<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1998 or
----------------
TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number 0-14677
DSP TECHNOLOGY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2832651
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
48500 KATO ROAD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (510) 657-7555
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ______
The aggregate market value of registrant's voting Common Stock held by non-
affiliates of the registrant was approximately $16,316,000 (based on the closing
sales price of the Company's Common Stock at March 31,1998 as reported by
NASDAQ). Shares of Common Stock held by each officer and director and by each
person who owns more than 5% of the Company's Common Stock have been excluded
because such persons may be deemed to be affiliates. This is not intended to be
a conclusive determination of affiliate status for any other purposes. The
number of shares outstanding of the registrant's Common Stock at March 31, 1998
was 2,277,360.
DOCUMENTS INCORPORATED BY REFERENCE:
Information in Part III is incorporated by reference to the Proxy Statement
for the Company's 1998 Annual Meeting of Shareholders which is to be filed with
the Securities and Exchange Commission before May 1, 1998.
This report (including exhibits) contains 71 pages. The Index to Exhibits
begins on page 33 of this report.
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PART I
ITEM 1: BUSINESS
This report contains, in addition to historical information, forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These foward-looking statements are
subject to certain risks and uncertainties, including those discussed in this
report. Actual results could differ materially from those projected in the
forward-looking statements as a result of competition, technological change and
other risks detailed in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors that May Affect Future
Results". In this report the words "anticipates," "believes," "expects,"
"intends," "may," "future," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
INTRODUCTION
The Company designs, develops, manufactures, markets and integrates high-
speed computer-automated instrumentation for measurement and control
applications in three major areas: powertrain testing, vehicle safety and
component testing, and general data acquisition and signal analysis. The
transportation industry is currently its largest market and major focus.
The Company's products are used to gather and measure analog signals
generated by transducers and/or detectors which measure physical properties such
as temperature, pressure, acceleration and radiation. These products have been
used primarily in the transportation industry in applications as diverse as
powertrain testing, dynamometer control, automotive combustion research, and
vehicle impact testing. To a lesser extent, aerospace companies, universities
and government-funded agencies use the Company's products in ultrasonics,
chemical kinetics, plasma diagnostics, spectroscopy, fusion research, explosives
testing, and vibration analysis.
In February 1995, the Company entered into a strategic alliance agreement
with FEV Motorentechnik GmbH & CO KG ("FEV"). The purpose of the alliance is to
develop and distribute test instrumentation and control products for the
transportation industry. FEV is a privately-held company based in Aachen,
Germany, and is a leader in complete engine and powertrain research and
development and instrumentation for the transportation industry.
DSP Technology Inc. (the "Company") was incorporated in California in July
1982 and commenced operations in May 1984. The Company reincorporated in
Delaware in September 1997. All references in this report to the "Company" and
"DSPT" refer to DSP Technology Inc. and its wholly-owned subsidiaries.
STRATEGY
The Company's strategy is to focus its resources on its largest market, the
transportation market. The Company defines the transportation market as
including the following industries and segments: major vehicle manufacturers
and their suppliers, the diesel industry (e.g., manufacturers of heavy trucks,
farm and construction equipment, and large stationary engines), the fuels and
lubricants industry, and small engine manufacturers. The Company believes that
the fundamental factors of government environmental regulation, global
competition among vehicle manufacturers, and rapid technological progress are
expanding the demand for advanced turnkey powertrain test solutions. Large
domestic and international customers demand more custom turnkey solutions that
require more complex services. The Company believes that investments in this
area are necessary and logical steps towards expanding its
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share of the transportation market.
To address its transportation industry customers' needs, the Company
announced its strategic decision, in the beginning of fiscal 1997, to: (1) focus
more heavily and expand its capabilities on the services side of the business;
(2) continue development of new products with higher levels of capability and
integration; and (3) take a more aggressive approach to marketing with the goal
of becoming a full-service company capable of manufacturing and providing
turnkey integration of the Company's products.
The Company, starting in fiscal 1997, invested heavily in developing
significant service capabilities in the areas of custom manufacturing, system
integration, project engineering and management, installation and commissioning.
These services are now offered as part of the sale of transportation products as
Test Cell Services.
The Company continues to invest in the development of data acquisition
products. The following systems, BaseLine ADAPT, ADAPT-DAC and ADAPT-CAS, were
introduced at the 1998 Society of Automotive Engineers ("SAE") show in Detroit,
Michigan in February 1998. See "Products and Customers---Powertrain Testing
Products" for description of these products.
In fiscal 1997, the Company also invested in new sales and marketing
personnel to support the expected growth in sales and increased marketing
activity. The added personnel were hired three to six months in advance of the
revenue opportunities to permit formal and on-the-job training in the Company's
products and processes. The Company has also embarked on setting up marketing
alliances to enhance its product offerings. This has resulted in the
introduction at the SAE show of RedLine Dyno, a line of low inertia, high
response dynamometers.
PRODUCTS AND CUSTOMERS
The Company manufactures and markets data acquisition and control products
in the form of integrated systems, modules and proprietary software developed by
the Company. These products are categorized into three application areas:
powertrain testing, vehicle safety and component testing, and general data
acquisition and signal analysis.
Powertrain Testing Products:
----------------------------
Powertrain testing is a critical discipline in the transportation industry.
DSPT supplies a wide range of products and services for powertrain test cells.
DSPT's RedLine and BaseLine products are accepted as standards by leading
automakers around the world. These systems help its customers develop more cost
effective, fuel efficient engines. By integrating hardware, software, services
and expertise into a cost-effective system, DSPT creates solutions that focus on
its customers' specific needs. These solutions, based on industry standards,
provide long-term flexibility for changing test requirements. The Company's
major customers in the transportation market are General Motors ("GM"), Hyundai
Motor ("Hyundai"), Sverdrup Technology, Inc. ("Sverdrup"), Waukesha Engine, FEV,
Lubrizol Corporation, Lotus Engineering, Ltd., and Chrysler Corporation.
RedLine ADAPT-DAC. The data acquisition and control system is a crucial
------------------
component in a powertrain test cell. RedLine ADAPT-DAC offers real-time control
over the engine under test. Multi-processor architecture allows the system to
acquire data on hundreds of preset parameters simultaneously as the engine
responds to test conditions. It can interface with and control a wide variety
of other test instruments and systems, including emission benches, combustion
analyzers and other devices. With its networking capabilities, ADAPT-DAC can
provide centralized, remote control of an entire suite of test cells. It
features innovative graphics and runs on a PC in the Windows environment. The
systems sell from $60,000 for a base system up to $500,000 with accessory
products, hardware spares, custom software, integration, installation and
training.
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RedLine ADAPT-CAS. The Company introduced the RedLine ADAPT-CAS at the SAE
------------------
show in February 1998. It is the third generation combustion analysis product
of RedLine ACAP which was introduced in 1991. ADAPT-CAS incorporates years of
feedback from industry leaders around the world. Designed for seamless
integration with ADAPT-DAC or with VME or VXI systems from other vendors, it
enhances the usefulness and quality of test data, raises the efficiency of test
cell operations and increases test safety. It is easy to use and features
dynamic graphic displays. Integrated with ADAPT-DAC, the combined system offers
a single user interface for operation, display of data, and system
configuration. The systems range in price from approximately $30,000 for a base
system to over $150,000.
RedLine DYNO. The Company offers a line of dynamometers called RedLine
-------------
DYNO. These dynamometers are low-inertia, high-response units designed for the
quick transient conditions of sophisticated powertrain testing. They interface
directly with RedLine ADAPT-DAC and provide another element in the complete
solution for powertrain testing. The systems range in price from approximately
$25,000 to $125,000.
RedLine CONNECT. As test cell electronics proliferate, test-cell wiring
----------------
becomes more complex, time-consuming and error-prone. The RedLine CONNECT
system provides a fast, simple, modular solution for interfacing test cell
instrumentation and signals. It combines the flexibility of individual signal
connections with the speed and convenience of single-point mass termination.
These systems range in price from approximately $10,000 to $25,000.
BaseLine ADAPT. BaseLine ADAPT is a self-contained data acquisition and
---------------
control system needing only a PC workstation and test cell interfaces to
implement an operational test system. It is the lower cost alternative to
RedLine ADAPT and offers space savings of approximately 70%, a significant
advantage in the equipment-crammed environment of today's test cell. Typical
systems range in price from approximately $35,000 to $45,000.
Test Cell Instrumentation and Accessory Products. The Company provides a
-------------------------------------------------
comprehensive array of test cell accessories (e.g., engine supports, coolant
control systems, containerized powertrain test cells) as integral parts of
RedLine installations.
Test Cell Services. Test Cell services personnel work in close partnership
-------------------
with its customers to design, install and service a wide variety of powertrain
test facilities. In the planning phase, project and applications engineers work
closely with customers' selected contractors to design and integrate complex
systems and facilities that will meet their needs. During installation, the
Company's installers and commissioning engineers work with the customer to
ensure timely completion and thorough testing of all equipment.
Vehicle Safety and Component Testing Products.
----------------------------------------------
IMPAX Data Acquisition Systems ("IMPAX"). IMPAX is a system typically used
-----------------------------------------
in collecting and processing data from full-scale vehicle crash tests, sled
simulators and component test stands. In addition, they have been used for
investigating lift-off dynamics for space launch vehicles. Systems prices range
from about $150,000 to $600,000 depending on the configuration. Major customers
for this product are General Motors, Autoliv, Lockheed-Martin, Sandia National
Laboratory and Morton International.
General Data Acquisition and Signal Analysis Products.
------------------------------------------------------
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Signal Acquisition Products ("SigLab"). SigLab high-performance signal
---------------------------------------
acquisition products are subsystems for personal computers and workstations in
the electronic and electro-mechanical device analysis market. SigLab products
provide a cost-effective, portable technology for measurement applications like
computer hard disk head positioning or acoustic noise suppression systems in
automobiles. The products are controlled by and integrated with the MATLAB
software from The MathWorks Inc., of Natick, Massachusetts. The products range
in price from $ 5,000 for a base 2-channel unit to $21,000 for an 8-channel
system with optional software and additional memory. Major customers for these
products are distributors such as Signaltech, Phase Metrics, USAF-Phillips Lab,
Honeywell Satellite Systems, Southwest Research Institute and Sigmatest.
Custom Data Acquisition Systems. The Company also designs custom systems
--------------------------------
for customer-specific measurement or control applications. These systems are
configured from the Company's line of modules, such as, signal conditioners,
transient recorders, analog-to-digital converters and interface modules. These
systems are typically sold to universities, government-funded labs and research
and development labs. The typical selling price of a system ranges from about
$25,000 to about $300,000 for a complex installation. Major customers for these
products are Naval Air Warfare Center, Westinghouse Electric and Aberdeen
Proving Grounds.
MANUFACTURING AND SUPPLIERS
The Company manufactures its products from components and prefabricated
parts such as integrated circuits, printed circuit boards, power supplies, and
enclosures manufactured by others. Manufacturing operations consist of assembly
of printed circuit boards, power supplies, and crates, system integration and
final testing. Materials and components used by the Company in manufacturing
are available primarily from domestic sources. Where possible, the Company buys
from multiple sources to avoid dependence on any single supplier. However,
certain custom analog devices are only available from a limited number of
suppliers.
MARKETING AND SALES
In the United States, the Company primarily sells and services its products
through its own sales and service organizations located in Michigan and
California. In Canada, Western Europe, Korea and Japan, the Company sells its
products through independent distributors through whom the Company provides
technical and administrative assistance. For its transportation market
products, the Company distributes its products through FEV in Europe except for
the United Kingdom. In the United Kingdom, the Company operates a sales and
customer support subsidiary for its powertrain testing products. The Company's
standard terms of sale generally require payment within 30 days of shipment.
The following customers accounted for over 10% of fiscal 1998 net sales: GM
at 21% of net sales and Hyundai at 14% of net sales. GM accounted for 18% and
11% of net sales in fiscal 1997 and fiscal 1996, respectively. No other customer
accounted for 10% or more of the Company's net sales in fiscal years 1998, 1997
or 1996.
Export sales, primarily to the United Kingdom, Western Europe, and the Far
East, accounted for approximately 35%, 32%, and 18% of sales in 1998, 1997 and
1996, respectively (See Note J of Notes to Consolidated Financial Statements).
At January 31, 1998 the Company had an order backlog of approximately
$11,500,000, compared to a backlog of approximately $9,500,000 at January 31,
1997, and approximately $4,900,000 at January 31, 1996. Backlog consists of
orders believed by management to be firm and scheduled for delivery within
twelve months. However, most orders can be rescheduled or canceled by customers
without significant penalty. In addition, backlog is dependent on the timing of
orders, particularly large orders, and on seasonal spending for capital
requirements. Accordingly, backlog at January 31, 1998, or at any other
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date, may not be indicative of prospective sales.
SERVICE AND WARRANTY
The Company maintains a telephone "hotline" staffed with qualified
technicians to respond to service calls. Most servicing is performed at its
facilities in Fremont, California and Ann Arbor, Michigan.
The Company generally extends a one year warranty for its products.
Warranty costs have been nominal to date.
