<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER 0-29024
-------
BENTHOS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-2381876
(State or Other Jurisdiction of (I.R.S. Employer
Corporation or Organization) Identification No.)
49 Edgerton Drive, North Falmouth, Massachusetts 02556
(Addresses of Principal Executive Offices) (Zip Code)
(508) 563-1000
Issuer's Telephone Number Including Area Code
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of Common
equity as of the latest practicable date:
Common Stock par value $.0667 1,352,302
(Class) (Outstanding stock at February 5, 1999)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
2
BENTHOS, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE THIRTEEN WEEKS ENDED
DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Face Sheet 1
Index 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
December 31, 1998 and
September 30, 1998
Condensed Consolidated Statements of Earnings
(unaudited) 4
Thirteen Weeks Ended
December 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of Cash Flow
(unaudited) 5
Thirteen Weeks Ended
December 31, 1998 and
December 31, 1997
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis 8-10
of Financial Condition and Results
of Operations
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
</TABLE>
<PAGE>
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Benthos, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Assets December 31, 1998 September 30, 1998
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 2,572 $2,509
Accounts Receivable, Net 1,784 1,609
Inventories 3,044 2,793
Prepaid Expenses and Other Current
Assets 478 630
Deferred Tax Asset 651 651
------- -------
Total Current Assets 8,529 8,192
Property, Plant and Equipment, Net 1,767 1,860
Other Assets 561 580
------- -------
$10,857 $10,632
======= =======
Liabilities and Stockholders'
Investment
Current Liabilities:
Accounts Payable $ 903 $ 990
Accrued Expenses 1,003 962
Customer Deposits 250 237
------- -------
Total Current Liabilities 2,156 2,189
------- -------
Stockholders' Investment:
Common Stock, $.0667 par value-
Authorized - 7,500 shares
Issued - 1,635 shares at
December 31, 1998
and September 30, 1998 109 109
Capital in Excess of Par Value 1,502 1,502
Retained Earnings 7,825 7,609
Treasury Stock, at Cost (735) (777)
------- -------
Total Stockholders' Investment 8,701 8,443
------- -------
$10,857 $10,632
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
4
Benthos, Inc. and Subsidiary
Condensed Consolidated Statements of Earnings
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
December 31, 1998 December 31, 1997
<S> <C> <C>
Net Sales $3,835 $3,120
Cost of Sales 2,344 1,325
------ ------
Gross Profit 1,491 1,795
Selling, General & Administrative
Expenses 905 1,240
Research and Development Expenses 285 270
------ ------
Income from Operations 301 285
Interest Income, Net 36 23
------ ------
Income before Provision for Income
Taxes 337 308
Provision for Income Taxes 121 118
------ ------
Net Income $ 216 $ 190
====== ======
Basic Earnings Per Share $0.16 $0.15
====== ======
Diluted Earnings Per Share $0.16 $0.14
====== ======
Common Shares Outstanding 1,350 1,293
====== ======
Common Shares Outstanding,
Assuming Dilution 1,381 1,394
====== ======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
5
Benthos, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flow
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
December 31, 1998 December 31, 1997
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 216 $ 190
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 160 186
Changes in Assets and Liabilities:
Accounts Receivable (175) 711
Inventories (251) (358)
Prepaid Expenses 152 123
Accounts Payable & Accrued Expenses (46) (153)
Customer Deposits 13 64
------ ------
Net Cash Provided by Operating Activities 69 763
Cash Flows from Investing Activities:
Purchases of Property, Plant & Equipment (18) (40)
Decrease (Increase) in Other Assets 12 (8)
------ ------
Net Cash by Used in Investing Activities (6) (48)
Cash Flows from Financing Activities:
Payments on long-term debt, net 0 (314)
------ ------
Net Increase in Cash and Cash Equivalents 63 401
Cash and Cash Equivalents, Beginning of Period 2,509 2,663
------ ------
Cash and Cash Equivalents, End of Period $2,572 $3,064
====== ======
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 0 $ 16
====== ======
Income Taxes Paid $ 29 $ 20
====== ======
Supplemental Disclosure of Noncash Activities:
Sale of Treasury Stock to the Company's ESOP $ 42 $ 70
====== ======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
6
Benthos, Inc.
Notes to Financial Statements
1. Fiscal Periods
The fiscal year of Benthos, Inc. (the Company) ends on September 30 each year.
Interim quarters are comprised of 13 weeks unless otherwise noted and end on the
Sunday closest to December 31, March 31, and June 30. All references in the
unaudited condensed consolidated financial statements to fiscal periods ended on
December 31, March 31, or June 30 mean the interim quarters referred to above.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the consolidated financial statements and notes thereto
for the fiscal year ended September 30, 1998, included in the Company's
previously filed Form 10-KSB. The accompanying condensed consolidated financial
statements reflect all adjustments (consisting solely of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for the full fiscal year. Certain reclassifications have been
made to the 1998 financial statements to conform with the 1999 presentation.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
(in thousands)
<S> <C> <C>
Raw Materials $ 89 $ 81
Work-in-Process 2,944 2,702
Finished Goods 11 10
------ ------
$3,044 $2,793
====== ======
</TABLE>
4. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net
earnings by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share is computed based upon
the weighted average number of common shares and dilutive common equivalent
shares outstanding. Common stock options have a dilutive effect on earnings per
share in all periods and are therefore included in the computation of diluted
earnings per share. The Company has stock options for 91,500 shares of common
stock at an average exercise price of $13.60 in the thirteen week period ended
December 31, 1998, which have not been included in basic or diluted earnings per
share as they are antidilutive.
<PAGE>
7
A reconciliation of basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
(in thousands)
Thirteen Weeks Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Weighted average common
shares outstanding 1,350 1,293
Potential common shares
pursuant to stock options 31 101
----- -----
Diluted weighted
average shares 1,381 1,394
===== =====
</TABLE>
<PAGE>
8
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in thousands)
Results of Operations -- First quarter of fiscal year 1999 compared with first
quarter of fiscal year 1998.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Earnings items to total
sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
December 31, 1998 December 31, 1997
(unaudited)
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Sales 61.1% 42.5%
----- -----
Gross Profit 38.9% 57.5%
Selling, General & Administrative
Expenses 23.6% 39.7%
Research and Development Expenses 7.4% 8.7%
----- -----
Income from Operations 7.9% 9.1%
Interest Income, Net .9% .8%
----- -----
Income Before Provision for Income
Taxes 8.8% 9.9%
Provision for Income Taxes 3.2% 3.8%
----- -----
Net Income 5.6% 6.1%
===== =====
</TABLE>
Sales. Net sales increased by 22.9% in the first quarter of fiscal year 1999 to
$3,835 as compared to $3,120 in the first quarter of fiscal year 1998. Sales of
the Undersea Systems Division increased by 109% to $3,097 in the first quarter
of fiscal year 1999 as compared to $1,479 in the first quarter of fiscal year
1998. The increase resulted mainly from higher sales of hydrophones in the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998
related to the Company's transition to its new Geopoint hydrophone product.
Sales of the Container Inspection Systems Division decreased by 55% to $738 in
the first quarter of fiscal year 1999 as compared to $1,641 in the first quarter
of fiscal year 1998. The decrease resulted largely from the timing of project
orders.
Cost of Sales. Cost of sales increased by 76.9% to $2,344 in the first quarter
of fiscal year 1999 as compared to $1,325 in the first quarter of fiscal year
1998. As a percentage of sales, cost of sales was 61.1% in the first quarter of
fiscal year 1999 as compared to 42.5% in the first quarter of fiscal year 1998.
The increase in the cost of sales dollars and percentage is attributed primarily
to the higher sales mix of the products of the Undersea Systems division which
carry a higher cost than the products of the Container Inspection Systems
Division.
<PAGE>
9
Gross Profit. Gross Profit decreased by 16.9% to $1,491 for the first quarter of
fiscal year 1999 as compared to $1,795 for the first quarter of fiscal year
1998. As a percentage of sales, gross profit was 38.9% in the first quarter of
fiscal year 1999 as compared to 57.5% in the first quarter of fiscal year 1998.
