the parties provided that such
disposal is made without impairing SHARP's reputation in the TERRITORY.
Article 12. COMPENSATION FOR DAMAGES
(a) In the event that either party defaults in the due performance of its
obligations hereunder, under any SALES CONTRACT or under any other
agreement made pursuant to or in connection with this Agreement or any
SALES CONTRACT, or in the event that this Agreement or SALES CONTRACT is
terminated or cancelled pursuant to paragraph (a) of Article 12 hereof, or
any other provisions contained herein or therein, then the other party or
the party dispatching a notice of termination or cancellation pursuant to
relevant provisions contained herein or therein (collectively the "Affected
Party") may demand compensation from the first party for the losses,
damages, incurred or sustained by the Affected Party as a result of any
such default, termination or cancellation.
The foregoing provisions of this Article shall not prejudice the right of
the Affected Party to extend the time for performance of any of its
obligations hereunder or under any SALES CONTRACT to the extent of the
duration of such default of the other party or to cancel any SALES CONTRACT
in respect of which the performance of any terms is then in default.
(b) UTSTARCOM shall defend, indemnify and hold harmless SHARP from and against
any and all actions, claims, demands, suits, losses, damages, costs,
expenses and judgements (including attorney's fee thereof) by whomever
made, brought or prosecuted and in any manner based upon, arising out of,
related to, occasioned by or attributable to any breach by UTSTARCOM and/or
HUTS of any provisions of this Agreement or any act or omission by
UTSTARCOM, its employees or agents in the performance thereof.
(c) SHARP shall defend, indemnify and hold harmless UTSTARCOM from and against
any and all actions, claims, demands, suits, losses, damages, costs,
expenses and judgements (including attorney's fee thereof) by whomever
made, brought or prosecuted and in any manner based upon, arising out of,
related to, occasioned by or attributable to any breach by SHARP of any
provisions of this Agreement or any act or omission by SHARP, its employees
or agents in the performance thereof.
(d) Without prejudicing the right of SHARP to terminate or cancel this
Agreement and/or any SALES CONTRACT and any other rights and remedies of
SHARP contained herein or in
10
<PAGE>
any SALES CONTRACT, if the SUPPLY PARTS are not shipped on the shipping
date specified in the relevant SALES CONTRACT due to any cause whatsoever
due to UTSTARCOM, including, without limitation, delay in or repudiation of
taking delivery of such SUPPLY PARTS or delay in performance of the
obligations of UTSTARCOM hereunder or under such SALES CONTRACT, UTSTARCOM
shall pay SHARP an overdue interest at the rate of [*] per annum of (i) the
full amount of the price of the relevant SUPPLY PARTS specified in such
SALES CONTRACT, accruing from and including such shipping date to and
including the actual shipping date or the date on which such SALES CONTRACT
is cancelled by SHARP hereunder, whichever date is applicable and (ii) the
losses, damages and expenses incurred or suffered by SHARP due to said
cancellation of the SALES CONTRACT, accruing from and including such
cancellation date to and including the date of actual payment by the
UTSTARCOM of said losses, damages and expenses.
(e) In any event, the parties hereto each disclaim any and all liability for
special, incidental, or consequential damages (including loss of profit)
relating to the terms and conditions of this Agreement.
Article 13. ASSIGNMENT
Neither party shall assign, transfer or otherwise dispose of this Agreement in
whole or in part or any right or obligation hereunder to any individual, firm or
corporation without the prior consent of the other party in writing.
Article 14. NOTICES
(a) Except as otherwise provided herein all notices to be given or made under
this Agreement shall be in writing and sent by registered air-mail and
addressed to the principal office of the parties as indicated hereinabove
or to such other address as either party may hereafter furnish to the other
party in writing.
(b) All notices shall be deemed to have been given or made on the day of
despatch.
Article 15. ENTIRE AGREEMENT
This Agreement constitutes the entire and only agreement between the parties
hereto as to the subject matter contained herein and supersedes all previous
understandings, commitments and
[*] * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
11
<PAGE>
agreements whether oral or written relating to the subject matter hereof, and no
modification, amendment or supplement of this Agreement shall be binding upon
the parties hereto except by mutual express written consent of subsequent date
signed by authorized representative or officer of each of the parties hereto.
Article 16. EXCEPTIONS
(a) SHARP shall not be liable for any delay in shipment or delivery,
non-delivery or destruction or deterioration, of all or any part of the
SUPPLY PARTS or for any other default in performance under this Agreement
or any SALES CONTRACT, which arises from any lockout, strike, labor trouble
or other industrial disturbance, inevitable accident, export cartel by
governmental authorities or industry or trade association of whatever
nature to limit its export of the SUPPLY PARTS, fire, explosion,
transportation difficulty, materials or labor shortage, SHARP's
subcontractor's or supplier's suspension or inability of or delay in
production or shipment of the SUPPLY PARTS, or from any cause beyond the
control of SHARP, including without limitation, war, blockade, embargo,
mobilizations, governmental, administrative or public direction or guidance
or order of any country including any reasonably anticipated direction or
guidance or order thereof, legal restriction imposed in any country
including any reasonably anticipated restriction thereof, riot, civil
commotion, warlike condition, prolonged failure or shortage of electric
power, gas, or oil, epidemic, earthquake, flood, typhoon, or other Act of
God.