RESEARCH AND DEVELOPMENT
The Company's ability to compete successfully in an industry subject to
rapid technological change depends on, among other things, its ability to
anticipate and respond to such change. Accordingly, the Company is committed to
a high level of research and development activity. The Company incurred
expenditures for research and development of $2,352,000 in fiscal 1998,
$2,203,000 in fiscal 1997, and $2,250,000 in fiscal 1996, representing 11%, 12%,
and 14%, of total sales in each such period. In accordance with the Statement
of Financial Accounting Standards No. 86 which requires the capitalization of
software development costs incurred subsequent to establishment of the
technological feasibility of producing the finished software product, the
Company capitalized $517,000, $630,000, and $322,000, in fiscals 1998, 1997 and
1996, respectively.
There can be no assurance that customers' budgets in the automotive and
advanced research markets for data acquisition and control products will
continue at present levels or that the Company will be successful in marketing
any new product it develops. In addition, there can be no assurance that the
Company will be able to develop, manufacture or market additional products as a
result of its efforts; that expenditures in addition to those currently
anticipated may not be required to complete the research and development or
that, if required, financing for these expenditures will be available; that
future sales from existing or developed products will be significant; or that
any sales will be profitable.
COMPETITION
Competition, from both U.S. and foreign competitors, is strong and active.
Some of these competitors are substantially larger companies with greater
resources. Management believes that these companies include AVL located in
Graz, Austria, and Sverdrup, a system integrator based in Tennessee.
The Company competes primarily on the basis of product diversity, features
and functions, price/performance, flexibility, and technical support. In
addition, the Company believes that an additional competitive factor in the
automotive market is its installed base in the United States. The Company
believes that it competes favorably with respect to all these factors. Systems
integration experience and ability is increasingly a factor in large system
orders and the Company believes that it has the personnel and the resources to
ably compete in this area, although many of its competitors are substantially
larger with greater resources.
PROPRIETARY RIGHTS
The Company relies upon a combination of copyright, trade secret laws and
non-disclosure and licensing agreements to establish and maintain its
proprietary rights to its products. The laws of certain foreign countries may
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. Although the Company continues to implement protective
measures and intends to defend its proprietary rights, there can be no assurance
that these measures will be successful. The Company believes, however, that,
because of the rapid pace of technological change in the automated test,
measurement and control industries, the legal protections for its products are
less significant factors in the Company's success than the knowledge, ability,
and experience of the Company's employees, the frequency of product enhancements
and the timeliness and quality of support services provided by the
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Company.
The Company is subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights. Certain technology used
in the Company's products is licensed from third parties on a non-exclusive
basis. These license agreements generally require the Company to pay royalties
and to fulfill confidentiality obligations in order to maintain the licenses.
The termination of any of these licenses may have a material adverse effect on
the Company's operations. While it may be necessary or desirable in the future
to obtain other licenses relating to one or more of its products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms.
EMPLOYEES
The Company had 145 employees at January 31, 1998. Of these employees, 92
worked in manufacturing and engineering, 37 in marketing and sales and 16 in
administration. None of the Company's employees is represented by a labor union
and there has never been a disruption of operations due to labor dispute.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information as to each executive officer as
of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
F. Gil Troutman, Jr. 54 President and Chief Executive Officer
Alan S. Broad 51 Senior Vice President
Joe M. Millares, Jr. 44 Vice President, Finance, Chief Financial Officer and Secretary
Larry Moulton 52 Director of Operations
</TABLE>
All officers are elected by the Board of Directors (the "Directors").
Elected officers hold office until the first meeting of the Directors following
the Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a
successor is chosen and qualified. There are no family relationships among the
officers and/or directors.
Mr. Troutman has served as Chief Executive Officer since October 1989 and
as a Director and President since July 1988. From 1985 until July 1988, Mr.
Troutman held the position of Product Line Manager of the Test Systems and
Instruments Group of GenRad, Inc. Prior to this, he held various other
management positions with GenRad, Inc. since 1967, including the position of
National Sales Manager of all GenRad products from 1982 to 1985.
Dr. Broad has served as Senior Vice President since March 1986 and as Vice
President of Engineering since April 1985. In 1981, Dr. Broad co-founded
Transiac and served as Director and Vice President of Transiac until it was
acquired by the Company in 1985.
Mr. Millares has served as Vice President, Finance, Chief Financial Officer
and Secretary since October 1989, and as Controller since September 1984. From
1980 to 1984, he served as Corporate Controller for Transend Corporation, a data
communications software/hardware company. Mr. Millares is a Certified Public
Accountant in California.
Mr. Moulton has served as Director of Operations since November 1996 and
was elected as an executive officer of the Company in February 1997. From 1994
to 1996, he served as Vice President of Sales and Marketing for Eagle Test
Systems, Inc., a manufacturer of test systems for the semiconductor industry.
From 1990 to 1994, he held the positions of General Manager, Data Acquisition
Division and Vice President of Keithley Instruments, Inc., a publicly-held
manufacturer of hardware and software data acquisition products.
ITEM 2: PROPERTIES
The Company's facilities consist of approximately 28,000 square feet of
space in Fremont, California and about 21,000 square feet of space in Ann Arbor,
Michigan which are leased under operating leases. The Fremont facility lease
which expires in October 1998 provides for monthly rent payments of $13,009
during the first year and progressing to $15,146 during the final year. The
Company is currently negotiating to extend its Fremont facility lease. The Ann
Arbor facility leases consist of a) a seven year lease for one building which
expires in January 2000, providing for monthly rent payments starting in January
1993 of $8,551 during the first year and increasing annually until the monthly
payments reach $10,257 during the seventh year; and b) a 31-month lease which
expires in June 1999, with monthly rent payments of $4,308 from December 1996
through May 1998 and increasing to $4,602 per month thereafter. The Company is
obligated to pay real estate taxes, insurance and maintenance expenses
associated with the leased facilities. Management believes that the existing
facilities are adequate for the Company's present operation.
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ITEM 3: LEGAL PROCEEDINGS
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended January 31, 1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is currently traded on the NASDAQ Market under
the symbol DSPT. The following table sets forth, for the periods indicated, the
high and low closing sales prices of the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Year ended January 31, 1998 Year ended January 31, 1997
--------------------------- ---------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 6-3/8 $5-3/8 $6-5/8 $4-1/4
Second Quarter 6 4-7/8 6-3/4 5
Third Quarter 11-5/8 5-5/8 5-3/4 4-1/2
Fourth Quarter 11-5/16 8 6-5/8 4-1/4
</TABLE>
HOLDERS
The approximate number of holders of record of the Company's Common Stock
at March 31, 1998 was 86. The Company believes that these recordholders hold
beneficially for more than 500 shareholders.
DIVIDEND POLICY
The Company has not paid dividends on its common stock. The Board of
Directors intends to retain earnings for the foreseeable future for the
Company's business. There are no dividend restrictions in the Company's bank
line of credit.
ITEM 6: SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the
Company derived from the audited financial statements of the Company and should
be read in conjunction with Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and respective Notes thereto, included elsewhere in this report.
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DSP Technology Inc.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results Data (for the year):
- -------------------------------------
Net sales $22,038 $17,987 $15,538 $12,977 $9,180
Net income 1,646 914 1,277 874 250
Net income per common share (diluted) .68 .40 .55 .40 .12
Balance Sheet Data (at year end):
- --------------------------------
Working capital $ 8,173 $ 5,726 $ 5,472 $ 4,190 $3,644
Total assets 16,730 11,799 10,294 8,744 6,774
Long-term obligations -- -- -- -- --
Stockholders' equity 10,657 8,687 7,698 6,268 5,390
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, the percentages
that certain items in the Consolidated Statements of Income bear to net sales.
The table and subsequent discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 46 44 40
Research and development 11 12 14
Marketing, general and administrative 31 37 33
Operating income 12 7 13
Net income 7 5 8
</TABLE>
Net sales increased by 23% to $22,038,000 in fiscal 1998 and by 16% to
$17,987,000 in fiscal 1997. The increases in fiscal 1998 and fiscal 1997 were
primarily due to continued increase in demand for the Company's RedLine data
acquisition and control products and custom turnkey services.
Cost of sales as a percentage of net sales were 46%, 44%, and 40% in
fiscals 1998, 1997 and 1996, respectively. As anticipated, the increase in cost
of sales for fiscal 1998 is a result of product mix with lower margin turnkey
service-related revenues becoming a bigger part of the Company's business. The
increase in cost of sales in fiscal 1997 primarily reflects the expansion of the
service staff to increase the Company's capacity to build, install and
commission RedLine products. These new personnel were brought on-board ahead of
time to support expected growth in service-related revenues. Cost of sales for
the Company's core products (e.g., RedLine ADAPT, RedLine ACAP) remain at
historical 40% levels.
Research and development expenses remained in the $2.2 million to $2.3
million range for the three years reported. As a percentage of net sales,
however, research and development expenses decreased to 11% in fiscal 1998 from
12% and 14% in fiscals 1997 and 1996, respectively. The slight
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increase in fiscal 1998 expenses in absolute dollars over the previous year was
due to higher development costs associated with the new RedLine products that
were recently introduced at the SAE Show in Detroit, Michigan. The decrease in
expenses in fiscal 1997 was due primarily to the higher capitalization of
software development costs in fiscal 1997 which more than offset increased
personnel staffing.
Marketing, general and administrative ("MG&A") expenses increased by 3% to
$6,916,000 in fiscal 1998, and decreased as a percentage of sales to 31% in
fiscal 1998 from 37% in fiscal 1997. The numbers reflect the Company's success
this year in using its resources more efficiently. MG&A expenses increased by
30% to $6,708,000 (or 37% of sales) in 1997 from $5,145,000 (or 33% of net
sales) in fiscal 1996. The increase in fiscal 1997 resulted from additional
sales and marketing staff, costs associated with improvements in the Company's
information technology infrastructure, and higher internal sales commissions due
to higher shipments and sales bookings.
Net other income in fiscal 1998 increased to $225,000 after decreasing to
$123,000 in fiscal 1997 from $136,000 in fiscal 1996. On average, in 1998, the
Company had greater available cash to invest or to take advantage of vendor
early payment discounts this year than in fiscal 1997. The lower net other
income in fiscal 1997 reflects lower available cash invested in interest-bearing
accounts compared to fiscal 1996.
The effective tax rates were approximately 40% in fiscal 1998, 33% in
fiscal 1997, and 39% in fiscal 1996. The higher tax rates this year reflect
higher domestic income contribution this year compared to last year. Domestic
tax rates historically have been higher than the Company's foreign subsidiary's
tax rates. The lower tax rates in fiscal 1997 reflect the increased profit
contributions of the Company's UK subsidiary which benefited from a lower tax
rate. Other factors that may affect the tax rates include R&D tax credits,
differences in state tax rates, software capitalization levels and foreign
income contributions.
As a result of the factors discussed above, net income increased to
$1,646,000, or $.68 per diluted share in fiscal 1998 compared to $914,000, or
$.40 per diluted share in fiscal 1997 and to $1,277,000, or $.55 per diluted
share in fiscal 1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information contained in this Report, the
following are important factors that should be considered carefully in
evaluating the Company and its business.
New Products and Rapid Technological Change. The markets for the
--------------------------------------------
Company's products are characterized by continued demands for increasingly
sophisticated measurement and control systems and turnkey solutions. The
Company's success depends upon its ability to introduce new products and to
enhance its existing products with features that meet changing end user
requirements. There can be no assurance that new products or enhancements will
gain market acceptance or that the Company will be successful in developing
product enhancements or new products that respond to technological change,
evolving industry standards and changing customer requirements.
Development and Management of Systems Integration Services. At the
-----------------------------------------------------------
beginning of fiscal 1997, management began to expand the services side of our
transportation market business. These services include systems integration,
project management, commissioning and installation and, coupled with our RedLine
products, management believes these capabilities will allow us to pursue further
our growth in the transportation market by providing full-service to our
customers. These services provide us the capability to provide turnkey systems
where they are required. Hence, the Company has invested in project management,
custom manufacturing, system integration, installation and commissioning staff
11
<PAGE>
during the past two years. The Company believes that the successful marketing
and expansion of its transportation products will be increasingly dependent on
its ability to offer these services. However, the introduction of these
services raises several risks for the Company. Specifically, the success
depends on the time it takes for these personnel and future staff to come up to
speed on our products, customers and the services they will provide; ability to
compete for qualified personnel in various technical positions; market
acceptance of the services; timing of service revenues; and the ability to
manage customer projects profitably. The successful management of these
projects depends on the timely availability and quality of key products, the
availability of key personnel, the ability to integrate different products from
a variety of vendors effectively and the management of difficult scheduling and
delivery problems. Most of the Company's systems integration projects use fixed
price contracts. The pricing of fixed price contracts requires accurate cost
estimation in order to be profitable.
Potential Fluctuations in Quarterly Results. The Company's quarterly
-------------------------------------------
operating results may vary significantly, depending on a number of factors, some
of which could adversely affect the Company's operating results and the trading
price of the Company's Common Stock. These factors include timing of receipt of
system orders from and shipments to major customers; variation in the Company's
product mix and component costs; economic conditions prevailing within the
Company's geographic markets and in the world-wide automotive industry; market
acceptance of new products and services; the timing and levels of operating
expenditures; and exchange rate fluctuations. Any unfavorable change in these
or other factors could have a material adverse effect on the Company's operating
results for a particular quarter.
Quarterly sales depend in part on the volume and timing of orders received
during a quarter, which are difficult to forecast. Moreover, a disproportionate
percentage of the Company's net sales in any quarter are typically generated in
the last month of a quarter. As a result, a shortfall in net sales in any
quarter as compared to expectations may not be identifiable until the end of the
quarter. In addition, a significant portion of the Company's sales are derived
from a few customers. Hence, a decrease in the purchasing levels from one or
more of these customers could adversely impact operating results.