The decrease in gross profit percentage is attributed primarily to the higher
sales mix of Undersea Systems Division products, which carry a lower gross
profit than the products of the Container Inspection Systems Division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 27.0% to $905 for the first quarter of
fiscal year 1999 as compared to $1,240 in the first quarter of fiscal year 1998.
As a percentage of sales, selling, general and administrative expenses decreased
to 23.6% in the first quarter of fiscal year 1999 as compared to 39.7% for the
first quarter of fiscal year 1998. This decrease in percentage of sales is
primarily a result of an increased level of sales in the first quarter of fiscal
year 1999, reduced selling expenses, and lower commission expenses in the
Container Inspection Systems Division which is a direct result of reduced sales
in that division as compared to the first quarter of fiscal year 1998.
Research and Development Expenses. Research and development expenses increased
5.6% to $285 for the first quarter of fiscal year 1999 as compared to $270 in
the first quarter of fiscal year 1998. As a percentage of sales, research and
development expenses decreased to 7.4% of sales in the first quarter of fiscal
year 1999 from 8.7% in the first quarter of fiscal year 1998. The increase in
the overall level of expenditures is due to investments in new product
development and is consistent with the Company's current operational plans.
Interest Income. Interest income, net increased to $36 in the first quarter of
fiscal year 1999 as compared to $23 in the first quarter of fiscal year 1998.
The increase in net interest income was a result of the Company having paid off
all the outstanding debt in fiscal 1998, offset by slightly lower interest rates
on invested capital.
Provision for Income Taxes. The provision for income taxes increased to $121 in
the first quarter of fiscal year 1999 as compared to $118 in the first quarter
of fiscal year 1998. The effective tax rate used in the first quarter of fiscal
year 1999 was 36.0% as compared to the rate of 38.3% used in the first quarter
of fiscal year 1998. The rate used in the first quarter of fiscal year 1999 is
lower than the statutory rate due primarily to the benefit from the Company's
Foreign Sales Corporation.
Liquidity and Capital Resources. The Company's cash and cash equivalents
increased $63 from September 30, 1998 to December 31, 1998. Cash of $69 was
provided by operating activities. Inventories used $251 to support future
sales. Accounts receivable increased by $175 as a result of increased shipments
in the latter part of the quarter. Prepaid expenses decreased $152. The
Company believes it is well positioned to finance future working capital
requirements and capital expenditures during the next twelve months through cash
on hand, current earnings and available credit facilities.
Year 2000 Issues. During 1998 and 1999, the company has been actively engaged
in addressing Year 2000 ("Y2K") issues, which result from the use of two-digit,
rather than four-digit, year dates in software, a practice which could cause
date-sensitive systems to malfunction or fail because they may not recognize or
process date information correctly.
STATE OF READINESS: To manage its Y2K program, the Company has divided its
efforts into four program areas:
* Information Technology (computer hardware, and software)
* Physical Plant (manufacturing equipment and facilities)
* Products (including product development)
* Extended Enterprise (suppliers and customers)
<PAGE>
10
For each of these program areas, the Company is using a four-step approach:
* Ownership (creating awareness, assigning tasks)
* Inventory (listing items to be assessed for Y2K readiness)
* Assessment (prioritizing the inventoried items, assessing
their Y2K readiness, planning corrective actions, developing
initial contingency plans)
* Corrective Action Deployment (implementing corrective
actions, verifying implementation, finalizing and executing
contingency plans)
As of December 31, 1998, the Ownership and Inventory steps were essentially
complete for all program areas. The Company expects to complete the Assessment
and Corrective Action Deployment steps by June 1999.
COSTS TO ADDRESS Y2K ISSUES: The Company began incurring expenses in 1997 to
resolve this issue. All expenditures will be expensed as incurred and are not
expected to have a significant impact on the Company's ongoing results of
operations.
RISKS OF Y2K ISSUES AND CONTINGENCY PLANS: The Company is in the process of
assessing the Year 2000 issues relating to its physical plant, products and
suppliers. The Company intends to develop a contingency planning process to
mitigate worst-case business disruptions such as delays in product delivery,
which could potentially result from events such as supply chain disruptions.
The Company expects its contingency plans to be complete by June 1999.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
The statements in this Quarterly Report on Form 10-QSB and in oral statements
which may be made by representatives of the Company relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking information is inherently subject to risks and
uncertainties, and actual results could differ materially from those currently
anticipated due to a number of factors which include: the timing of large
project orders, competitive factors, shifts in customer demand, government
spending, economic cycles, availability of financing as well as the factors
described in this report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
<PAGE>
11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits set forth in the
Exhibit Index on the following
page are filed herewith as a
part of this report.
(b) Reports on Form 8-K
None
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.
BENTHOS, INC
By: /s/ Francis E. Dunne, Jr.
------------------------------------
Francis E. Dunne, Jr.
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
DATE: February 5, 1999
<PAGE>
BENTHOS, INC.
EXHIBIT INDEX
Exhibit
3.1 Restated Articles of Organization (1)
3.2 Articles of Amendment dated April 28, 1997 (2)
3.3 Articles of Amendment dated April 20, 1998 (5)
3.4 By-Laws (1)
3.5 By-Law Amendments adopted January 23, 1998 (4)
4.1 Common Stock Certificate (1)
10.1 Employment Contract with Samuel O. Raymond (1)
10.2 Amendment to Employment Contract with Samuel O. Raymond (2)
10.3 Employment Contract with John L. Coughlin (1)
10.4 Employee Stock Ownership Plan (1)
10.5 First Amendment to Employee Stock Ownership Plan (2)
10.6 401(k) Retirement Plan (1)
10.7 First Amendment to 401(k) Retirement Plan (2)
10.8 Second Amendment to 401(k) Retirement Plan (2)
10.9 Third Amendment to 401(k) Retirement Plan (3)
10.10 Supplemental Executive Retirement Plan (1)
10.11 1990 Stock Option Plan (1)
10.12 Stock Option Plan for Non-Employee Directors (1)
10.13 1998 Non-Employee Directors' Stock Option Plan (4)
10.14 License Agreement between the Company and The Penn State
Research Foundation dated December 13, 1993 (1)
10.15 Technical Consultancy Agreement between the Company and
William D. McElroy dated July 12, 1994 (1)
<PAGE>
Exhibit
-------
10.16 Technical Consultancy Agreement between the Company and
William D. McElroy dated October 1, 1996 (3)
10.17 General Release and Settlement Agreement between the Company
and Lawrence W. Gray dated February 8, 1996 (1)
10.18 Line of Credit Loan Agreement between the Company and Cape
Cod Bank and Trust Company dated September 24, 1990, as
amended (1)
10.19 Commercial Mortgage Loan Extension and Modification
Agreement between the Company and Cape Cod Bank and Trust
Company, dated July 6, 1994 (1)
10.20 License Agreement between the Company and Optikos
Corporation dated July 29, 1997 (3)
10.21 Hydrophone License Agreement between the Company and
Syntron, Inc. dated December 5, 1996.
10.22 Amendment Number 1 to Hydrophone License Agreement between
the Company and Syntron, Inc. dated September 11, 1998.
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule
27.1 Restated Financial Data Schedule (1998)
(1) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-SB filed with the Commission on December 17, 1996
(File No. O-29024) and incorporated herein by this reference.
(2) Previously filed as an exhibit to Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 30, 1997 (File No.
O-29024) and incorporated herein by this reference.
(3) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 29, 1997 (File No. O-29024)
and incorporated herein by this reference.
<PAGE>
(4) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1997
(File No. O-29024) and incorporated herein by this reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File
No. 0-29024) and incorporated herein by this reference.
<PAGE>
Exhibit 10.21
SYNTRON, INC. - BENTHOS, INC.
HYDROPHONE LICENSE AGREEMENT
This Agreement made effective as of the fifth day of December, 1996, regardless
of the date of last signature hereto, is by and between SYNTRON, INC., a for
profit corporation duly organized and existing under the laws of the State of
Delaware and having an office at 17200 Park Row, Houston, Texas 77084-4925
(LICENSOR) and BENTHOS, INC., a for profit corporation duly organized and
existing under the laws of the State of Massachusetts and having an office at 49
Edgerton Drive, North Falmouth, Massachusetts 02556-2826 (LICENSEE).