(b) In the event of any delay or failure due to cause or causes given in the
preceding paragraph (a), SHARP shall send by facsimile, e-mail or otherwise
a written notice stating the reason therefor to UTSTARCOM as promptly as
possible. The performance of SHARP shall be deemed suspended as long as,
and to the extent that, any such cause(s) continue, but this Agreement
and/or any SALES CONTRACT then executory shall not be regarded as
terminated, frustrated or cancelled simply as a result of such delay or
failure and the parties hereto shall continue once more with its
performance when the cause or causes of such delay or failure have ceased
or have been eliminated, provided, however, that if such delay or failure
extends or is reasonably anticipated to extend for a period of more than
three(3) months, SHARP may without any liability on its part terminate or
cancel this Agreement and/or the said SALES CONTRACT by sending a written
notice to UTSTARCOM to the extent that SHARP's performance has been
prevented or delayed.
Article 17. ARBITRATION
Any dispute arising from the execution of, or in connection with, this Agreement
shall be settled
12
<PAGE>
through friendly consultation between the parties. If the dispute cannot be
settled within sixty (60) days from the first date of consultation, the dispute
shall be settled by arbitration consisting of three (3) arbitrators. Arbitration
shall be held in San Francisco, California under the International Arbitration
Rules of the American Arbitration Association if initiated by SHARP, and shall
be held in Osaka, Japan under the Commercial Arbitration Rules of the Japan
Commercial Arbitration Association if initiated by UTSTARCOM. The award rendered
by the arbitration shall be final and binding upon the parties and may be
entered by any court having jurisdiction.
Article 18. GOVERNING LAW & TRADE TERMS
(a) It is mutually agreed that the terms of this Agreement and the performance
hereunder shall in all respects be governed, construed and interpreted in
accordance with the laws of Japan, excluding its provisions regarding
conflict of laws.
(b) If and to the extent applicable the trade terms used in this Agreement
shall have the meaning given to such terms in the International Commercial
Terms (Incoterms 1990).
Article 19. MISCELLANEOUS
(a) SEPARABILITY: The parties hereto agree that, in the event of one or more of
the provisions hereof being subsequently declared invalid or unenforceable
by court or administrative decision, such invalidity or unenforceability of
any of the provisions shall not in any way affect the validity or
enforceability of any other provisions hereof except those which the
invalidated or unenforceable provisions comprise an integral part of or are
otherwise clearly inseparable from such other provisions.
(b) WAIVER: A waiver by a party hereto of any particular provision hereof shall
not be deemed to constitute a waiver in the future of the same or any other
provision of this Agreement.
(c) EXPENSES: Unless otherwise expressly agreed herein, in the SALES CONTRACT
or otherwise in writing by the parties hereto, each party shall bear all
losses, damages, liabilities, expenses and disbursements incurred or made
by itself or any other investment made by itself in connection with or in
pursuance of this Agreement or any SALES CONTRACT, and neither party shall
be entitled to compensation or remedy of any kind whatsoever from the other
party for the said losses, damages, liabilities, expenses, disbursements or
investment whether on termination of this Agreement or any SALES CONTRACT
for any reason whatsoever or otherwise unless otherwise expressly agreed
upon in writing by the other party.
13
<PAGE>
(d) TITLE: The Article titles in this Agreement have been inserted for
convenience only and shall in no way be used in the interpretation hereof.
(e) GUARANTEE OF HUTS AND EASTCOM: UTSTARCOM hereby unconditionally guarantees
to SHARP the due and punctual performance by HUTS and/or EASTCOM of all the
material terms and conditions of this Agreement to be performed by HUTS
and/or EASTCOM hereunder, and indemnifies and holds SHARP harmless from and
against any damages, costs, expenses and other liabilities incurred by
SHARP by reason of failure of HUTS and/or EASTCOM to fully perform and
comply with the material terms and conditions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective representatives or officers duly authorized thereunto as of
the date first above written.
SHARP CORPORATION UTSTARCOM INC..
BY: BY:
----------------------------------------- ---------------------------
Name: Sueyuki Hirooka Name: Hong Liang Lu
Title: Corporate Senior Executive Director Title: President & Chief
& Group General Manager of Executive Officer
International Business Group
14
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 8,566
<RECEIVABLES> 97,884
<ALLOWANCES> (8,608)
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0
0
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