Dependence on International Sales. Part of the Company's revenue growth in
---------------------------------
the past few years was due to increases in the Company's international sales,
particularly in Western Europe and Asia. International sales accounted for
approximately 35%, 32%, and 18% of net sales in fiscals 1998, 1997 and 1996.
The Company's international sales are subject to the risks inherent in
international sales, including political and economic changes and disruptions,
various regulatory requirements, and tariffs or other barriers. In addition,
fluctuations in exchange rates may render the Company's products less
competitive relative to local product offerings or may cause foreign customers
to delay or decrease potential orders. One or more of these factors may have a
material effect on the Company's future international sales and, consequently,
on the Company's operating results.
Competition. The markets for the Company's products are intensely
-----------
competitive and subject to rapid technological change. Some of the Company's
competitors have significantly greater financial, technical, product
development, manufacturing or marketing resources than the Company. In addition,
some of these competitors have a larger installed base than the Company,
particularly outside the United States. The Company believes that its ability to
compete depends on a number of factors, including price, product functionality,
product quality and reliability, system integration capabilities, and post-sale
service and support. There can be no assurance that the Company will be able to
continue to compete successfully with respect to these factors. Competitors
could introduce additional products or add features to their existing products
that are superior to the Company's products or that achieve greater market
acceptance.
Because of the foregoing factors, as well as other factors affecting the
Company's operating
12
<PAGE>
results, past financial performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $8,145,000 at January 31, 1998 from $5,726,000
at January 31, 1997, while the current ratio decreased to 2.5 to 1.0 from 3.0 to
1.0. In fiscal 1998, cash and cash equivalents increased to $4,701,000 from
$1,323,000 due primarily to a $3,915,000 increase in operating activities and
lower capital expenditure levels. At January 31, 1998, the Company had a
$1,000,000 secured bank line of credit. Cash flows generated from operations in
fiscal 1998 include $1,128,000 received from customers as deposits on future
orders, the revenues of which will be recognized in future periods. As such,
cash flows from operations will be proportionately reduced in these periods.
The Company's management believes that cash and cash equivalents, funds
from operations and funds available under its bank line of credit will be
sufficient to satisfy its anticipated requirements in 1999. At January 31,
1998, the Company had no material outstanding commitments to purchase capital
equipment.
YEAR 2000 COMPLIANCE
The Company believes that its products are Year 2000 compliant. The Company
is currently reviewing its internal management information systems, billing,
outside payroll and other informational service functions to determine the
nature and extent of any Year 2000 issues related to such functions. In
addition, Year 2000 issues may also arise with respect to products furnished by
third-party suppliers that may result in unforseen costs or delays to the
Company and therefore may have a material adverse effect on the Company.
13
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DSP TECHNOLOGY INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statement of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Index to Supplementary Data
Auditors Report on Schedule 29
Valuation and Qualifying Accounts 30
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of DSP Technology Inc.:
We have audited the accompanying consolidated balance sheets of DSP
Technology Inc. and subsidiaries as of January 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DSP Technology
Inc. and subsidiaries as of January 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
March 6, 1998
15
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
January 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,701 $ 1,323
Accounts receivable, net of allowance for doubtful
accounts of $150 in 1998 and $50 in 1997 5,581 4,784
Inventories 2,682 2,015
Deferred income taxes 577 266
Prepaid expenses and other 216 192
------- -------
Total current assets 13,757 8,580
Property and equipment, net 1,341 1,540
Cost in excess of net assets of acquired business, net of
accumulated amortization of $641 in 1998 and $523
in 1997 244 362
Other assets 1,388 1,317
------- -------
$16,730 $11,799
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 687 $ 799
Accrued liabilities 3,755 1,849
Income taxes payable 1,142 206
------- -------
Total current liabilities 5,584 2,854
Deferred income taxes 489 258
Commitments -- --
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized;
none issued -- --
Common stock; 25,000,000 shares authorized, $.001 par value;
shares issued and outstanding: 2,264,860 in 1998 and
2,179,962 in 1997 3,301 2,988
Retained earnings 7,356 5,699
------- -------
Total stockholders' equity 10,657 8,687
------- -------
$16,730 $11,799
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended January 31,
----------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net sales $22,038 $17,987 $15,538
Cost of sales 10,227 7,842 6,187
------- ------- -------
Gross profit 11,811 10,145 9,351
Operating expenses:
Research and development 2,352 2,203 2,250
Marketing, general and administrative 6,916 6,708 5,145
------- ------- -------
9,268 8,911 7,395
------- ------- -------
Operating income 2,543 1,234 1,956
Other income, net 225 123 136
------- ------- -------
Income before income taxes 2,768 1,357 2,092
Income taxes 1,122 443 815
------- ------- -------
Net income $ 1,646 $ 914 $ 1,277
======= ======= =======
Net income per share:
Basic $ .74 $ .42 $ .60
======= ======= =======
Diluted $ .68 $ .40 $ .55
======= ======= =======
Weighted average shares used in computing
basic net income per share 2,211 2,168 2,130
======= ======= =======
Weighted average shares and equivalents used in computing
diluted net income per share 2,437 2,304 2,331
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common stock Total
---------------- Retained stockholders'
Shares Amount earnings equity
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 31, 1995 2,109 $2,767 $3,501 $ 6,268
Exercise of stock options 45 153 153
Net income 1,277 1,277
----- ------ ------ -------
Balance at January 31, 1996 2,154 $2,920 $4,778 $ 7,698
Exercise of stock options 26 68 68
Foreign exchange translations 7 7
Net income 914 914
----- ------ ------ -------
Balance at January 31, 1997 2,180 $2,988 $5,699 $ 8,687
Exercise of stock options 85 313 313
Foreign exchange translations 11 11
Net income 1,646 1,646
----- ------ ------ -------
Balance at January 31, 1998 2,265 $3,301 $7,356 $10,657
===== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
18
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended January 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income $1,646 $ 914 $ 1,277
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,107 847 741
Deferred income taxes (80) 217 --
Changes in operating assets and liabilities:
Accounts receivable (797) (1,482) (299)
Inventories (667) 180 (388)
Prepaid expenses and other (24) (149) (35)
Accounts payable (112) 340 (103)
Accrued liabilities 1,906 478 (28)
Income taxes payable 936 (416) 252
------ ------- -------
Net cash provided by operating activities 3,915 929 1,417
------ ------- -------
Cash flows from investing activities:
Purchases of property and equipment (407) (1,015) (521)
(Purchases) redemptions of certificates of deposit, net -- 199 (199)
Investment in software development (517) (630) (322)
Other 74 (44) (46)
------ ------- -------
Net cash used in investing activities (850) (1,490) (1,088)
------ ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 313 68 153
------ ------- -------
Increase (decrease) in cash and cash equivalents 3,378 (493) 482
Cash and cash equivalents at beginning of period 1,323 1,816 1,334
------ ------- -------
Cash and cash equivalents at end of period $4,701 $ 1,323 $ 1,816
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during year for income taxes $ 23 $ 639 $ 433
====== ======= =======
Cash paid during year for interest $ 22 $ 22 $ 12
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. The Company is engaged in a single business consisting of the
design, manufacture, integration, marketing and maintenance of high-speed,
computer-automated measurement and control systems for the worldwide automotive
powertrain, vehicle safety and advanced research and development markets. The
Company's principal markets are in the United States, United Kingdom, Western
Europe, and the Far East.
The Company's fiscal year ends on the Sunday nearest to January 31.
However, for financial statement purposes, each fiscal year is presented as if
it ended on January 31.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out) or market.
REVENUE RECOGNITION. The Company recognizes revenue primarily upon
shipment. The Company's systems integration projects use fixed price contracts
and revenue is recognized as it is earned pursuant to contract terms.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets (three to seven years) or the lease
term if shorter.
INTANGIBLE ASSETS. Cost in excess of net assets (`goodwill') is amortized
on a straight line basis over 25 years. The Company evaluates the realizability
of goodwill by comparing the carrying value to the undiscounted future cash
flows of the related assets. Purchased technology, is included in other assets
and amortized over five years. Effective February 1, 1996, impairments, if any,
are recognized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to Be Disposed Of," if applicable.
RESEARCH AND DEVELOPMENT. Expenditures for research and development are
expensed as incurred, except for certain costs incurred in developing computer
software to be sold, which have been capitalized in accordance with the
provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Such costs are capitalized once
technological feasibility of the product has been established. Capitalized
software costs aggregated $517,000, $630,000 and $322,000 for the years ended
January 31, 1998, 1997 and 1996, respectively. Capitalized software is included
in other assets and is being amortized over the life of the product on a
straight-line basis. The Company evaluates the realizability of capitalized
software on an ongoing basis relying on a number of factors including operating
results, business plans, market trends and product development cycles.
INCOME TAXES. The Company accounts for income taxes using an asset and
liability approach for financial accounting and reporting purposes.
20
<PAGE>
NET INCOME PER SHARE. The Company adopted SFAS No. 128, "Earnings per
Share," in the fourth quarter of fiscal 1998. Under SFAS No. 128, the Company
presents two earnings per share ("EPS") amounts. Basic EPS is calculated based
on net income available to common shareholders and the weighted-average number
of shares outstanding during the reported period. Diluted EPS includes
additional dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options outstanding. All prior period EPS amounts have
been restated to conform to the provisions of the statement.
<TABLE>
<CAPTION>
Year ended January 31,
------------------------
1998 1997 1996
------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Number of shares on which basic EPS is calculated:
Average outstanding during the year 2,211 2,168 2,130
Add: Incremental shares under stock option plans 226 136 201
------ ------ ------
Number of shares on which diluted EPS is calculated 2,437 2,304 2,331
====== ====== ======
Net income $1,646 $ 914 $1,277
====== ====== ======
Basic EPS $ .74 $ .42 $ .60
Diluted EPS $ .68 $ .40 $ .55
</TABLE>
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash and
cash equivalents. These instruments are recorded at their carrying values which
approximate fair values because of their short maturity.
USING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS. Certain reclassifications have been made in the fiscal
1997 financial statements to conform with the fiscal 1998 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS. In fiscal 1999, the Company will
implement two accounting standards issued by the Financial Accounting Standards
Board in June 1997. SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
will have no effect on the Company's financial position or results of operations
as they require only changes in or additions to current disclosures.
During 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition on software
transactions and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is taking steps to meet the
requirements of the SOP and expects that it will not have a material effect on
the financial position or results of operations of the Company.
21
<PAGE>
<TABLE>
<CAPTION>
NOTE B - INVENTORIES
Inventories consist of:
January 31,
-----------
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Raw materials $ 1,695 $ 1,221
Work-in-process 637 476
Finished goods 350 318
------- -------
$ 2,682 $ 2,015
======= =======
</TABLE>
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
January 31,
-----------
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Machinery and equipment $ 734 $ 717
Office furniture 1,914 1,717
Computer equipment 2,263 2,070
------- -------
4,911 4,504
Accumulated depreciation and
amortization (3,570) (2,964)
------- -------
$ 1,341 $ 1,540
======= =======
</TABLE>
NOTE D - Other Assets
Other assets consist of:
<TABLE>
<CAPTION>
January 31,
-----------
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Capitalized software, net of accumulated amortization of
$849 in 1998 and $544 in 1997 $ 1,199 $ 987
Purchased technology, net of accumulated amortization
of $264 in1998 and $190 in 1997 104 178
Other 85 152
------- -------
$ 1,388 $ 1,317
======= =======
</TABLE>
NOTE E - BANK LINE OF CREDIT
At January 31, 1998, the Company has a $1,000,000 line of credit with a
bank renewable annually in May. Under the provisions of the line of credit
agreement, the Company may borrow amounts up to $1,000,000 at the bank's prime
rate of interest (8.50% at January 31, 1998). Borrowings are collaterized by
all unencumbered assets of the Company and the Company must maintain certain
financial ratios and be profitable on an annual basis. There was no outstanding
balance at January 31, 1998 or 1997. Funds were borrowed at a weighted average
interest rate of 8.63% and 8.15% during 1998 and 1997, respectively.
22
<PAGE>
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
January 31,
-----------
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Employee compensation and benefits $ 755 $ 605
Commissions 112 105
Customer deposits 1,969 841
Other 919 298
------ ------
$3,755 $1,849
====== ======
</TABLE>
NOTE G - INCOME TAXES
Earnings before taxes consists of:
<TABLE>
<CAPTION>
Year ended January 31,
----------------------
1998 1997 1996
---- ---- ----
(Thousands)
<S> <C> <C> <C>
U.S. operations $2,269 $ 962 $1,883
Foreign operations 499 395 209
------ ------ ------
$2,768 $1,357 $2,092
====== ====== ======
</TABLE>
Income tax expense consists of:
<TABLE>
<CAPTION>
Year ended January 31,
----------------------
1998 1997 1996
---- ---- ----
(Thousands)
<S> <C> <C> <C>
Currently payable:
Federal income taxes $ 800 $ 67 $ 575
State income taxes 227 43 182
Foreign taxes 175 116 58
------ ------ ------
1,202 226 815
Deferred:
Federal income taxes (71) 184 --
State income taxes (9) 33 --
------ ------ ------
(80) 217 --
------ ------ ------
$1,122 $ 443 $ 815
====== ====== ======
</TABLE>
The difference between income tax rates computed by applying the Federal
statutory income tax rate to income before income taxes and the actual effective
tax rate is reconciled as follows:
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Goodwill .5 1.1 .7
State income taxes 5.4 2.7 5.7
Research and development credits (1.8) (3.3) (1.8)
Benefit of foreign sales corporation (1.0) (3.8) (1.6)
Other 2.4 2.0 1.9
---- ---- ----
Effective tax rate 40.5% 32.7% 38.9%
==== ==== ====
</TABLE>
At January 31, 1998 and 1997, respectively, the major components of
deferred tax assets are:
23
<PAGE>
inventory reserves and cost capitalization - $ 284,000 and $ 102,000; receivable
and warranty reserves - $ 105,000 and $ 35,000; and accrued compensation-$
126,000 and $90,000. The major item in non-current deferred tax liabilities is
research and development expenses of $481,000 at January 31, 1998 and $335,000
at January 31, 1997.