WITNESSETH
- ----------
WHEREAS, LICENSOR is dedicated to fostering and advancing scientific research
within its own organization and is responsible for developing inventions made by
employees of LICENSOR by evaluating invention disclosures, pursuing patents and
licensing patents which are obtained thereon; and
WHEREAS, LICENSOR is the owner of certain "Proprietary Rights" as later defined
herein, and has the right to grant licenses thereunder; and
WHEREAS, LICENSOR'S Hydrophone design arose out of research performed at the
place of business of LICENSOR and in part by the inventor named in the patent
described in Proprietary Rights, which inventor has the capabilities and
experience to exploit Proprietary Rights; and
WHEREAS, LICENSEE recognizes the validity of the LICENSOR'S Proprietary Rights;
and
WHEREAS, LICENSEE is capable of manufacturing, distributing, using, leasing and
selling the "Licensed Product" as later defined herein, and LICENSEE desires to
obtain an exclusive license under the Proprietary Rights to manufacture, use,
distribute and sell the Licensed Product upon the terms and conditions
hereinafter set forth;
NOW, therefore, in consideration of the premises and mutual covenants contained
herein, and with intent to be legally bound, the parties hereto agree as
follows:
DISPUTES ARISING BETWEEN THE PARTIES HERETO SHALL BE RESOLVED BY BINDING
- ------------------------------------------------------------------------
ARBITRATION AS PROVIDED HEREINAFTER.
- -----------------------------------
Page 1 of 14
<PAGE>
ARTICLE I - DEFINITIONS
For purpose of this Agreement, the following words and phrases shall have the
following meanings:
1.1 "LICENSEE" shall refer to the corporate entity Benthos, Inc. and all
entities a) in which LICENSEE owns more than fifty percent (50%) equity
interest or b) over which LICENSEE may, directly or indirectly,
effectively influence or control the conduct of such entity.
1.2 "LICENSOR" shall refer to the corporate entity Syntron, Inc. and all
entities a) in which LICENSOR owns more than fifty percent (50%) equity
interest or b) over which LICENSOR may, directly or indirectly,
effectively influence or control the conduct of such entity.
1.3 "Proprietary Rights" shall mean all of the following LICENSOR intellectual
property:
a. United States Patent Application No. 08/545,111 thereon; and
United States Patent Application No. 08/579,327 thereon.
b. Any reissues, extensions, divisional applications,
continuations, or continuations in part of the Patent
described in (a) above, and any Patents issuing as a result of
the Patent Applications thereon; and described in (a) above;
and
c. All foreign counterparts to the items described in (a) and (b)
above; and
d. All information transmitted to Benthos, Inc. via the
information packet labeled "Proposed Syntron Hydrophone
10/l/96"; and
e. Other trade secrets, confidential information, know-how and
other information related to the subject matter hereof
conveyed by any means to LICENSEE by LICENSOR; and
f. All information based upon the LICENSOR's intellectual
property described in items (a) through and including (e)
above including, but not limited to, information developed by
LICENSEE hereunder and any derivative of, enhancement to, or
other extension of LICENSOR's intellectual property provided
by LICENSOR to LICENSEE hereunder or related hereto.
1.4 A "Licensed Product" shall mean any product or material which is
covered in whole or in part by Proprietary Rights, or is manufactured
using a process which is covered in whole or in part by Proprietary
Rights, that is manufactured by LICENSEE for its own use or Commercial
Sale.
1.5 A "Licensed Process" shall mean any process which is covered in whole
or in part by Proprietary Rights and/or LICENSEE's trade secrets,
confidential information, know-how, and other information relating
thereto, including without limitation, LICENSEE's proprietary technical
information pertaining to LICENSEE's existing manufacturing processes
and know-how imparted in the Documentation as later defined herein.
Page 2 of 14
<PAGE>
1.6 "Net Selling Price" shall mean the actual gross selling price of
Licensed Products collected by LICENSEE upon a Commercial Sale by
LICENSEE, excluding all packaging, instructional, shipping, insurance,
taxes or other charges made to any purchaser and evidenced as a
separately priced item on LICENSEE's invoice to the purchaser, and also
excluding reasonable and customary trade discounts, documented
commissions to third party sales representatives and/or agency fees
and/or similar documented selling costs, if any, provided any
combination of which shall not exceed fifteen percent (15%) of the
gross selling price and none of such costs are a component of
LICENSEE's auditable overhead rates, and refunds or credits allowed or
taken by the purchaser on account of returns or defective articles.
1.7 "Commercial Sale" shall mean any transaction which transfers to any
purchaser, who is not in any way related to LICENSEE, physical
possession of and title to Licensed Products, after which transfer
LICENSEE has no right or power to determine directly or indirectly the
purchaser's resale price, if any, or to benefit directly or indirectly
from such resale price other than by increased sales of the Licensed
Products.
1.8 "Documentation" shall mean the documentation to be generated by
LICENSEE hereunder to a complete set of manufacturing (including but
not limited to piece part, subassembly and related specifications)
drawings, process documentation, work instructions, test procedures and
software, and design verification parameters and performance criteria,
and any future updates thereto as and when initiated by LICENSEE.
ARTICLE II - GRANT
- ------------------
2.1 Subject to the terms and conditions hereof, LICENSOR hereby grants to
LICENSEE and LICENSEE hereby accepts an exclusive, worldwide license to
make, distribute, use, and sell the Licensed Products, to practice the
Licensed Processes, and to utilize the Documentation for a period of five
(5) years commencing on the effective date of this Agreement. The
foregoing notwithstanding, LICENSEE and LICENSOR expressly acknowledge and
agree that the granting by LICENSOR to LICENSEE of such exclusive license
shall only limit for a period of three (3) years commencing on the
effective date of this Agreement LICENSOR from making, or granting a
license to a current or future LICENSOR Affiliate entity to make on behalf
of LICENSOR or LICENSOR Affiliate entity, the Licensed Product, practice
the Licensed Processes and utilize the Documentation, for LICENSOR's or
LICENSOR Affiliate entity's use, lease, or sale as a component part of a
product of LICENSOR or LICENSOR's Affiliate entity. The term of this
Agreement may be extended by written agreement of the parties at any time
prior to the expiration of the then current term of the Agreement. In the
event of expiration or termination of the exclusive License granted by
LICENSOR to LICENSEE hereinabove, LICENSEE shall have a non-exclusive
worldwide license to make, distribute, use, and sell the Licensed
Products, to practice the Licensed Processes, and to utilize the
Documentation, on the same terms and conditions as this Agreement.
Concurrently, LICENSEE hereby grants a reciprocal, royalty free,
perpetual, non-exclusive license to LICENSOR with respect to utilization
of LICENSEE's proprietary information embedded in and/or a part of the
Licensed Processes and Documentation. The provisions herein with respect
to these non-exclusive licenses shall survive the termination of this
Agreement.
Page 3 of 14
<PAGE>
2.2 LICENSOR represents that it neither owns nor controls nor is aware of
patent rights or other proprietary rights to technology which would
prevent LICENSEE from enjoying the benefits of the rights granted to
LICENSEE herein.
2.3 LICENSEE shall use all reasonable commercial efforts to bring to market
the Licensed Products or Licensed Processes, including without limitation
the generation of the Documentation. The initial design verification
parameters and performance criteria have been mutually agreed between the
parties hereto and are documented in Appendix A attached hereto and made a
part hereof. The Documentation shall be deemed Work For Hire due to
contemplation of the compensation to be provided to LICENSEE by LICENSOR
in accordance with paragraph 4.1(B) hereof and shall be licensed to
LICENSEE by LICENSOR under this Agreement and be subject to the terms and
conditions hereof. Due to potential LICENSOR commercial impact known to
and hereby acknowledged by LICENSEE, should LICENSEE fail to bring
Licensed Products or Licensed Processes to market not later than 5 January
1998 with a review of the status of final determination of the design path
not later than 30 November 1997 and such failure is attributable to
LICENSEE and LICENSOR is not in default hereunder, this Agreement may be
terminated at the sole discretion of LICENSOR with forty-five (45) days'
notice to LICENSEE notwithstanding other provisions herein to the contrary
and the Documentation as it exists at the time of such termination shall
be owned by LICENSOR and delivered to LICENSOR by LICENSEE at the time of
such termination. All obligations of either LICENSEE or LICENSOR that by
their nature would survive termination of this Agreement for any reason
herein provided shall so survive.