NOTE H - STOCK OPTION PLANS
The Company has two stock option plans, the 1991 Option Plan ("1991 Option
Plan") and the 1991 Directors Option Plan ("1991 Directors Option Plan")
accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The 1991 Option Plan provides for the granting of
incentive and non-statutory options to employees (including officers and
directors who are employees). The 1991 Directors Option Plan provides for the
granting of nonqualifed stock options to directors of the Company who are not
employees of the Company. The options, which have terms of five or ten years
when issued, typically vest over three years. The exercise price of each option
equals the market price of the Company's stock on the date of grant or, in the
case of those holding more than 10% of the Company's outstanding common stock,
110% of the market price. Accordingly, no compensation cost has been recognized
for grants from either plan. A total of 1,018,327 shares of the Company's
common stock have been reserved for issuance under the 1991 Option Plan, of
which 214,365 shares are available for grant at January 31, 1998. The 1991
Directors Option Plan has 75,000 common stock shares reserved, of which 12,000
shares are available for grant at January 31, 1998.
Had compensation costs for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below. Pro forma results may not be indicative of pro forma results in future
periods because the pro forma amounts do not include pro forma compensation cost
for options granted prior to February 1, 1995.
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------
1998 1997 1996
------- ----- -------
<S> <C> <C> <C>
Net income (In thousands):
As reported $1,646 $ 914 $1,277
Pro forma $1,310 $ 678 $1,158
Net income per share (diluted):
As reported $ .68 $ .40 $ .55
Pro forma $ .55 $ .30 $ .51
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model.
24
<PAGE>
A summary of the status of the various stock option plans as of January 31,
and changes during the years ending on those dates is presented
below.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ---------- ------ --------- ------ ----------
(In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 602 $4.47 555 $4.29 452 $3.48
Granted 103 6.09 95 5.11 165 6.36
Exercised (85) 3.69 (25) 2.67 (45) 3.40
Forfeited (20) 5.90 (23) 4.81 (17) 5.46
--- --- ---
Outstanding at end of year 600 4.81 602 4.47 555 4.29
Weighted-average fair value of
options granted during the year $4.27 $3.18 $3.99
Expected term (years) 7 6 6
Volatility 67.0% 60.0% 60.0%
Risk free interest rate 6.3% 6.8% 6.5%
Dividend yield -- -- --
</TABLE>
The following information applies to options outstanding at January 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 1/31/98 Life Price at 1/31/98 Price
- ----------------------------- ------------ ----------- --------- ------------ ---------
(In thousands) (In years) (In thousands)
<S> <C> <C> <C> <C> <C>
$0.875 - 1.250 37 2 $1.23 37 $1.23
2.625 - 3.875 156 6 3.21 156 3.21
4.000 - 6.000 210 8 5.16 112 5.03
6.125 - 9.375 197 9 6.36 92 6.33
</TABLE>
NOTE I - COMMITMENTS
Leases. The Company leases its facilities in Fremont, California and Ann
Arbor, Michigan under operating leases which expire in October 1998 and January
2000, respectively. Rental expenses were $350,000 in 1998, $303,000 in 1997, and
$286,000 in 1996.
Future minimum rental commitments for all leases with initial non-
cancelable lease terms of more than one year are $310,000 in 1999 and $141,000
in 2000.
NOTE J - MAJOR CUSTOMERS AND FOREIGN OPERATIONS
One customer accounted for 21%, 18% and 11% of net sales for 1998, 1997 and
1996, respectively. One other customer accounted for 14% of net sales in 1998.
25
<PAGE>
<TABLE>
<CAPTION>
Foreign sales were as follows:
Year ended January 31,
-------------------------------
1998 1997 1996
----------- -------- ------
(In thousands)
<S> <C> <C> <C>
United Kingdom ("UK") $ 2,636 $2,904 $1,120
Asia/Pacific Rim 3,496 1,476 1,322
Western Europe, excluding UK 1,457 1,352 367
Other countries 152 28 47
------- -------- ------
$ 7,741 $5,760 $2,856
======= ======== ======
</TABLE>
A summary of the Company's operations by geographic area is presented
below:
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Net Sales
United States $20,514 $16,311
United Kingdom 2,636 2,904
Eliminations (1,112) (1,228)
Operating Margin
United States $ 2,022 $ 885
United Kingdom 501 395
Eliminations 20 (46)
Identifiable Assets
United States $15,229 $10,864
United Kingdom 1,770 1,391
Eliminations (269) (456)
</TABLE>
NOTE K - EMPLOYEE BENEFIT PLAN
The Company has established the DSP Technology Inc. 401(k) Profit Sharing
Plan covering substantially all employees of the Company who have at least six
months of service and are at least twenty-one years of age. The amount
participants may voluntarily contribute in any year is established by law and
subject to cost of living adjustments. The Company has the option to make
matching contributions on a year to year basis. Contributions to the plan by
the Company in 1998, 1997, and 1996 aggregated $85,000, $69,000, and $46,000,
respectively.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the Registrant's directors contained in
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under
the caption, "ELECTION OF DIRECTORS," is hereby incorporated by reference.
Information with respect to executive officers of the Registrant is contained in
26
<PAGE>
Part I of this Report.
ITEM 11: EXECUTIVE COMPENSATION
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER
MATTERS" is hereby incorporated by reference.
ITEM 12: SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "GENERAL INFORMATION---Stock
Ownership of Certain Beneficial Owners and Management" is hereby incorporated by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER
MATTERS---Certain Relationship and Related Transactions" is hereby incorporated
by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The financial statements required in accordance with this Item have been
filed as part of this Report under Part II, Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule has been filed as part of this
Report:
<TABLE>
<CAPTION>
Schedule Description Page No.
- -------- ----------- --------
<S> <C> <C>
Auditors' Report on Schedule 29
II Valuation and Qualifying Accounts 30
</TABLE>
Financial statement schedules not listed above have been omitted because
the information required to be set forth therein is inapplicable or is shown in
the Consolidated Financial Statements or Notes thereto.
27
<PAGE>
(a)(3) Exhibits
The following exhibits are filed or incorporated by reference as part of
this Report:
Ex. No. Description
- ------- ---------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Restated By-laws (1)
10.1 Profit Sharing Plan Employees' Retirement Trust (2) **
10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) **
10.3 1991 Directors Stock Option Plan, as amended (4) **
10.4 Form of 1991 Directors Stock Option Plan Agreement (3) **
10.5 1991 Stock Option Plan , as amended (4) **
10.6 Form of 1991 Stock Option Plan Agreement (3) **
10.7 Lease Agreement dated July 15, 1992 between Varsity Drive
Company Inc. and DSP Technology Inc. (4)
10.8 Lease Agreement dated August 2, 1993 between Minos Management
Company and DSP Technology Inc.(5)
10.9 Strategic Alliance Agreement By and Between FEV
Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated
February 26, 1995. +
10.10 Form of Indemnity Agreement
21.1 Subsidiaries of Registrant (5)
23.1 Consent of independent Certified Public Accountants (to
incorporate report on consolidated financial statements into
Company's Form S-8 Registration Statements)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule
___________________________________
** Compensatory plan or arrangement.____________
+ Confidential treatment has been requested for certain portions of this
exhibit.
(1) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18,
1997.
(2) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987.
(3) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992.
(4) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993.
(5) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994.
(6) Included on page 33 to this Report.
(b) REPORTS ON FORM 8-K
None.
28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of DSP Technology Inc.:
In connection with our audits of the consolidated financial statements of DSP
Technology Inc. and subsidiary companies referred to in our report dated March
6, 1998, which is included in Part II of this form, we have also audited
Schedule II for each of the three years in the period ended January 31, 1998. In
our opinion, this schedule presents fairly the information required to be set
forth therein.
San Jose, California
March 6, 1998
29
<PAGE>
Schedule II
DSP TECHNOLOGY Inc.
Valuation and Qualifying Accounts
(Thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended:
January 31, 1996.............. 50 0 0 (1) 50
January 31, 1997.............. 50 0 0 (1) 50
January 31, 1998.............. 50 100 0 (1) 150
Reserve for inventory obsolescence:
Year ended:
January 31, 1996.............. 244 71 (24) 291
January 31, 1997.............. 291 0 (133) 158
January 31, 1998.............. 158 309 0 467
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 21st day of April
1998.
DSP TECHNOLOGY INC.
By: /s/ Jose M. Millares
----------------------------------
JOSE M. MILLARES
Chief Financial Officer
31
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints F. Gil Troutman, Jr. and Jose M. Millares, Jr.,
or either of them, his attorneys-in-fact, each with power of substitution, for
him in any and all capacities, to sign this Annual Report on Form 10-K, and any
amendments thereto, and to file the same, with Exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Howard O. Painter, Jr. Chairman of the Board April 15, 1998
- --------------------------
Howard O. Painter, Jr.
/s/ F. Gil Troutman, Jr. Director, Chief Executive Officer April 15, 1998
- ------------------------ and President (Principal
F. Gil Troutman, Jr. Executive Officer)
/s/ Jose M. Millares Vice President, Finance April 15, 1998
- -------------------- (Principal Financial
Jose M. Millares and Accounting Officer
and Secretary)
/s/ J. Scott Kamsler Director April 15, 1998
- --------------------
J. Scott Kamsler
/s/ Michael A. Ford Director April 15, 1998
- -------------------
Michael A. Ford
32
<PAGE>
EXHIBIT INDEX
Ex. No. Description
- ------- ---------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Restated By-laws (1)
10.1 Profit Sharing Plan Employees' Retirement Trust (2) **
10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) **
10.3 1991 Directors Stock Option Plan, as amended (4) **
10.4 Form of 1991 Directors Stock Option Plan Agreement (3) **
10.5 1991 Stock Option Plan, as amended (4) **
10.6 Form of 1991 Stock Option Plan Agreement (3) **
10.7 Lease Agreement dated July 15, 1992 between Varsity Drive
Company Inc. and DSP Technology Inc. (4)
10.8 Lease Agreement dated August 2, 1993 between Minos Management
Company and DSP Technology Inc.(5)
10.9 Strategic Alliance Agreement By and Between FEV
Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated
February 26, 1995. +
10.10 Form of Indemnity Agreement
21.1 Subsidiaries of Registrant (5)
23.1 Consent of independent Certified Public Accountants (to
incorporate report on consolidated financial statements into
Company's Form S-8 Registration Statements)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule
___________________________________
** Compensatory plan or arrangement.
+ Confidential treatment has been requested for certain portions of this
exhibit.
(1) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18,
1997.
(2) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987.
(3) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992.
(4) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993.
(5) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994.
(6) Included on page 33 to this Report.
(b) REPORTS ON FORM 8-K
None.
33
<PAGE>
EXHIBIT 10.9
STRATEGIC ALLIANCE AGREEMENT
BY AND BETWEEN
FEV MOTORENTECHNIK GMBH & CO. KG
AND
DSP TECHNOLOGY INC.
[*] = 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.
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
This Agreement is entered into by and between FEV Motorentechnik GmbH & Co.
KG ("FEV") with a place of business at Neuenhofstrasse 181, D-52078 Aachen and
DSP Technology Inc. ("DSPT") with a place of business at 48500 Kato Road,
Fremont, California 94538. The effective date of this Agreement shall be
February 26, 1995 ("Effective Date").
WHEREAS, FEV and DSPT, providing complementary products, desire to combine
resources to survive the strong competition in the field of test and
instrumentation products for the Transportation Industry.
NOW THEREFORE, the Parties agree to enter into a strategic alliance to
achieve the aforementioned goals and hereby agree as follows:
1. Definitions. This Agreement and the definitions herein are limited to Test
-----------
and Instrumentation Products, unless otherwise explicitly stated.
1.1 Continuous Product Improvement shall mean minor changes to software or
------------------------------
hardware such as bug fixes, hardware ECOs (internal engineering change orders)
without adding new functionality (features and/or functions) to a Product or
PreExisting Product. These do not require a Product Appendix.
1.2 Competitor shall mean any person or legal entity and its subsidiaries
----------
which develops and/or markets one or more products or services for the
Transportation Industry which are the same or substantially similar to those of
DSPT or FEV, respectively. Competitors of each Party shall be set forth under
the other Party's name (as Target) on the Competitor List, which shall be
initially delivered and executed by both Parties upon execution of this
Agreement and which may be modified from time to time by mutual agreement of the
Management Team, as evidenced by each Party executing such revised Competitor
List. Neither Party shall unreasonably withhold approval of modifications to the
other Party's Competitor List to add an entity as a Competitor of a Party in
cases of evident and substantial competition by an entity with such Party.