2.4 LICENSEE agrees that any improvement, enhancement or derivative
information or product it develops to, or that results from, the
Proprietary Rights during the term of this Agreement, or any extension
thereto, shall be disclosed to LICENSOR. LICENSOR shall have equal
ownership of and/or proprietary rights to such improvement, enhancement or
derivative information or product. LICENSEE's rights to use of any such
improvement, enhancement or derivative information or product LICENSEE
develops to, or that results from, the Proprietary Rights shall be equally
licensed to LICENSEE hereunder as the original subject matter of this
Agreement. In the event either party intends to protect said improvement,
enhancement or derivative information or product it develops to, or that
results from, the Proprietary Rights by filing patents, such party shall
provide notice to the other. In the event that such party is LICENSEE and
where the practice of resulting patent applications and patents would
infringe Proprietary Rights, LICENSEE shall provide to LICENSOR an
exclusive, perpetual, worldwide, royalty-free license under such patent
applications and patents for such rights as may have been granted under,
or derived from, such patent applications and patents. Where the practice
of resulting patent applications and patents would not infringe
Proprietary Rights, LICENSEE shall provide to LICENSOR a non-exclusive,
perpetual, worldwide, royalty-free license under such patent applications
and patents for such rights as may have been granted under, or derived
from, such patent applications and patents.
Page 4 of 14
<PAGE>
ARTICLE III - EXPORT CONTROLS
3.1 It is understood that LICENSOR and LICENSEE are subject to United States
law and regulations controlling the export of technical data, computer
software, laboratory prototypes and other commodities, and that their
obligations hereunder are contingent on compliance with applicable United
States export laws and regulations. The transfer of certain technical data
and commodities may require a license from the cognizant agency of the
United States Government and/or written assurances by LICENSEE that
LICENSEE shall not export data or commodities to certain foreign countries
without prior approval of such agency. LICENSOR neither represents that a
license shall not be required nor that, if required, it shall be issued.
LICENSEE shall be responsible for payment of all reasonable costs,
attendant to securing said licenses.
ARTICLE IV - FEE, COST BASIS/REMUNERATION, ROYALTIES, AND REPORTING
4.1. For the rights, privileges and license granted hereunder, LICENSEE shall
pay a license fee, provide preferred selling price and delivery status,
and pay royalties to LICENSOR in the manner hereinafter provided to the
end of the term of the Proprietary Rights, which shall be until the last
patent to expire of all patents included within Proprietary Rights, or
until this Agreement shall be terminated as hereinafter provided:
(A) LICENSEE agrees to pay LICENSOR a License Issue fee in the amount of
Ten Dollars ($10.00);
(B.1) LICENSOR shall pay LICENSEE an amount equal to $ 158,500.00 (One
Hundred Fifty-eight Thousand Five Hundred Dollars) for the
completion of the engineering required to place the Licensed Product
in a high volume manufacturing design state including without
limitation the generation of the Documentation. The fee hereinabove
to be paid by LICENSOR to LICENSEE will include full compensation
for all engineering design, manufacturing design, the generation and
copying of the Documentation and any future updates thereto as and
when initiated by LICENSEE and prototype materials required to
fabricate parts for proof of design. Said fee shall be deemed earned
by LICENSEE on 1) the successful completion of testing to the
satisfaction of LICENSOR and LICENSEE to a mutually agreed upon set
of performance specifications documented in Appendix B attached
hereto and made a part hereof and 2) delivery to LICENSOR by
LICENSEE of a complete and accurate reproducible copy of the then
current Documentation. Once the fee is earned as stated above,
payment of said fee shall be effected in stages as follows:
a) By issuance of an Invoice with Net payment terms for, and
payment of, $ 108,500.00 which shall be due and payable on the later
of 5 January 1998 or 30 days following the date upon which the total
fee is deemed earned as stated above, and
b) By retention by LICENSEE of $0.50/unit of the $2.20/unit
portion of the royalty due LICENSOR on the first 100,000 units sold
by LICENSEE to a third party in accordance with paragraph 4.1.(F)
hereof.
Page 5 of 14
<PAGE>
The work product of LICENSEE's services, including results, and all
ideas, plans, developments, and inventions which LICENSEE conceives
or reduces to practice during the course of performance under this
subparagraph 4.1.(B) and this Agreement shall be the exclusive
property of LICENSOR. This information, material, plans, and any
such ideas or inventions shall be deemed LICENSOR Proprietary
Information and shall not be disclosed to anyone outside of LICENSOR
or used by LICENSEE outside the terms and conditions of this
Agreement or used by others without the prior written consent of
LICENSOR. Such work product which qualifies as a "work for hire"
under the copyright laws of the United States shall be the exclusive
property of LICENSOR as "work for hire". All right, title, and
interest, including any copyright in and to any written data which
does not qualify as a "work-for-hire" shall be deemed to have been
automatically transferred to LICENSOR from the date of inception
thereof. Upon LICENSOR's request, LICENSEE shall execute any
document and render such other assistance as reasonably necessary to
perfect full right, title, and interest worldwide in the written
data, including formal conveyance of copyright. Written data shall
not be published or submitted for publication by LICENSEE without
the prior written approval of LICENSOR. Further, if any such
article, paper, treatise, or report includes work previously
copyrighted by LICENSEE, LICENSEE hereby grants to LICENSOR a
nonexclusive, worldwide, irrevocable, paid-up license under such
copyrights to reproduce, distribute, and use the works in any
manner.
During the period of this Agreement and thereafter at any reasonable
time when called upon to do so by LICENSOR, LICENSEE shall execute
patent applications, assignments to LICENSOR, and other papers and
shall render such other assistance that LICENSOR believes necessary
to secure for LICENSOR the full protection and ownership of all
rights in and to the work product of the services performed by
LICENSEE. The filing of patent applications on inventions made by
LICENSEE shall be decided by LICENSOR and shall be for such
countries as LICENSOR shall elect. LICENSOR shall bear all the
expenses in connection with the preparation, filing, and prosecution
of applications for patents and for all matters provided in this
subparagraph requiring the time and/or assistance of LICENSEE as to
inventions. Further, LICENSOR shall pay LICENSEE the hourly rate of
$ 75.00 for services which LICENSEE performs in connection with
inventions and patent applications which may be required by LICENSOR
whether during the term of this Agreement or after expiration or
termination of this Agreement. LICENSEE warrants that the
engineering design, manufacturing design, the generation and copying
of the Documentation and any future updates thereto shall not
violate any third party's intellectual property rights nor include
any unauthorized disclosure of any third party's intellectual
property and agrees to, at its sole expense, at all times during the
term of this Agreement and thereafter indemnify, defend, and hold
LICENSOR, their trustees, officers, employees and affiliates
harmless against any and all costs and/or liabilities of whatever
nature that may result from any claim by any third party for
infringement of such third party's intellectual property rights. The
aforementioned documentation deemed "work for hire" shall be clearly
marked as the property and proprietary information of LICENSOR.
Page 6 of 14
<PAGE>
(B.2) LICENSOR shall pay LICENSEE an amount equal to $ 61,000.00
(Sixty-one Thousand Dollars) for production tooling required by
LICENSEE or LICENSEE's subcontractors to produce the Licensed
Product. The fee hereinabove to be paid by LICENSOR to LICENSEE will
include full compensation for all engineering design and
manufacturing for production tooling required by LICENSEE or
LICENSEE's subcontractors and any future updates thereto as and when
initiated by LICENSEE to produce the Licensed Product. Issuance of
an Invoice with Net 30 payment terms for, and the payment of, said
fee is contingent on 1) the successful completion of testing to the
satisfaction of LICENSOR and LICENSEE of Licensed Product
manufactured using the production tooling to be tested to a mutually
agreed upon set of performance specifications documented in Appendix
B attached hereto and made a part hereof and 2) delivery to LICENSOR
by LICENSEE of a complete and accurate listing of such production
tooling with values per individual item, the extended total of which
shall equal said fee, and the physical location address for each
individual item. Title to such production tooling shall vest in
LICENSOR upon payment of such invoice. LICENSOR shall have complete
and unhindered access to such production tooling at all times.
LICENSEE shall be responsible for maintenance and replacement of
such production tooling as long as LICENSEE derives benefit from its
use or until such time as LICENSOR shall take physical possession of
it.
(C) LICENSEE shall manufacture the Licensed Product to the
specifications agreed to for the use of LICENSOR and all other
customers that may have a need for this product regardless of these
other customers competitive position with LICENSOR.
(D) In consideration of granting said exclusive license to LICENSEE,
LICENSEE will provide most favored customer status to LICENSOR with
respect to any selling price and delivery of the Licensed Product to
LICENSOR. NO ROYALTIES ARE DUE LICENSOR ON THE VALUE OF PRODUCTS
SOLD TO LICENSOR. At all times that this license is exclusive to
LICENSEE, LICENSOR will not compete with LICENSEE in the Licensed
Product as an saleable end-item.
(E) LICENSEE is free to set the unit sales price of the Licensed Product
to any LICENSEE customer. The foregoing notwithstanding and by way
of indication of most favored customer status of LICENSOR, the Net
Selling Price of such unit sales price to any third party will not
be lower at any time than the actual gross selling price to LICENSOR
for like or lesser quantity purchase commitment.
(F) For all sales of the Licensed Product to any organization or entity
other than LICENSOR, LICENSEE shall pay to LICENSOR running
Royalties in the amount of five and one half percent (5.5 %) of the
Net Selling Price plus $ 2.20 per unit for each Commercial Sale of
Licensed Products by LICENSEE for the first 100,000 units sold by
LICENSEE to a third party and ten percent (10.0 %) of the Net
Selling Price only thereafter for each Commercial Sale of Licensed
Products by LICENSEE, said Royalty to be due and payable upon
delivery of the report due pursuant to Paragraph 4.5 hereof. In the
event a Commercial Sale of Licensed Products occurs together with
the sale or
Page 7 of 14
<PAGE>
lease of a system or other product, (a) such royalty shall be
calculated solely on the Licensed Product, as no royalty shall be
payable with respect to any other portion of such system or product;
and (b) in the event the Net Selling Price of the Licensed Product
is not separately stated, the royalty shall be calculated based upon
the Net Selling Price from the most recent prior comparable
Commercial Sale of a separate Licensed Product.
4.2 No multiple royalties shall be payable solely for the reason that any
Licensed Products, its manufacture, use, or sale are or shall be covered
by more than one patent application, patent or certificate of registration
licensed under this Agreement.
4.3 Royalty payments shall be paid in United States dollars in Houston, Texas,
or at such other place as LICENSOR may reasonably designate.
4.4 LICENSEE shall keep full, true and accurate books of account and records
containing all particulars that may be necessary for the purposes of
showing the amounts payable to or by LICENSOR hereunder. Said books of
account shall be kept at LICENSEE's principal place of business or the
principal place of business of the appropriate division of LICENSEE to
which this Agreement relates. Said books and the supporting data shall be
open at all reasonable times for three (3) years following the end of the
calendar year to which they pertain, to the inspection of independent
CPA's to be proposed by LICENSOR and approved by LICENSEE, said approval
not to be unreasonably withheld, for the purpose of verifying LICENSEE's
royalty statement or compliance in other respects with this Agreement,
such inspection to occur no more than once each calendar year upon
reasonable prior notice to LICENSEE. The expense of such inspection shall
be borne by LICENSOR unless such inspection reveals a shortfall in
payments due to LICENSOR by LICENSEE or other violation of the terms and
conditions of this Agreement by LICENSEE in which case such expenses shall
be borne by LICENSEE.
4.5 The Royalty provided in Paragraph 4.1(F) shall be payable to LICENSOR
within in one (1) month after the end of each calendar quarter. LICENSEE
shall have the option of paying any portions of the royalty herein
provided at any time earlier than that specified. Each royalty payment to
LICENSOR shall include an appropriate statement of the gross revenues due
LICENSOR and shall identify the portion(s) of the Agreement under which
said royalty payments are made. In addition, each royalty payment shall be
accompanied by true and accurate reports giving such particulars of the
business conducted by LICENSEE during the period to which such payment
applies under this Agreement ending thirty (30) days prior to such payment
date as shall be pertinent to an accounting hereunder.
4.6 The royalty payments set forth in this Agreement shall, if overdue, bear
interest until payment at the maximum per annum rate permitted by
applicable law. The payment of such interest shall not foreclose LICENSOR
from exercising any other rights it may have as a consequence of the
lateness of any payment.
Page 8 of 14
<PAGE>
ARTICLE. V - INFRINGEMENT
- -------------------------
5.1 Enforcement of Patent Rights. In the event LICENSEE alleges that a third
----------------------------
party is infringing a right contained within Proprietary Rights, LICENSEE
shall immediately notify LICENSOR of said alleged infringement. LICENSOR
shall, in its sole discretion, determine whether an infringement is
occurring and shall take whatever actions it deems necessary to enforce
Proprietary rights. LICENSOR shall, within thirty (30) days after notice
thereof, inform LICENSEE how and to what extent it is pursuing such third
party. In the event LICENSEE deems such action to be insufficient,
LICENSEE shall have, with LICENSOR's prior written consent signed by an
officer of LICENSOR, such consent not to be unreasonably withheld, the
right, in LICENSOR's name, to pursue such infringer, as LICENSEE may
reasonably deem appropriate; provided, however, that in the event LICENSEE
takes such action in LICENSOR's name, it shall provide LICENSOR prior
written notice thereof, shall keep LICENSOR fully informed of the progress
thereof and shall act in a reasonable manner at all times in connection
with the prosecution thereof. In the event LICENSOR recovers any amounts
from such third party as a result of any action taken by LICENSOR,
LICENSOR shall deduct therefrom the out-of-pocket legal and related
expenses LICENSOR incurred in obtaining such amount, retain a percentage
of the remainder equal to the percentage that the royalty fee
hereinprovided is of the then current Net Selling Price and remit the rest
to LICENSEE. In the event LICENSEE recovers any amounts from such third
party as result of any action taken by LICENSEE, such amounts shall be
treated as a Net Selling Price hereunder, provided that LICENSEE shall
deduct therefrom the out-of-pocket legal and related expenses it incurred
in obtaining such amounts prior to paying Royalties thereon. LICENSOR may
bring and prosecute suits for infringement against others under the
Proprietary Rights. LICENSOR shall retain whatever financial recoveries
are obtained from said litigation and shall bear all the expenses of the
litigation.
5.2 Prosecution of Patents. LICENSOR shall, at its sole discretion and
----------------------
expense, diligently prosecute any patent applications included within
Proprietary Rights.
5.3 Third Party Actions. In the event a third party at any time brings a claim
-------------------
against LICENSEE alleging that LICENSEE's exercise of the Proprietary
Rights infringe any rights of such third party, LICENSOR shall, with the
reasonable cooperation of LICENSEE, defend LICENSEE against such claim at
the expense of LICENSOR and LICENSOR shall pay any settlement amount or
the damages that a court of competent jurisdiction awards, plus any other
costs and expenses incurred by LICENSEE in connection therewith provided
LICENSEE shall a) promptly notify LICENSOR in writing of any such claim,
b) allow LICENSOR to control such defense and any related settlement
negotiation, and c) cooperate with LICENSOR in the defense of any such
claim or any related settlement negotiations.
ARTICLE VI - LIABILITY AND INSURANCE
- ------------------------------------
6.1 LICENSEE, at its sole expense, shall at all times during the term of this
Agreement and thereafter indemnify, defend, and hold LICENSOR, their
trustees, officers, employees and affiliates harmless against any claims,
liabilities, judgments and expenses arising out of the
Page 9 of 14
<PAGE>
death of or injury to any person or persons or out of any damage to
property and against any other claim of any kind resulting from the
production, manufacture, sale, advertising, distributing, use, sale or
transfer of Licensed Products or Licensed Processes pursuant to this
Agreement. LICENSOR shall give prompt written notice to LICENSEE of any
matter asserted by LICENSOR to be covered by this Section 6.1. LICENSEE
shall have the sole right to defend any matter covered by this Section
6.1.