1.3 Developers shall mean employees, agents or contractors of either Party.
----------
1.4 Documentation shall mean any and all of the documents and other
-------------
materials, prepared in accordance with industry standards and practices,
relating to the Independent Technology or Joint Technology necessary to
manufacture the Products, PreExisting Products or Enhanced Products.
1.5 Enhancements shall mean any additions to functionality (new features
------------
and/or functions), specifically designed for use in and primarily sold to the
Transportation Industry, to any Product, PreExisting Product or Enhanced Product
hardware and/or software, which is successfully developed pursuant to a Product
Appendix.
1.5.1 Customer Proprietary Enhancement shall mean a customer
--------------------------------
requested addition or change in functionality (features or functions) in
Products, PreExisting Products or Enhanced Products, in either hardware or
software, that is proprietary to that customer, and such customer has requested
in writing not to share such proprietary information with the other Party. While
these do not require a Product Appendix, to the extent permissible, the
developing Party must inform the other Party in writing that such Customer
Proprietary Enhancements have been requested.
1.5.2 Localized Enhancement shall mean an Enhancement with
---------------------
specialized functions for a particular market or customer where such Enhancement
is not proprietary to such customer. This requires a Product Appendix.
<PAGE>
1.6 Enhanced Product shall mean a PreExisting Product or New Product
----------------
with one or more Enhancements.
1.7 Free Products shall mean [*]. All Free Products in existence as
-------------
of the Effective Date shall be set forth on the "Free Products List," which
shall be initially delivered and executed by the Management Team upon execution
of this Agreement. The Free Products List may be modified from time to time by
mutual agreement of both Parties, as evidenced by the Management Team executing
such revised Free Products List.
1.8 GPM (Guidelines for Product Management) shall mean guidelines
--------------------------------------
which [*].
1.9 Group Managers shall mean the highest ranking manager of each
--------------
Party who is directly responsible for that Party's integrated Test and
Instrumentation Products for the Transportation Industry.
1.10 Independent Technology shall mean Technology solely owned by
----------------------
either Party which is not publicly available and which is in existence and has
been incorporated into a PreExisting Product or a Free Product or any other
product solely owned by either Party as of the date it is contributed to a
Product Appendix pursuant to Paragraph 12.2 ("Technology Exchange").
1.11 Intellectual Property Rights shall mean all patents and other
----------------------------
patent rights (such as continuations, continuations in part, and reissues),
utility models, copyrights and mask work rights, including without limitation,
all applications and registrations with respect thereto, rights in trade
secrets, know-how, trademarks and trade names and all other intellectual
property rights which are held by one or both Parties in any jurisdiction.
1.12 Invention shall mean any Invention or discovery which is or may
---------
be patentable or otherwise protectable under Title 35 of the United States Code
or Section 1 et seq. of the German Patentgesetz and Gebrauchsmustergesetz (the
"Patent Laws") as applicable. For the purposes of this Agreement, an invention
or discovery shall be deemed to be an Invention when a Party determines that it
is patentable under the Patent Laws of that Party's nationality, or the Parties
mutually determine that it is patentable under either of the Patent Laws.
1.13 Joint Inventions shall mean those Inventions that [*].
----------------
[*] = 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
<PAGE>
1.14 Joint Technology shall mean [*].
----------------
1.15 Management Team shall mean Geschftsfuhrender Gesellschafter of
---------------
FEV and CEO of DSPT.
1.16 Manufacturing Cost shall mean [*].
------------------
1.17 New Product shall mean [*]. The New Products include but are not
-----------
limited to those Products listed on the New Products List initially delivered
and executed by both Parties upon execution of this Agreement.
1.18 Net Realized Revenue shall mean the price paid by the customer
--------------------
for Products, PreExisting Products and Enhanced Products, and documented in the
invoice, [*].
1.19 Parallel Product shall mean a product, [*].
----------------
1.20 Party shall mean either FEV or DSPT, and Parties shall mean FEV
-----
and DSPT.
1.21 PreExisting Product shall mean [*].
-------------------
1.22 Patents shall mean all patents owned solely by a Party, or
-------
jointly by the Parties.
1.23 Product(s) shall mean:
----------
(i) Enhancements
(ii) Localized Enhancements
(iii) New Products
[*] = 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.
3
<PAGE>
1.24 Product Appendix shall mean [*]. The Product Appendix Form shall
----------------
be developed by the Parties and delivered upon execution of this Agreement, and
may be modified from time to time by mutual agreement of both Parties. Each
Product Appendix shall incorporate by reference the terms and conditions of this
Agreement. Draft Product Appendices for those products on the New Product List
and for certain Enhancements and PreExisting Products shall be initially
delivered and executed by the Parties upon execution of this Agreement and shall
be modified and completed after the Effective Date, as evidenced by the mutual
execution of such Product Appendices by the Parties.
1.25 Product Development shall mean the development of Enhancements
-------------------
and New Products, in addition to the Continuous Product Improvement of
PreExisting Products, Enhancements, and New Products.
1.26 Product Leader shall mean the Party who is responsible for
--------------
complete product management consistent with the terms of the Product Appendix.
The initial Product Leaders are set forth on the Product Leader List initially
delivered and executed by both Parties upon execution of this Agreement.
1.27 Product Managers shall mean those managers within FEV and DSPT
----------------
that are responsible for the product management of Products, PreExisting
Products and Enhanced Products and for resolving in good faith by unanimous
agreement any issues relating to their responsibilities. One Product Manager
shall be appointed by the Group Manager for each Party for each Product Appendix
in accordance with Paragraph 4.7 ("Management").
1.28 Product Share Tables shall mean tables included in each Product
--------------------
Appendix defining for each Product, PreExisting Product and Enhanced Product
[*].
1.29 Proprietary Information shall mean, except as otherwise
-----------------------
provided in this Agreement, all information marked or designated by a Party as
"Proprietary" or "Confidential;" and all information, whether or not in written
form, which the receiving Party knows or has reason to know is confidential
information of the other Party. As used herein, Proprietary Information
includes, but is not limited to, discoveries, ideas, designs, drawings,
specifications, techniques, models, data, documentation, customer lists,
marketing plans, and financial and technical information.
1.30 Rest of World ("ROW") shall mean [*].
---------------------
1.31 Technology shall mean proprietary expertise, algorithms,
----------
Inventions, trade secrets, ideas, know-how, Patents, copyrightable works, data,
designs, processes, specifications, fabrication techniques or parameters or
procedures, packaging techniques, recipes, device structures, chemical
constituents and formulations, patent applications, and other information owned
solely or jointly by the Parties relating to products for the Transportation
Industry, including their design, development, manufacture, fabrication, testing
or servicing. Technology shall not include Third Party Technology.
[*] = 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.
4
<PAGE>
1.32 Territory shall mean such countries [*] as set forth on the
---------
Territory List to be initially delivered and executed by the Parties upon
execution of this Agreement. The Territory List may be modified from time to
time by mutual agreement of the Management Team, as evidenced by each Party
executing such revised Territory List.
1.33 Test and Instrumentation Product shall mean any tool or piece
--------------------------------
of equipment for measurement and control in the field of research, development
and testing for the Transportation Industry.
1.34 Third Party Technology shall mean any technology jointly owned
----------------------
by any Party with any third party or licensed by any Party from any third party.
1.35 Transportation Industry shall mean the automotive industry,
-----------------------
off-road equipment manufacturers, marine engine industry, supplier industry,
fuels and lubricant industry, automotive engineering development companies,
companies developing, manufacturing or selling combustion engines for power
generation, and other combustion engine-related companies not specified.
1.36 Transfer of Control shall mean:
-------------------
1.36.1 in the case of DSPT:
(a) [*].
(b) [*].
1.36.2 in the case of FEV:
(a) [*].
(b) [*].
(c) [*].
(i) [*].
[*] = 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.
5
<PAGE>
[*].
(ii) [*].
(iii) [*].
1.36.3 [*].
2. Overview of the Strategic Alliance.
----------------------------------
2.1 Goals. The Parties intend to [*], which can effectively compete in
-----
the Transportation Industry. Consistent with the mission, goals and business
plan of the strategic alliance as approved and revised by the Management Team
from time to time, the Parties will:
2.1.1 [*].
2.1.2 [*].
2.2 Proposal of New Product and Enhancements. The Parties agree that in
----------------------------------------
order to strengthen the strategic nature of this alliance, neither Party will
develop or market [*].
2.3 Parallel Products. [*].
-----------------
2.4 [*] Distributorship.
--------------------
2.4.1 DSPT hereby appoints FEV [*] distributor within FEV's Territory
of DSPT's PreExisting Products. FEV shall not promote or distribute any products
which are directly competitive to such PreExisting Products without the prior
written approval of DSPT.
FEV hereby appoints DSPT [*] distributor within DSPT's Territory of FEV's
PreExisting Products. DSPT shall not promote or distribute any products which
are directly competitive to such PreExisting Products without the prior written
approval of FEV.
Nothing in this Agreement, however, shall prevent either Party from
accepting unsolicited orders for its PreExisting Products from outside of its
respective Territory.
[*] = 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.
6
<PAGE>
2.4.2 Effective upon the distribution by DSPT of more than [*], DSPT
hereby appoints FEV as the [*] of DSPT. DSPT shall provide FEV with notice
immediately upon the distribution of the [*]. FEV may decline such appointment
[*] by notifying DSPT in writing, and DSPT shall then be [*]. FEV shall not
promote or distribute any products which are directly competitive to the Free
[*] without the prior written approval of DSPT.
Effective upon the distribution by FEV of more than three [*], FEV hereby
appoints DSPT as the [*] of FEV. FEV shall provide DSPT with notice immediately
upon the distribution of the [*]. DSPT may decline such appointment [*] by
notifying FEV in writing, and FEV shall then be free to [*]. FEV shall not
promote or distribute any products which are directly competitive to the [*]
without the prior written approval of FEV.
Nothing in this Agreement, however, shall prevent either Party from
accepting unsolicited orders for its [*] from outside of its respective
Territory.
2.4.3 The Parties shall mutually agree as necessary to the further
terms and conditions of the [*] distributorship arrangements set forth in
Paragraphs 2.4.1 and 2.4.2.
3. Product Appendix Procedure.
--------------------------
3.1 Either Party may [*] and submitting [*] it to the [*] for written
approval prior to completion of [*].
3.2 The Parties agree that the development of a [*] and that the [*]
of the [*] by both Parties will be a [*]. However, major changes in the [*] and
manufacturing site have to be [*]. Other changes may be [*]. [*] will be [*] by
the Management Team, so that the Product Share Tables are consistent with the
work performed.
3.3 For the Product Appendix procedure the following general rules
will apply:
3.3.1 A Product Appendix is not required for Continuous Product
Improvements. However, the other Party needs to be kept completely informed of
such improvements, as set forth in the GPM and in Paragraph 12.1 ("Technology
Exchange").
3.3.2 One Product Appendix is required for each (i) PreExisting
Product to be distributed pursuant to Paragraph 2.4 ("[*] Distributorship"),
(ii) Product, and (iii) Enhanced Product.
[*] = 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.
7
<PAGE>
3.4 If a Party proposes that the Parties develop a New Product by
means of a draft Product Appendix and the other Party declines (in writing or by
failing to take action for [*] to participate in the development, the proposing
Party is thereafter entitled to [*], subject to the provisions of Paragraphs
3.4.1, 3.4.2 and 3.4.3. If a Party proposes that the Parties develop
Enhancements by means of a draft Product Appendix and the other Party declines,
(in writing, or by failing to take action for [*], to participate in the
development, the other Party is thereafter entitled to [*]. However, the
declining Party reserves the right to [*]. The proposing Party shall notify the
declining Party, immediately and in writing, of the [*].
3.4.1 GPM P-1 Phase. If a Party initially elects not to
-------------
participate in a Product Appendix and the other Party proceeds with such Product
Development, the declining Party may [*].
3.4.2 GPM P-1 Phase Completion. If a Party initially elects
------------------------
not to participate in a Product Appendix, the declining Party may [*].
3.4.3 Post GPM P-1 Phase. If a Party initially elects not to
------------------
participate in a Product Appendix and the other Party proceeds with such Product
Development and distribution, the declining Party may [*].
3.5 Notwithstanding the foregoing, neither Party shall be permitted to
submit a draft Product Appendix for any Enhancement or New Product, or develop a
product without such Product Appendix, which the Proposing Party has reason to
know (a) [*], and (b) [*]. Such consent is not to be unreasonably withheld or
delayed. Moreover, neither Party shall submit a draft Product Appendix for any
Enhancement or series of Enhancements or for Localized Enhancements, or develop
such enhancements without such Product Appendix, which enhancements the
Proposing Party knows are unnecessary, or impractical, or unmarketable, or not
cost-effective. Submission of Product Appendices for Enhancements or development
of enhancements [*].
[*] = 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.
8
<PAGE>
[*].
4. Management.
----------
4.1 The management structure will consist of the Management Team,
Group Managers and Product Managers.
4.2 The Management Team will meet a minimum of four times per year at
[*] times and locations (or telephonically) to:
4.2.1 exchange information as defined in a Sample Agenda which
shall be initially delivered and executed by both Parties upon execution of this
Agreement and which may be modified from time to time [*] of the Management Team
of both Parties.