6.2 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, LICENSOR MAKES
NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESSED
OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OR NON-INFRINGEMENT OF
PATENT RIGHT CLAIMS WHICH ARE ISSUED OR PENDING. LICENSOR represents that
LICENSOR is not aware of any patent right claims pending with respect to
LICENSOR's Proprietary Rights as of the effective date of this Agreement.
6.3 The only rights being granted pursuant to this Agreement are those
specifically set forth in Article II herein and this Agreement is not to
be construed or implied in any way to create any additional rights, or
options to any rights with regard to the licensing of Proprietary Rights.
LICENSEE shall keep in confidence and secrecy not only the subject matter
of the rights herein conveyed, but also such trade secrets, confidential
information, know-how, and other information relating thereto as it
relates to the present Proprietary Rights. LICENSOR shall keep in
confidence and secrecy LICENSEE's trade secrets, confidential information,
know-how, and other information relating thereto, including without
limitation, LICENSEE's proprietary technical information pertaining to
LICENSEE's existing manufacturing processes and know-how. LICENSEE and
LICENSOR hereby covenant to maintain the other's confidential and
proprietary information in secrecy. The parties further agree that but for
the representations of the parties that such information is received in
confidence and will be maintained in confidence, the present Agreement
would not have been entered into. Each party is free to use the
information conveyed hereunder and such future information as is conveyed
by the other party during the life of the present Agreement subject to the
provisions hereof and after expiration of the present Proprietary Rights,
should this Agreement remain in force until such time. However, should
this Agreement be terminated for any reason, then each party shall be
forbidden from using the trade secrets, confidential information and other
proprietary information of the other party for ten (10) years after such
termination, except for such information as contained in Licensed Process
and Documentation and except as otherwise provided in Paragraph 2.1
hereof.
6.4 LICENSEE agrees it has obtained liability insurance with coverage in an
amount no less than $1,000,000.00 per occurrence. Adequate evidence, such
as a Certificate of Insurance, of the required coverage will be provided
by LICENSEE to LICENSOR's Manager of Purchasing, 17200 Park Row, Houston,
Texas 77084 and LICENSEE agrees to keep said office of LICENSOR informed
of any changes in coverage or carriers.
Page 10 of 14
<PAGE>
ARTICLE VII - USE OF NAMES
- --------------------------
7.1 LICENSEE shall be free to use the name of LICENSOR in any advertising,
promotional or sales literature, provided that, in each case, LICENSEE has
obtained the prior written consent of an officer of LICENSOR, except that
LICENSEE may state that it is licensed by LICENSOR under one or more of
the patents and/or applications comprising the Proprietary Rights.
LICENSOR shall be free to use the name of LICENSEE, provided that, for
each such use, LICENSOR has obtained the prior written consent of
LICENSEE.
ARTICLE VIII -ASSIGNMENT
- ------------------------
8.1 Except as provided below, this Agreement is not assignable and any attempt
to do so shall be void.
8.2 This Agreement is made subject of the condition LICENSEE shall not become
bankrupt, insolvent or placed in the hands of a receiver or trustee, in
which event LICENSOR may, at its option, cancel this Agreement provided
that all sums of money owing to LICENSOR and all affirmative duties and
obligations hereunder shall survive such cancellation. If LICENSOR does
not so cancel this Agreement, this Agreement shall bind the heirs,
assigns, successors in interest, trustees, devises, executors and
administrators of the parties hereto in the same manner as is binding on
the signatory parties hereto.
8.3 LICENSEE may not transfer the present License except:
a) LICENSEE transfers substantially all its assets, and
b) LICENSEE shall advise LICENSOR at least thirty (30) days in advance
of any such contemplated transfer, and
c) LICENSEE shall provide the identity of the prospective transferee,
and
d) LICENSOR, at its sole discretion, is fully satisfied with the
qualifications of the prospective transferee, and
e) The prospective transferee shall agree in writing to be bound
by the terms and conditions hereof.
ARTICLE IX- PATENT MAINTENANCE
- ------------------------------
9.1 So long as LICENSEE is generating sufficient Royalties hereunder to cover
the expense to do so, LICENSOR shall diligently maintain the Proprietary
Rights during the term of this Agreement at its expense.
ARTICLE X - TERMINATION
- -----------------------
10.1 If LICENSEE shall cease a) to carry on its business, or b) to produce
Licensed Product, or c) to maintain competitive market pricing for
Licensed Product, this Agreement shall subject to immediate termination at
the sole discretion of LICENSOR.
Page 11 of 14
<PAGE>
10.2 Upon any material breach or default of this Agreement by LICENSEE,
LICENSOR shall have the right to terminate this Agreement and the rights,
privileges and license granted hereunder by forty-five (45) days' notice
to LICENSEE. Such termination shall become immediately effective upon the
expiration of said forty-five (45) day period, unless LICENSEE a) shall
have cured any such breach or default prior thereto, b) shall have been
granted a definite extension of such cure period in writing by LICENSOR,
or c) has demanded resolution under Article XI prior thereto.
10.3 LICENSEE shall have the right to terminate this Agreement at any time
after three (3) years on three (3) months' written notice to LICENSOR and
upon payment of all amounts due LICENSOR through the effective date of the
termination.
10.4 Termination under this Article, or any other termination provision
elsewhere expressed in this Agreement, shall not relieve LICENSEE of its
obligation to pay royalties due and owing at the time of said termination
or as otherwise due and owing under this Agreement. Termination of this
Agreement shall not relieve either party of any obligation which this
Agreement expressly provides shall survive termination of this Agreement
for any reason.
10.5 In the event of termination of this Agreement for any reason other than
default hereunder by LICENSEE, and should such termination occur before
the termination of the Proprietary Rights and thereby place LICENSEE in a
position of holding Licensed Product built in accordance with or pursuant
to the Proprietary Rights wherein LICENSEE would be unable to sell such
Licensed Product, in that event, LICENSOR shall be obligated to purchase
such inventory at a price to be mutually agreed, but not to exceed the
cost thereof plus twenty percent (20%).
ARTICLE XI - ARBITRATION
- ------------------------
11.1 BINDING ARBITRATION. ALL CONTROVERSIES AND/OR DISPUTES ARISING OUT OF THIS
-------------------
AGREEMENT SHALL BE DECIDED BY THREE (3) ARBITRATORS. WRITTEN NOTICE OF ANY
DISPUTE SHALL BE GIVEN BY THE AGGRIEVED PARTY, CLEARLY SPECIFYING THE
NATURE OF THE DISPUTE AND THE RELIEF REQUESTED, INCLUDING THE PARAGRAPH OF
THIS AGREEMENT IN QUESTION, IF ANY. IF THE DISPUTE CANNOT BE AMICABLY
RESOLVED (EVIDENCED BY WRITING SIGNED BY BOTH PARTIES) WITHIN THIRTY (30)
DAYS OF SUCH NOTICE, EITHER PARTY MAY SERVE THE OTHER WITH A WRITTEN
DEMAND FOR ARBITRATION PURSUANT TO THIS ARTICLE. WHERE LICENSEE HAS
DEMANDED THE ARBITRATION UNDER PARAGRAPH 10.2, THE THIRTY (30) DAY PERIOD
IN THE FOREGOING SENTENCE SHALL BE INAPPLICABLE.
11.2 Procedure
---------
11.2.1 Each party shall be responsible for one half of the cost of the
arbitrators. The arbitrators shall be selected as follows;
Page 12 of 14
<PAGE>
11.2.1.1 The party demanding arbitration shall, together with its demand
for arbitration, submit the name of one arbitrator.
11.2.1.2 Within twenty (20) calendar days thereafter the party receiving
such demand shall respond with the name of an additional
arbitrator.
11.2.1.3 The two arbitrators so selected shall, within twenty (20)
calendar days after the selection of the second arbitrator,
select a third arbitrator. Failure of the two arbitrators so
selected to select a third arbitrator shall be referred to the
American Arbitration Association for immediate resolution.
11.2.2 All pre-hearing, hearing, and post-hearing procedures shall be governed
by the Commercial Arbitration Rules of the American Arbitration
Association then in effect, except as modified by this Agreement.