4.2.2 FEV, its Geschaftsfuhrer and its Group Manager and other
FEV affiliates and any other persons with access to this information will each
be governed by DSPT's insider trading compliance policy as set forth in DSPT's
insider trading policy, which shall be delivered upon execution of this
Agreement, while this Agreement remains in effect. Each Party shall restrict
access to the information provided under Paragraph 4.2.1 to the Parties listed
or to others in the respective organizations with a "need to know."
4.3 The Management Team will approve the distribution and marketing
approach for the Products. The Management Team will also approve the designation
of any joint ventures or distributors as necessary for distribution and
marketing of the Products.
4.4 Either FEV or DSPT will be designated in the Product Appendix as
being the Product Leader, as approved by the Management Team.
4.5 [*].
4.6 DSPT [*] FEV Test Technology Group [*]. Also, FEV [*] DSPT
Transportation Group [*]. [*].
4.7 The Product Managers will have primary responsibility for the
working level day-to-day product management of Products developed under the
terms of a Product Appendix and for resolving in good faith by unanimous
agreement any issues relating to their responsibilities. Each Group Manager
shall appoint a Product Manager for each New Product or Enhancement to be
developed. The two Product Managers designated for each Product Appendix may
vary from appendix to appendix. If the Group Manager fails to appoint such
Party's Product Manager for any project, the Group Manager shall serve in such
role. Such Product Managers shall initially be described in the applicable
Product Appendix. Either Party
[*] = 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.
9
<PAGE>
may change the identity of such Party's Product Manager at any time upon prior
written notice to the other Party, but the Parties agree to exercise reasonable
restraint in exercising this right so that there is a reasonable continuity of
supervision for each development project.
4.8 Each Product Manager shall be responsible for keeping the other
Party's Product Manager informed of the progress of the project and any problems
encountered with respect to the research and development work being performed in
accordance with the applicable Product Appendix and for responding to any
reasonable inquiry made by the other Product Manager regarding any such
development work. Each Party has to submit all of the required information as
defined in the GPM and Paragraph 12.1 ("Technology Exchange"), and handle the
disclosure and receipt of information in accordance with Paragraph 19.7
("Proprietary Information; Nondisclosure") of this Agreement.
5. Resolution of Technical and Business Issues.
-------------------------------------------
5.1 [*].
5.2 [*].
5.3 [*].
6. Contributions of the Parties.
----------------------------
6.1 DSPT and FEV will (i) share in contributing engineering personnel
and equipment necessary to carry out each Party's respective portion of the
proposed research and development, (ii) share in contributing the use of
facilities, and (iii) share in providing other resources to the development
effort. Where practicable, the Parties will bear expenses in proportion to their
respective portions of the proposed research and development, with final
decisions on sharing of expenses and resources to be made by the Group Managers
by mutual agreement.
6.2 Both Parties will [*].
6.3 Both Parties will [*].
[*] = 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.
10
<PAGE>
6.4 Both Parties will, as practicable, in a reasonably timely manner,
[*], including, but not limited to [*].
6.5 Both Parties will be [*].
6.6 Both Parties will, in general, [*]. [*] will be monitored and
compared to the development plan in the Product Appendix and the GPM during the
development of the Product or Enhanced Product. [*].
6.7 The Party who manufactures the Products, Enhanced Products and
PreExisting Products will be [*]. The purpose of [*] is to [*] on the [*] so
that over time [*]. The Parties agree to use reasonable efforts to use
information from [*] where commercially reasonable.
6.8 Each Party will [*].
7. Product Revenue Shares.
----------------------
7.1 The Product Share Table for Products, PreExisting Products and
Enhanced Products shall [*].
7.2 Payment. The Parties shall be paid monthly in U.S. Dollars
-------
within thirty (30) days of the end of the month in which the customer invoice is
partially or fully paid. Payment to the Parties will reflect any reversals due
to Product, PreExisting Product or Enhanced Product returns occurring in that
month.
8. Costs. Each Party [*]. During the performance of this Agreement, each
-----
Party shall provide the other Party with reasonable office space, equipment and
secretarial help without charge for use by such Party when visiting the facility
of the other Party.
9. Loaned Equipment, Capital Equipment and Supplies.
------------------------------------------------
[*] = 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.
11
<PAGE>
9.1 Each Party will provide the other Party with the equipment and
documentation mutually agreed upon in writing by the Parties as necessary for
development of the Products described in the Product Appendices as defined in
the GPM. All such equipment and documentation will be returned to the lending
Party at its request after termination of the Product Development activities
hereunder. All equipment loaned by one Party to the other Party shall remain the
property of the lending Party. The lending Party shall pay shipping costs for
delivery of the equipment to the borrowing Party. Any equipment shall be
returned to the lending Party by the borrowing Party, shipping and insurance
costs prepaid by the Party returning it. While in the possession of the
borrowing Party, the equipment shall be maintained by such Party in good working
order and shall be fully insured by such Party.
9.2 Capital equipment and supplies requirements for each Product
Appendix and the GPM which were acquired by one Party shall be the sole property
of the acquiring Party absent prior written agreement by the Parties to the
contrary. Capital equipment and supplies requirements for each Product Appendix
and the GPM which were acquired by use of funds from both Parties shall be the
joint property of the Parties, and each Party's ownership shall be in proportion
to the portion of the total cost of each item paid for by such Party, absent
prior written agreement by the Parties to the contrary. Unless otherwise agreed
by the Parties, upon termination of a Product Appendix in connection with which
capital equipment has been acquired with the funds of both Parties, the Party
owning the majority share of such equipment shall purchase the other Party's
ownership interest in full, after deducting depreciation based on a mutually
agreed upon depreciation schedule.
10. Manufacturing.
-------------
10.1 The Party identified as the manufacturing Party for a Product,
PreExisting Product or Enhanced Product on the applicable Product Share Table
shall manufacture and deliver such Product, PreExisting Product or Enhanced
Product as required by the GPM and the applicable Product Appendix. The Product
Leader will coordinate with the Party in the role of manufacturer to deliver all
Documentation as defined in the GPM and Paragraph 12.1 ("Technology Exchange")
to such manufacturing Party.
10.2 Each Party will [*]. Each Party will use reasonable efforts to
ensure that it has no contracts, agreements, understandings or arrangements of
any kind with any of its vendors which prevent or will prevent the other Party
from buying directly from any such vendor any item or service related to the
Products, Enhanced Products or PreExisting Products. Each Party hereby agrees
that it will use reasonable efforts to ensure that the other Party is able to
directly purchase any time or service related to the Products, Enhanced Products
or PreExisting Products which such Party buys from any such vendor under any
volume discounts or quantity pricing and terms applicable to such Party. Such
vendor list will indicate which of such vendors are sole source vendors. As used
herein, a "sole source vendor" shall mean a vendor who is the only manufacturer
of a part known and "sole source part" shall mean a part which is manufactured
by only one manufacturer. The Party providing the vendor list agrees to notify
the other Party of the identity of a second manufacturer of a sole source part
promptly after learning the identity of any such manufacturer. All vendor lists
provided by a Party shall be deemed to be Proprietary Information of that Party.
10.3 Each Party will provide support to the other Party for all
Products, PreExisting Products and Enhanced Products, and such support shall
consist at a minimum of off-site telephone, facsimile and electronic mail
support, in the form of consultations, assistance and advice.
10.4 In the case where a Party has contributed Independent Technology,
such contributing Party will provide support to the manufacturing Party in the
form of (a) instruction
[*] = 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.
12
<PAGE>
in use of the Documentation and (b) technical support to answer questions
related to the manufacturing of the PreExisting Products, Products or Enhanced
Products. In the event that the manufacturing Party encounters a problem, the
other Party shall provide any data which the manufacturing Party may reasonably
request in order to verify, diagnose and correct the error, defect or
nonconformity. The Parties shall implement temporary workaround procedures where
necessary and shall work in good faith to initiate and complete permanent
corrective measures for such problems.
11. Product Distribution.
--------------------
11.1 All Products and Enhanced Products will [*].
11.1.1 The Parties may [*].
11.1.2 The Parties may [*].
11.2 The responsibilities of the Group Managers of both Parties will
include, but not be limited to, the following:
11.2.1 Tactical marketing tasks in the geographic market,
including but not limited to: assistance in product definition; product
profitability; advertising and public relations; product and competitive
positioning; conferences, seminars and exhibitions; and pricing;
11.2.2 Key account selling, including but not limited to:
establishing target accounts and determining account strategy;
11.2.3 Technical sales, including but not limited to:
presentations; business plans and proposals; customer need identification and
selling against the competition;
11.2.4 Customer support, including but not limited to: hotline;
hardware and software support; customer training; commissioning customer
dynamometer test cells;
[*] = 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.
13
<PAGE>
applications engineering; project management; system integration; application
software engineering; and equipment maintenance and services; and
11.2.5 Detailed sales forecast for manufacturing, revised
monthly.
12. Technology Exchange.
-------------------
12.1 The FEV and DSPT employees assigned to each Product Appendix
shall [*].
(a) [*].
(b) [*].
(i) [*].
(ii) [*].
(iii) [*].
(c) [*].
(d) [*].
(e) [*].
12.1.1 For the purpose of effective exchange of technical
information and know-how, and the assurance of quality manufacture of Products
and Enhanced Products, the Parties shall [*].
12.2 Each Party will, in its discretion, [*].
[*] = 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.
14
<PAGE>
[*].
12.3 [*].
12.4 [*].
12.5 In the case where Parties agree, pursuant to the terms of a
particular Product Appendix, to distribute a Product, Enhanced Product or
PreExisting Product under a trademark owned by one of the Parties, the trademark
license terms described in Paragraph 22 ("Limited Right to Use Trademarks") will
be applicable. In the case where the Parties agree, pursuant to the terms of a
particular Product Appendix, to distribute a Product, Enhanced Product or
PreExisting Product under a new trademark, the Group Managers will meet and
mutually agree upon the new trademarks, and the ownership of such trademarks
will be registered by one of the Group Managers as mutually agreed upon. In any
case where the Parties have mutually agreed in the applicable Product Appendix
that one or more trademark(s) of a Party will be used on Products, Enhanced
Products or PreExisting Products or where a new trademark for use by both
Parties is registered only by one Party, the trademark owner will grant the
other Party a nonexclusive, limited right, to the extent that trademark owner
has the authority to grant such limited right, to use the trademark owner's
trademarks described in the applicable Product Appendix only on the Products,
Enhanced Products and PreExisting Products designated therein, in product
literature, promotion and advertising for the Products, Enhanced Products or
PreExisting Products. Such license will terminate [*].
12.6 The designation of a product as an Enhancement in the applicable
Product Appendix is a conclusive determination of the status of such product.
12.7 The designation of a product as a New Product in the applicable
Product Appendix is a conclusive determination of the status of such product.
12.8 In the event that either Party proposes to contribute Third Party
Technology to a proposed Product Appendix, the Parties shall, prior to the
execution of such proposed Product Appendix, mutually agree as to the
appropriate arrangements regarding the terms of a license to use such Third
Party Technology in any successfully developed New Product or Enhancement
developed pursuant to such proposed Product Appendix.
13. Term and Termination.
--------------------
[*] = 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.
15
<PAGE>
13.1 The initial term of the Agreement will be a period of three (3)
years from the Effective Date (the "Initial Term") and the Agreement will remain
in effect thereafter unless and until terminated hereunder.
13.2 [*].
13.3 Each Product Appendix will remain in effect as long as [*].
13.3.1 [*].
13.3.2 [*].
13.3.3 [*].
13.3.4 [*].
13.3.4.1 (a) [*].
[*] = 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.
16
<PAGE>
(b) [*]
13.3.4.2 [*]
13.3.4.3 [*]
13.3.4.4 [*]
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
17
<PAGE>
[*]
13.3.5 [*]
13.3.6 [*]
13.3.7 [*]
14. Termination Effect.
------------------
14.1 Except as set forth below, upon termination of any or all
Product Appendices or this Agreement, [*]
14.2 Upon termination of the Agreement (or a Product Appendix or
Product Appendices),[*]
(a) [*] or
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
18
<PAGE>
(b) [*] or
(c) [*] or
(d) [*]
After [*] years from termination:
14.2.1 [*]
14.2.2 [*]
14.2.3 [*]
14.3 [*]
14.4 [*]
14.5 [*]
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
19
<PAGE>
[*]
14.6 [*]
14.7 Effect of Termination on Joint Ventures. [*]
---------------------------------------
14.8 Payment of Compensation. [*]
-----------------------
15. Continuing Manufacturing Obligation.
-----------------------------------
15.1 [*]
15.2 [*]
16. Limitation of Liability; Indemnification in Connection with
-----------------------------------------------------------
Distribution.
- ------------
16.1 SUBJECT TO [*] NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL,
SPECIAL, INDIRECT OR INCIDENTAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH
THIS AGREEMENT, WHETHER IN AN ACTION BASED ON
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
20
<PAGE>
CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, EVEN IF
INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING THE FAILURE OF
ANY OTHER REMEDY PROVIDED HEREIN.