11.2.3 The site of the arbitration proceedings pursuant to this Article shall be
Boston, Massachusetts if commenced by LICENSOR and Houston, Texas if
commenced by LICENSEE.
11.2.4 All decisions of the arbitrators shall be by majority vote. The
arbitrators shall be bound to make specific findings of fact and reach
conclusions of law, based upon the submissions and evidence of the
parties. and shall issue a written decision explaining the basis for the
decision and award. Proceedings shall be concluded within sixty (60) days
of the date the third arbitrator is selected.
11.3 Court Actions During the pendency of any proceeding under Section 11.1 or
-------------
11.2, neither party will commence any litigation relating to any dispute
under this Agreement and any litigation commenced prior to commencement of
any proceeding under Sections 11.1 or 11.2 shall be stayed pending the
outcome thereof. The parties agree to fully abide by the terms of any
arbitration award hereunder as final and binding. Judgment upon any award
may be entered and enforced by either party in any court of competent
jurisdiction.
ARTICLE XII - MISCELLANEOUS PROVISIONS
- --------------------------------------
12.1 This Agreement shall be construed, governed, interpreted and applied in
accordance with the laws of the State of Texas.
12.2 The parties hereto acknowledge that this Agreement sets forth the entire
agreement and understanding of parties hereto as to the subject matter
hereof, and shall not be subject to any change or modification except by
the execution of a written instrument subscribed to by the parties hereto.
12.3 Whenever possible each provision of this Agreement shall be interpreted in
the same manner as to be effected and valid under applicable law. The
provisions of this Agreement, other than Article II, are severable, and in
the event that any provisions of this Agreement shall be determined to be
invalid or unenforceable under any controlling body of the law, such
Page 13 of 14
<PAGE>
invalidity or unenforceability shall not in any way affect the validity or
enforceability of the remaining provisions hereof.
12.4 LICENSEE agrees to mark the Licensed Products as Patented for all products
shipped from any location of manufacture.
12.5 The failure of either party to assert a right hereunder or to insist upon
compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or any other right hereunder and shall
not excuse a similar subsequent failure to perform any such term or
condition by the other party.
12.6 All notices and correspondence provided for herein shall be given by
depositing same in the United States Mail, first class postage prepaid,
mailed to the following addresses:
<TABLE>
<S> <C>
If to LICENSOR: If to LICENSEE:
Syntron, Inc. Benthos, Inc.
Attention: Manager of Purchasing Attention: President
17200 Park Row 49 Edgerton Drive
Houston, TX 77084-4925 North Falmouth, MA 02556-2826
</TABLE>
The above addresses are the registered offices of the parties. Changes in
address shall be given by utilizing the notice provisions of this
paragraph.
12.7 This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute
one and the same instrument.
12.8 No provision of this Agreement shall be construed or be deemed to create a
joint venture or partnership or establish the relationship of principal
and agent between LICENSOR and LICENSEE. The relationship of LICENSOR and
LICENSEE shall at all times be that of licensor and licensee, neither
party being empowered to act on behalf of the other except to the extent
expressly authorized herein.
IN WITNESS THEREOF, the parties have hereunto set their hands and seals and duly
executed this Agreement the day and year set forth below,
SYNTRON, INC. BENTHOS, INC.
By: /s/ BRUCE NELSON By: /s/ JOHN L. COUGHLIN
-------------------------- --------------------------
Name: BRUCE NELSON Name: JOHN L. COUGHLIN
Title: President Title: President/CEO
Date: 3 Nov 97 Date: 10/21/97
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Page 14 of 14
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Exhibit 10.22
AMENDMENT NUMBER 1
to
SYNTRON, INC. - BENTHOS, INC.
HYDROPHONE LICENSE AGREEMENT
This Amendment Number 1 modifies the SYNTRON, INC. - BENTHOS, INC. HYDROPHONE
LICENSE AGREEMENT in the following respects. The SYNTRON, INC. - BENTHOS, INC.
HYDROPHONE LICENSE AGREEMENT and this Amendment Number 1 shall be referred to
collectively as the "Agreement". LICENSOR and LICENSEE agree as follows:
1. Replace ARTICLE IV in its entirety with:
ARTICLE IV - FEE, COST BASIS/REMUNERATION, ROYALTIES, AND REPORTING
4.1. For the rights, privileges and license granted hereunder, LICENSEE shall
pay a license fee, provide engineering services, provide preferred selling
price and delivery status, and pay royalties to LICENSOR in the manner
hereinafter provided to the end of the term of the Proprietary Rights,
which shall be until the last patent to expire of all patents included
within Proprietary Rights, or until this Agreement shall be terminated as
hereinafter provided:
(A) LICENSEE agrees to pay LICENSOR a License Issue fee in the amount
of Ten Dollars ($10.00);
(B.1) LICENSEE shall provide engineering services to complete the
engineering required to place the Licensed Product in a high volume
manufacturing design state including without limitation the
generation of the Documentation. Such services shall include all
engineering design, manufacturing design, the generation and
copying of the Documentation and any future updates thereto as and
when initiated by LICENSEE and prototype materials required to
fabricate parts for proof of design. Such services shall be deemed
initially completed by LICENSEE on 1) the successful completion of
testing to the satisfaction of LICENSOR and LICENSEE to a mutually
agreed upon set of performance specifications documented in
Appendix B attached hereto and made a part hereof and 2) delivery
to LICENSOR by LICENSEE of a complete and accurate reproducible
copy of the then current Documentation.
The work product of LICENSEE's services, including results, and all
ideas, plans, developments, and inventions which LICENSEE conceives
or reduces to practice during the course of performance under this
subparagraph 4.1.(B) and this Agreement shall be the exclusive
property of LICENSOR. This information, material, plans, and any
such ideas or inventions shall be deemed LICENSOR Proprietary
Information and shall not be disclosed to anyone outside of
LICENSOR or used by LICENSEE outside the terms and conditions of
this Agreement or used by others without the prior written consent
of LICENSOR. Such work product which qualifies as a "work for hire"
under the copyright laws of the United States shall be the
exclusive property of LICENSOR as "work for hire". All right,
title, and interest, including any copyright in and to any written
data which does not qualify as a "work-for-hire" shall be deemed to
have been automatically transferred to LICENSOR from the date of
inception thereof. Upon LICENSOR's
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PAGE 2
Syntron, Inc. - Benthos, Inc.
Hydrophone License Agreement
Amendment Number 1
request, LICENSEE shall execute any document and render such other
assistance as reasonably necessary to perfect full right, title,
and interest worldwide in the written data, including formal
conveyance of copyright. Written data shall not be published or
submitted for publication by LICENSEE without the prior written
approval of LICENSOR. Further, if any such article, paper,
treatise, or report includes work previously copyrighted by
LICENSEE, LICENSEE hereby grants to LICENSOR a nonexclusive,
worldwide, irrevocable, paid-up license under such copyrights to
reproduce, distribute, and use the works in any manner.
During the period of this Agreement and thereafter at any
reasonable time when called upon to do so by LICENSOR, LICENSEE
shall execute patent applications, assignments to LICENSOR, and
other papers and shall render such other assistance that LICENSOR
believes necessary to secure for LICENSOR the full protection and
ownership of all rights in and to the work product of the services
performed by LICENSEE. The filing of patent applications on
inventions made by LICENSEE shall be decided by LICENSOR and shall
be for such countries as LICENSOR shall elect. LICENSOR shall bear
all the expenses in connection with the preparation, filing, and
prosecution of applications for patents and for all matters
provided in this subparagraph requiring the time and/or assistance
of LICENSEE as to inventions. Further, LICENSOR shall pay LICENSEE
the hourly rate of $ 75.00 for services which LICENSEE performs in
connection with inventions and patent applications which may be
required by LICENSOR whether during the term of this Agreement or
after expiration or termination of this Agreement. LICENSEE
warrants that the engineering design, manufacturing design, the
generation and copying of the Documentation and any future updates
thereto shall not violate any third party's intellectual property
rights nor include any unauthorized disclosure of any third party's
intellectual property and agrees to, at its sole expense, at all
times during the term of this Agreement and thereafter indemnify,
defend, and hold LICENSOR, their trustees, officers, employees and
affiliates harmless against any and all costs and/or liabilities of
whatever nature that may result from any claim by any third party
for infringement of such third party's intellectual property
rights. The aforementioned documentation deemed "work for hire"
shall be clearly marked as the property and proprietary information
of LICENSOR.