16.2 Each Party shall bear its own risks of any claims of any loss, injury
or damage by a private third party, government, or governmental or regulatory
agency arising out of or in connection with the development, design, manufacture
or distribution of Products and Enhanced Products by each Party, and shall
promptly inform the other Party of any action based on such claim. Each Party,
at its own expense, shall carry adequate liability and property insurance to
cover such risks, and if requested by the other Party, shall deliver to the
other Party evidence reasonably satisfactory to the other Party of such
insurance. Nothing in the Paragraph 16.2, however, shall be deemed to prohibit
either Party from joining the other Party as a party in any such action, or from
seeking indemnification to which the Party may be entitled under any applicable
legal or equitable principle (pursuant to Paragraph 23.8.2 ("Arbitration") of
this Agreement) from the other Party for any costs, expenses or damages incurred
by such Party as a result of such action.
17. Disclaimers. NOTHING IN THIS AGREEMENT SHALL BE INTERPRETED OR
-----------
CONSTRUED AS:
A WARRANTY OR REPRESENTATION OF EITHER PARTY AS TO THE VALIDITY OR SCOPE OF
ANY PATENT;
A WARRANTY OR REPRESENTATION THAT ANY PRODUCT OR PREEXISTING PRODUCT MADE,
USED OR OTHERWISE DISPOSED OF BY EITHER PARTY IS OR WILL BE FREE FROM
INFRINGEMENT OF PATENTS, TRADEMARKS OR COPYRIGHTS OF THIRD PARTIES;
REQUIRING EITHER PARTY TO INDEMNIFY THE OTHER PARTY IN THE EVENT OF A CLAIM
BY ANY THIRD PARTY THAT ANY TECHNOLOGY, PREEXISTING PRODUCT OR PRODUCT SUPPLIED
PURSUANT TO THIS AGREEMENT INFRINGES SUCH THIRD PARTY'S PATENTS, TRADEMARKS OR
COPYRIGHTS, AS THE PARTIES SPECIFICALLY AGREE THAT THEY EACH BEAR THEIR OWN
RISKS IN THIS REGARD.
EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, REQUIRING EITHER PARTY TO
FILE, SECURE, OR MAINTAIN IN FORCE ANY PATENT, PATENT APPLICATION, COPYRIGHT
REGISTRATION, OR SEMICONDUCTOR CHIP PROTECTION ACT REGISTRATION;
EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, AN OBLIGATION THAT EITHER
PARTY WILL ENFORCE ANY INTELLECTUAL PROPERTY RIGHTS, INCLUDING RIGHTS RELATING
TO TRADEMARKS AND TRADE NAMES, AGAINST A THIRD PARTY FOR THE BENEFIT OF THE
OTHER PARTY;
GRANTING BY IMPLICATION, ESTOPPEL, OR OTHERWISE ANY LICENSES OR
SUBLICENSING RIGHTS NOT EXPRESSLY GRANTED PURSUANT TO THIS AGREEMENT;
EXCEPT FOR RIGHTS EXPRESSLY GRANTED BY THIS AGREEMENT, CONFERRING ANY RIGHT
TO USE IN ADVERTISING, PUBLICITY, OR OTHERWISE ANY TRADEMARK OR TRADE NAME; OR
21
<PAGE>
A REPRESENTATION OR WARRANTY OF ANY KIND REGARDING THE PERFORMANCE OF ANY
TECHNOLOGY, PREEXISTING PRODUCT OR PRODUCT SUPPLIED PURSUANT TO THIS AGREEMENT,
WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND/OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY PREEXISTING PRODUCT
OF EITHER OF THE PARTIES, ANY NEW PRODUCT OR ENHANCEMENTS INCORPORATING OR
FABRICATED BY USE OF ANY OF THE TECHNOLOGY DEVELOPED OR LICENSED HEREUNDER.
18. Representations and Warranties.
------------------------------
18.1 DSPT hereby represents and warrants to FEV as follows:
18.1.1 DSPT Organization and Standing. DSPT is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of California,
with all requisite power and authority to own, lease and operate its properties
and to conduct its business as now being conducted.
18.1.2 DSPT Authorization. DSPT has all corporate rights, power and
------------------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by DSPT and
the consummation by DSPT of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on behalf of DSPT. The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not conflict with, or result in any breach of, any of
the material terms, provisions or conditions of any material agreement or
instrument to which DSPT is a Party or by which DSPT is bound.
18.1.3 DSPT Authority to Grant Rights. DSPT has full legal authority
------------------------------
to grant all of the rights granted to FEV hereunder without violating any
agreements between DSPT and any third party.
18.2 FEV hereby represents and warrants to DSPR as follows:
18.2.1 FEV Organization and Standing. FEV is a GmbH & Co. KG duly
-----------------------------
organized, validly existing and in good standing under the laws of Germany, with
all requisite power and authority to own, lease and operate its properties and
to conduct its business as now being conducted.
18.2.2 FEV Authorization. FEV has all corporate rights, power and
-----------------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by FEV and the
consummation by FEV of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on behalf of FEV. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not conflict with, or result in any breach of, any of
the material terms, provisions or conditions of any material agreement or
instrument to which FEV is a Party or by which FEV is bound.
18.2.3 FEV Authority to Grant Rights. FEV has full legal authority
-----------------------------
to grant all of the rights granted to DSPT hereunder without violating any
agreements between FEV and any third party.
19. Proprietary Rights.
------------------
22
<PAGE>
19.1 [*]
19.2 [*]
19.3 [*]
19.4 Obtaining and Maintaining Intellectual Property Rights: Use.
-----------------------------------------------------------
19.4.1 Each Party agrees to execute, upon written request of the
other Party, [*] and that is subject to copyright protection to the other Party
([*]). Such transfer shall be executed in the form attached to this Agreement as
Exhibit A ("[*]").
- ---------
19.4.2 Each Party agrees to assist the other Party in any reasonable
manner to obtain and enforce Intellectual Property Rights [*] for the requesting
Party's benefit in any and all countries, and each Party agrees to execute, when
requested, applications and assignments to the requesting Party and any other
lawful documents deemed necessary by the requesting party to carry out the
ownership provisions of this Agreement. If called upon to render assistance
under this Paragraph 19.4.2, a Party will be entitled to a fair and reasonable
fee, in addition to reimbursement of expenses incurred, at the prior written
request of the other Party.
19.4.3 Each Party agrees to use reasonable commercial efforts to
apply appropriate patent markings, and copyright and trademark notices to each
Product, Enhanced Product or PreExisting Product it distributes.
19.5 Employee and Contractor Agreements. Each Party represents that all
----------------------------------
persons who perform work for a Product Appendix (whether employees or
contractors) shall have executed appropriate agreements which vest all
Intellectual Property Rights related to a Product Appendix in such Party in
accordance with the terms of this Agreement. FEV and/or DSPT, as applicable,
agree to require, by written agreement, their employees, other than clerical and
nontechnical employees, to disclose promptly in writing to personnel identified
as responsible for the administration of patent matters and in a format
suggested by FEV and/or DSPT each Joint Invention made under a Product Appendix
in order that FEV and/or DSFIT can execute all papers necessary to file patent
applications on each Joint Invention. FEV or DSPT, as applicable shall instruct
such employees through employee agreements or other suitable education programs
on the importance of reporting Inventions in sufficient time to permit the
filing of patent applications prior to United States, German or any other
foreign statutory bar.
19.6 Status Meeting. The Parties will [*]
--------------
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
23
<PAGE>
[*]
19.7 Proprietary Information; Nondisclosure.
--------------------------------------
19.7.1 Obligation. Each Party shall, following receipt of
----------
Proprietary Information, keep in confidence and trust all such Proprietary
Information, and shall not use or disclose such Proprietary Information other
than as permitted under this Agreement unless otherwise mutually agreed in
writing by the Parties. The receiving Party shall use the same degree of care to
avoid unauthorized dissemination of such Proprietary Information as it employs
with regard to its own information of a similar nature which it does not desire
to have disseminated, and in all cases the receiving Party warrants that such
degree of care is at least reasonable care. Each Party agrees to advise those
employees and others who have a need to know and who have access to the
Proprietary Information of the disclosing Party of their respective
responsibilities with respect to such Proprietary Information at the time such
access is first granted and also at the time such employees are transferred or
reassigned within the receiving Party or at the time of termination of
employment with the receiving Party, whichever first occurs. It is understood
that receipt of Proprietary Information under this Agreement shall not create
any obligation in any way limiting or restricting the assignment and/or
reassignment of the employees of either Party within the organization of such
Party.
19.7.2 Exceptions. Information shall not be deemed Proprietary
----------
Information, and the receiving Party shall have no obligation with respect to
any information which (a) is already known to the receiving Party without
nondisclosure restrictions before it is first received from the disclosing Party
as indicated by written records; (b) is or becomes publicly known through no act
or omission of the receiving Party; (c) is received by the receiving Party from
a third Party without nondisclosure restrictions and without breach of this or
any similar Agreement; or (d) is developed by the receiving Party independently
and without benefit of the information revealed pursuant to this Agreement.
Further, a Party may disclose Proprietary Information: (x) in response to a
valid order of a court or subdivision thereof, provided, however, that the Party
-------- -------
making the disclosure pursuant to the order shall first have given notice to the
other Party and have made a reasonable effort to obtain a protective order
requiring that the Proprietary Information so disclosed be used only for the
purposes for which the order was issued; (y) as otherwise required by law; or
(z) as necessary to establish rights under this Agreement.
19.7.3 Third Party Proprietary Information. Neither Party shall
-----------------------------------
disclose to the other Party or to any employee or contractor of the other Party
any proprietary information of any third Party in contravention of any Agreement
with such third Party. If any such third Party proprietary information is
subject to use or disclosure restrictions imposed by such third Party, the
disclosing Party shall provide written notice of such restrictions to the
receiving Party prior to the time of disclosure and the receiving Party shall
advise the disclosing Party as to whether or not such information is desired
under such restrictions. If the receiving Party agrees to receive the third
Party proprietary information, the receiving Party shall comply with any such
restrictions identified by the disclosing Party in the written notice.
19.7.4 Disclosure by Marketing of Products or Services. The marketing
-----------------------------------------------
of any product or service which inherently discloses the Proprietary Information
of either Party shall not in itself be deemed to be a prohibited publication or
disclosure of such Proprietary Information for purposes of Paragraph 19.7
("Proprietary Information; Nondisclosure") of this Agreement.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
24
<PAGE>
19.7.5 Disclosure by Publication. From time to time the Parties may,
-------------------------
individually or jointly, wish to present papers or publish papers on the
research conducted under this Agreement. Prior to any such presentation or
publication the presenting/publishing Party will allow the other Party a
reasonable opportunity, and shall provide notice thereof at least fifteen (15)
days prior to the proposed presentation, to review the proposed presentation
materials or publication to insure that the release of such information to the
general public will be consistent with the treatment required for such
information under the terms of this Agreement. Neither Party will present or
publish any information containing Joint Technology without mutual agreement
that such information can be made public consistent with the terms of this
Agreement.
20. Filing of Patent Applications.
-----------------------------
20.1 Joint Invention.
---------------
20.1.1 In the [*] status meetings, DSPT and FEV will [*].
20.1.2 [*].
20.2 No Disclosure. Neither Party shall disclose in any patent
-------------
application it may file, any Invention, discovery, technology or improvement
owned solely by the other Party without first obtaining the written permission
of the other Party prior to making such disclosure.
20.3 Infringement Claims. With respect to Independent Technology,
-------------------
each Party shall be responsible for filing, at its own expense, any action
alleging that a third Party has infringed or misappropriated the ownership
rights of such Party. Neither Party shall have any obligation to file any such
action, and there shall be no accounting to the other Party in the event of a
favorable judgment of award in such an action. Each Party acknowledges that the
other Party is free to settle any such disputes as deemed appropriate by the
other Party so long as such settlement is consistent with any Intellectual
Property Rights treatment required by the terms of this Agreement. DSPT and FEV
agree to cooperate with each other in any Intellectual Property Rights
litigation by one of the Parties as a licensee of the other Party's Independent
Technology, so long as the licensee Party reimburses the owner Party for
reasonable attorneys' fees and out-of pocket costs. [*].
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
25
<PAGE>
21. Invention Disclosure and Filing of Patent Application by FEV and DSPT.
---------------------------------------------------------------------
21.1 Disclosure. The disclosure by the inventing Party to the other
----------
Party shall be in the form of a written report and shall identify the
inventor(s), The disclosure must (i) be sufficiently complete in technical
detail to convey a clear understanding to the extent known at the time of the
disclosure, of the nature, purpose, operation, and the physical, chemical,
biological or electrical characteristics of the [*], and (ii) the disclosure
must also identify any publication, on sale or public use of the [*] and whether
a manuscript describing the [*] has been submitted for publication at the time
of disclosure. In addition, after disclosure, the disclosing Party will promptly
notify the other Party of the acceptance of any manuscript describing the [*]
for publication or of any sale or public use planned by FEV and/or DSFIT.
21.2 Filing. Subject to the terms of this Agreement, FEV and/or DSPT
------
will file an initial patent application on a [*] to which it elects
to retain title within six (6) months after election of title or, if earlier,
prior to the end of any statutory period wherein valid patent protection can be
obtained in the United States or any other nation or patent authority after a
publication, on sale, or public use. Subject to the terms of this Agreement, FEV
and/or DSPT will file patent applications in additional countries or
international patent offices within ten (10) months of the corresponding initial
patent application.
21.3 Cooperation. Each Party agrees to cooperate with the other Party and
-----------
to provide the information each Party needs to comply with the obligations under
the terms of Paragraph 21 ("Invention Disclosure and Filing of Patent
Application by FEV and DSPT") of this Agreement.