(B.2) LICENSEE shall provide engineering services to determine what
production tooling will be necesary and provide such production
tooling required by LICENSEE or LICENSEE's subcontractors to
produce the Licensed Product. Such services shall include all
engineering design and manufacturing for production tooling
required by LICENSEE or LICENSEE's subcontractors and any future
updates thereto as and when initiated by LICENSEE to produce the
Licensed Product. Such services shall be deemed initially completed
by LICENSEE on 1) the successful completion of testing to the
satisfaction of LICENSOR and LICENSEE of Licensed Product
manufactured using the production tooling to be tested to a
mutually agreed upon set of performance specifications documented
in Appendix B attached hereto and made a part hereof and 2)
delivery to LICENSOR by LICENSEE of a complete and accurate listing
of such production tooling with values per individual item. Title
to such production tooling provided by LICENSEE to itself and its
subcontractors shall be held by LICENSEE. LICENSEE shall be
responsible for maintenance and replacement of such production
tooling as required.
(C) LICENSEE shall manufacture the Licensed Product to the
specifications agreed to for the use of LICENSOR and all other
customers that may have a need for this product regardless of these
other customers competitive position with LICENSOR.
2
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PAGE 3
Syntron, Inc. - Benthos, Inc.
Hydrophone License Agreement
Amendment Number 1
(D) In consideration of granting said exclusive license to LICENSEE,
LICENSEE will provide most favored customer status to LICENSOR with
respect to any selling price and delivery of the Licensed Product
to LICENSOR. NO ROYALTIES ARE DUE LICENSOR ON THE VALUE OF PRODUCTS
SOLD TO LICENSOR. At all times that this license is exclusive to
LICENSEE, LICENSOR will not compete with LICENSEE in the Licensed
Product as an saleable end-item.
(E) LICENSEE is free to set the unit sales price of the Licensed
Product to any LICENSEE customer. The foregoing notwithstanding and
by way of indication of most favored customer status of LICENSOR,
the Net Selling Price of such unit sales price to any third party
will not be lower at any time than the actual gross selling price
to LICENSOR for like or lesser quantity purchase commitment.
(F) For all sales of the Licensed Product to any organization or entity
other than LICENSOR up to the combined, cummulative amount of the
first 250,000 units, LICENSEE shall not be required to pay any
running Royalties to LICENSOR. For all sales of the Licensed
Product to any organization or entity other than LICENSOR following
such first 250,000 units, LICENSEE shall pay to LICENSOR running
Royalties in the amount of $0.75 per unit for each Commercial Sale
of Licensed Products by LICENSEE - said Royalty to be due and
payable upon delivery of the report due pursuant to Paragraph 4.5
hereof. In the event a Commercial Sale of Licensed Products occurs
together with the sale or lease of a system or other product, such
royalty shall be solely on the Licensed Product, as no royalty
shall be payable with respect to any other portion of such system
or product.
4.2 No multiple royalties shall be payable solely for the reason that any
Licensed Products, its manufacture, use, or sale are or shall be covered by
more than one patent application, patent or certificate of registration
licensed under this Agreement.
4.3 Royalty payments shall be paid in United States dollars in Houston, Texas,
or at such other place as LICENSOR may reasonably designate.
4.4 LICENSEE shall keep full, true and accurate books of account and records
containing all particulars that may be necessary for the purposes of
showing the amounts payable to or by LICENSOR hereunder. Said books of
account shall be kept at LICENSEE's principal place of business or the
principal place of business of the appropriate division of LICENSEE to
which this Agreement relates. Said books and the supporting data shall be
open at all reasonable times for three (3) years following the end of the
calendar year to which they pertain, to the inspection of independent CPA's
to be proposed by LICENSOR and approved by LICENSEE, said approval not to
be unreasonably withheld, for the purpose of verifying LICENSEE's royalty
statement or compliance in other respects with this Agreement, such
inspection to occur no more than once each calendar year upon reasonable
prior notice to LICENSEE. The expense of such inspection shall be borne by
LICENSOR unless such inspection reveals a shortfall in payments due to
LICENSOR by LICENSEE or other violation of the terms and conditions of this
Agreement by LICENSEE in which case such expenses shall be borne by
LICENSEE.
4.5 The Royalty provided in Paragraph 4.1(F) shall be payable to LICENSOR
within in one (1) month after the end of each calendar quarter. LICENSEE
shall have the option of paying any portions of the
3
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PAGE 4
Syntron, Inc. - Benthos, Inc.
Hydrophone License Agreement
Amendment Number 1
royalty herein provided at any time earlier than that specified. Each
royalty payment to LICENSOR shall include an appropriate statement of the
gross revenues due LICENSOR and shall identify the portion of the Agreement
under which said royalty payments are made. In addition, each royalty
payment shall be accompanied by true and accurate reports giving such
particulars of the business conducted by LICENSEE during the period to
which such payment applies under this Agreement ending thirty (30) days
prior to such payment date as shall be pertinent to an accounting
hereunder.
4.6 The royalty payments set forth in this Agreement shall, if overdue, bear
interest until payment at the maximum per annum rate permitted by
applicable law. The payment of such interest shall not foreclose LICENSOR
from exercising any other rights it may have as a consequence of the
lateness of any payment.
2. Replace Appendix A dated October 16, 1997 in its entirety with Appendix A
dated June 18, 1998.
3. Replace Appendix B Revision E dated October 17, 1997 in its entirety with
Appendix B Revision G dated May 26, 1998.
4. All other terms and conditions of the Agreement remain unchanged.
IN WITNESS THEREOF, the parties have hereunto set their hands and duly executed
this Amendment Number 1 as of the day and year set forth below.
AGREED ON BEHALF OF AGREED ON BEHALF OF
SYNTRON, INC. (LICENSOR) BENTHOS, INC. (LICENSEE)
By: /s/ RICHARD F. MILES By: /s/ JOHN L. COUGHLIN
----------------------- ----------------------
Name: RICHARD F. MILES Name: JOHN L. COUGHLIN
Title: President Title: President/CEO
Date: September 11, 1998 Date: 9-9-98
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BENTHOS, INC. AND SUBSIDIARY
CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 2,572
<SECURITIES> 0
<RECEIVABLES> 2,353
<ALLOWANCES> 170
<INVENTORY> 3,044
<CURRENT-ASSETS> 8,757
<PP&E> 6,296
<DEPRECIATION> 4,529
<TOTAL-ASSETS> 10,857
<CURRENT-LIABILITIES> 2,156
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 8,592
<TOTAL-LIABILITY-AND-EQUITY> 10,857
<SALES> 3,835
<TOTAL-REVENUES> 3,835
<CGS> 2,344
<TOTAL-COSTS> 905
<OTHER-EXPENSES> 285
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 337
<INCOME-TAX> 121
<INCOME-CONTINUING> 216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216
<EPS-PRIMARY> .16<F1>
<EPS-DILUTED> .16<F1>
<FN>
<F1>THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS
NO. 128 AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BENTHOS, INC. AND SUBSIDIARY
CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 3,064
<SECURITIES> 0
<RECEIVABLES> 1,459
<ALLOWANCES> 162
<INVENTORY> 2,421
<CURRENT-ASSETS> 7,806
<PP&E> 6,103
<DEPRECIATION> 4,209
<TOTAL-ASSETS> 9,934
<CURRENT-LIABILITIES> 1,809
<BONDS> 442
0
0
<COMMON> 106
<OTHER-SE> 7,577
<TOTAL-LIABILITY-AND-EQUITY> 9,934
<SALES> 3,120
<TOTAL-REVENUES> 3,120
<CGS> 1,325
<TOTAL-COSTS> 1,240
<OTHER-EXPENSES> 270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 308
<INCOME-TAX> 118
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> .15<F1>
<EPS-DILUTED> .14<F1>
<FN>
<F1> THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH
SFAS NO. 128 AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE
OF PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</FN>
</TABLE>