21.4 Decisions. Each Party agrees to notify the other of any decisions
---------
not to continue the prosecution of a patent application, (ii) pay maintenance
fees, or (iii) defend in a reexamination or opposition proceeding on a patent,
in any country, not less than sixty (60) days before the expiration of the
response period required by the relevant patent office. In the case of [*]
the Parties will be considered to have been notified with respect to (i), (ii)
or (iii) above on the basis of the decisions made in the quarterly Status
Meetings or as otherwise mutually agreed by the Parties.
22. Limited Right to Use Trademarks.
-------------------------------
22.1 Any use of a Party's trademarks shall be in accordance with
applicable trademark law. Each Party agrees not to attach additional trademarks,
logos or trade designations to Products, Enhanced Products or PreExisting
Products except as mutually agreed to in writing in the applicable Product
Appendix. Each Party agrees that whenever the trademarks owned by the other
Party as of the Effective Date (the "Trademarks") are used in advertising or in
any other manner, they shall clearly indicate the other Party as the trademark
owner. Each Party agrees not to do or cause to be done any act or anything
contesting or in any way impairing or reducing the trademark owner's right,
title, and interest in the Trademarks of the other Party. Each Party understands
and agrees that use of the Trademarks of the other Party in connection with the
Products, Enhanced Products or PreExisting Products shall not create any right,
title, or interest, in or to the use of the Trademarks of the other Party and
that all such uses and goodwill associated with such Trademarks will inure to
the benefit of the other Party. Each Party agrees that the nature and quality of
any products or services supplied in connection with such Trademarks of the
other Party shall conform to the standards set by the other Party. Each Party
agrees to cooperate with the other Party in facilitating the monitoring and
control of the nature and quality of such products and services, and to supply
the other Party with specimens of use of the Trademarks of the other Party upon
request, including, without limitation, during inspections pursuant to Paragraph
12.1.1 ("Technology Exchange"). The owner of the Trademark shall have the sole
right and discretion to bring legal or administrative proceedings to its rights
in the
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
26
<PAGE>
Trademark including actions for trademark infringement or unfair competition
proceedings involving its Trademarks. Each Party, at the request and expense of
the other Party, shall provide the other Party with any specimens, execute all
applications for trademark registrations, trademark assignments or similar
documents for the other Party's Trademarks, and shall perform any other similar
act reasonably necessary (i) for such Party to secure or maintain any and all
trademark rights in any country, provided that the Parties are marketing the New
Products or Enhancements in association with such other Party's Trademarks in
such country or (ii) to effectuate the lawful right to use product names,
designations or Trademarks owned by the other Party as reasonably required by
the other Party.
22.2 As of the Effective Date, the Parties own the Trademarks set
forth on Exhibit B. The use of such Trademarks by the non-owning Party in
---------
connection with any PreExisting Product, Product, Free Product or Enhanced
Product requires the prior written consent of the other Party. The non-owning
Party shall cease any use of the other Party's Trademarks upon termination of
this Agreement. Neither Party shall at any time attempt to register the
Trademarks owned by the other Party or any trademark confusingly similar to such
Trademarks, nor shall either Party use any such confusingly similar trademarks
on its own products. This obligation shall survive the termination of the non-
owning Party's right to distribute such PreExisting Product, Product, Free
Product or Enhanced Product under this Agreement.
23. General Terms and Conditions.
----------------------------
23.1 Notices. All notices shall be addressed to the Parties at the
-------
address first described above and given in writing either by personal delivery
to the Party to whom notice is given, or by confirmed facsimile, or by certified
mail. The date upon which any such notice is so personally delivered, or the
date of confirmation of facsimile or date of delivery of certified mail, shall
be deemed to be the date of such notice, irrespective of the date appearing
therein.
23.2 Export Control. Both Parties acknowledge that the export
--------------
control laws and regulations of the United States, Germany and other nations may
restrict the export and re-export of certain commodities and technical data,
possibly including [*]. Both Parties agree to comply with all export controls
imposed on Restricted Technology by any country or organization or nations
within whose jurisdiction(s) such Party does business. Both Parties agree that
they will not export or re-export [*] in any form without complying with the
export control laws of the relevant jurisdiction(s).
23.3 Force Majeure. Either Party shall be excused from any delay or
-------------
failure in performance hereunder caused by any occurrence or contingency beyond
its reasonable control, including, but not limited to, an act of God,
earthquake, labor disputes, shortages of materials or supplies, riots, and
transportation difficulties. The obligations and rights of the Party so excused
shall be extended on a day-to-day basis for the time period equal to the period
of such excusable delay. In order to obtain a suspension under this subsection,
the Party delayed shall send written notice of the delay and the reason therefor
to the other Party within seven (7) calendar days from the time the Party
delayed knew of the delay in question.
23.4 Waiver. Any waiver of any right or remedy under this Agreement
------
must be in writing and signed by the Party to be bound to be effective. No delay
or omission in exercising any right or remedy shall operate as a waiver of such
right or remedy or any other right or remedy. A waiver on any one occasion shall
not be construed as a waiver of any right or remedy on any future occasion.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
27
<PAGE>
23.5 Assignment. This Agreement may not be assigned, in whole or in
----------
part, by either Party without the prior written consent of the other Party
hereto, except that without securing such prior consent and subject to Paragraph
13.3.4.2, either Party hereto shall have the right to assign this Agreement to
any successor to such Party by way of merger or consolidation or the acquisition
of substantially all of the entire business and assets of DSPT or FEV, providing
that such successor shall expressly assume all of the obligations and
liabilities of such Party under this Agreement. Such consent shall not be
unreasonably withheld. Any assignment prohibited hereunder shall be null and
void and shall constitute a material breach of this Agreement.
23.6 Headings. All Paragraph captions are for reference only and
--------
shall not be considered in construing this Agreement.
23.7 Severability. If any provision of this Agreement is held
------------
invalid by any law, rule, order or regulation of any government, or by the final
determination of a court of last resort, or a court whose decision was not
appealed with the appropriate time limit, such invalidity shall not affect (a)
the other provisions of this Agreement, (b) the application of such provision to
any other circumstance other than that with respect to which this Agreement was
found to be unenforceable; or (c) the validity or enforceability of this
Agreement as a whole.
23.8 Governing Law, Arbitration.
--------------------------
23.8.1 This Agreement (including its exhibits) and all
amendments thereto, and all arrangements made hereunder among the Parties
(including but not limited to the transfer of ownership and the Product
Appendices) shall be governed by [*] substantive law. However, this clause is
not intended to override the principle of territoriality in respect to
intellectual and industrial property rights as expressed in [*]. [*] shall not
apply to this Agreement.
23.8.2 Arbitration. Any dispute arising out of or in connection
-----------
with this Agreement (including its exhibits) and all amendments thereto, and all
arrangements made hereunder among the Parties, including disputes on its
conclusion, binding effect, amendment and termination, shall be resolved, to the
exclusion of the ordinary courts, by a [*]. If there are not more than two
parties involved in the procedure, each Party nominates an arbitrator.
The proceedings shall be held in [*] unless the Parties shall mutually
agree otherwise in writing. The proceedings shall be conducted in [*] language,
and any award shall be written in [*] language.
The Parties shall be entitled to resort to any competent state court in any
jurisdiction for provisional, preliminary or interlocutory relief, which court
shall apply [*] substantive law insofar as specific laws of the competent
state court are not mandatorily applicable. In the event that the requesting
Party obtains provisional, preliminary or interlocutor relief, such party shall
institute the arbitration within the time limit set by the rules of the state
court, but not later that sixty (60) days after the entry into force of the
order of such state court granting such relief.
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
28
<PAGE>
23.9 No Joint Venture. Except as to any joint venture distribution
----------------
arrangements established pursuant to Paragraph 11.1.1 ("Product Distribution"),
each Party hereto shall act as an independent contractor and nothing in this
Agreement is intended to or shall be construed as creating any partnership,
joint venture or other similar relationship between the Parties hereto. No
relationship, other than that created by and set forth in this Agreement, shall
be established by any reference to the Parties operating as "allies" and
"partners".
23.10 Publicly and News Releases. Any news release, public
--------------------------
announcement, or advertisement or publicity proposed to be released by either
Party concerning the existence of this Agreement, its terms or conditions or the
activities of either Party in connection with this Agreement shall be subject to
the written approval of the other Party prior to release and such approval will
not be unreasonably withheld.
23.11 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be an original, and all of which together shall constitute
one instrument.
23.12 Rules and Regulations of the Parties. The employees of FEV and
------------------------------------
DSPT shall obey all pertinent rules and regulations of the other Party while on
the premises of the other Party during any activities pursuant to this
Agreement.
23.13 Transactions. Nothing contained herein shall restrict either
------------
DSPT or FEV from quoting, offering to sell, or selling to others any products,
items or services which it regularly offers for sale, which are not covered by
this Agreement.
23.14 Survival. As applicable, the obligations of this Agreement in
--------
Paragraphs 8 ("Costs"); 9 ("Loan Equipment, Capital Equipment and Supplies"); 10
("Manufacturing"); 12.4, 12.5 ("Technology Exchange"); 13.3.4.4(v) and (vi)
("Term and Termination"); 14 ("Termination Effect"); 15 ("Continuing
Manufacturing Obligation"); 16 ("Limitation of Liability"); 17 ("Disclaimers");
18 ("Representations and Warranties"); 19, except for 19.5 and 19.6
("Proprietary Rights"); 20.1.2, 20.2, 20.3 ("Infringement Claims"); 21.4
("Invention Disclosure and Filing of Patent Application by FEV and DSFIT"); 22
("Limited Right to Use Trademark"); and 23 ("General Terms and Conditions") of
this Agreement shall survive any termination or expiration hereof.
23.15 Integration. This Agreement and all exhibits thereto (which
-----------
are hereby incorporated herein by reference as fully as if set forth in the body
of this Agreement) constitute the entire agreement between the Parties with
respect to the subject matter hereof, superseding any prior or contemporaneous
oral or written agreements or understandings.
23.16 Modifications. No subsequent alterations, amendments or
-------------
additions hereto shall be binding and valid unless reduced to writing and signed
by an authorized representative of each Party.
23.17 Attorneys' Fees. Except for mediation where all costs shall be
---------------
shared equally, the prevailing Party in any dispute arising out of or in
connection with this Agreement, including appeals, shall be awarded their
reasonable attorneys' fees, costs and expenses, including experts' fees.
29
<PAGE>
23.18 Third Party Obligations. Where this Agreement refers to duties
-----------------------
of parties who are not Parties to this Agreement (the "Third Parties"), the
Party which is closest to the relevant Third Party shall procure an undertaking
of such Third Party that such Third Party will comply with the relevant duties
and obligations contained in this Agreement.
IN WITNESS WHEREOF, the authorized representatives of the Parties have
executed this Agreement as of the Effective Date:
FEV: DSPT:
FEV Motorentechnik GmbH & Co. KG DSPT Technology Inc.
By: /s/ Professor Franz F. Pischinger By: /s/ F. Gil Troutman
--------------------------------- -----------------------------------
Typed Name: Professor Franz F. Pischinger Typed Name: F. Gil Troutman
Title: Geschaftsfuhrender Gesellschafter Title: President and CEO
30
<PAGE>
EXHIBIT 10.10
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of ___________________, 199___, is made by
and between DSP Technology, Inc., a Delaware corporation (the "Company"), and
________________________________________ (the "Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents in
connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its subsidiaries and the Company's
stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
<PAGE>
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include
--------
all out-of-pocket costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however, that "expenses" shall not include any judgments, fines, ERISA
excise taxes or penalties, or amounts paid in settlement of a proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the By-Laws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers,
<PAGE>
if the Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if the Indemnitee is not a director or officer but is a
key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or
-------------------
is a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is
------------------
a party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
or on behalf of Indemnitee under a valid and collectible insurance policy of D&O
Insurance, or under a valid and enforceable indemnity clause, by-law or
agreement.
<PAGE>
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
---------------------------------
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense, or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
expenses to the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any
------------------
expenses incurred by the
<PAGE>
Indemnitee with respect to any proceeding instituted by the Indemnitee to
enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by the Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under
------------------------
this Agreement for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement, which consent shall not be unreasonably
withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or By-Laws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
-----------
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in
any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
---------------------------
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal
<PAGE>
or unenforceable) shall not in any way be affected or impaired thereby, and (ii)
to the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable and to give effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Governing Law. This Agreement shall be governed exclusively by and
-------------
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
THE COMPANY:
DSP TECHNOLOGY, INC.
By ______________________________________
Title ___________________________________
Address: _______________________________
_______________________________
INDEMNITEE:
[Indemnitee's Printed Name]
Address: _______________________________
_______________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 6, 1998 accompanying the consolidated
financial statements and schedule included in the annual report of DSP
Technology Inc. and subsidiaries on Form 10-K for the year ended January 31,
1998. We hereby consent to the incorporation by reference of said reports in
the Registration Statements of DSP Technology Inc. and subsidiaries on Forms S-
8, (File No. 33-6994, effective July 13, 1990, File No. 33-43163 and File No.
33-43164, effective October 4, 1991, and File No. 33-85554 and File No. 33-
85540, effective October 24, 1994).
GRANT THORNTON LLP
San Jose, California
April 20, 1998
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<PAGE>
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