-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NlLjsnIz8qmhGDQY0OKx2TMsMmMrp/NMptaVQ9+EjNR1IROl3DtF2o6vR3a/mCNP 4ZLCskuD9Ecy9Kj6BCiVZw== 0000912057-01-006930.txt : 20010307 0000912057-01-006930.hdr.sgml : 20010307 ACCESSION NUMBER: 0000912057-01-006930 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTSTARCOM INC CENTRAL INDEX KEY: 0001030471 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 521782500 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29661 FILM NUMBER: 1557881 BUSINESS ADDRESS: STREET 1: 1275 HARBOR BAY PARKWAY STREET 2: STE 100 CITY: ALAMEDA STATE: CA ZIP: 94502 BUSINESS PHONE: 5108648800 MAIL ADDRESS: STREET 1: 1275 HARBOR BAY PARKWAY STREET 2: STE 100 CITY: ALAMEDA STATE: CA ZIP: 94502 10-K 1 a2040014z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ . COMMISSION FILE NUMBER 000-29661 ------------------------ UTSTARCOM, INC. (Exact name of Registrant as specified in its charter) ------------------------ DELAWARE 52-1782500 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1275 HARBOR BAY PARKWAY, ALAMEDA, 94502 CALIFORNIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (510) 864-8800 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.00125 par value ------------------------ 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 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 voting stock held by non-affiliates of the registrant as of January 31, 2001, was approximately $846,164,868 based upon the closing price of $25.625 reported for such date on The Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive. As of January 31, 2001, registrant had outstanding 95,810,101 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2001 are incorporated herein by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UTSTARCOM, INC. TABLE OF CONTENTS
PAGE -------- PART I. Item 1. Business.................................................... 3 Item 2. Facilities.................................................. 22 Item 3. Legal Proceedings........................................... 23 Item 4. Submission of Matters to a Vote of Security Holders......... 23 Executive Officers.......................................... 23 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 25 Item 6. Selected Financial Data..................................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risks..................................................... 52 Item 8. Financial Statements and Supplementary Data................. 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 83 PART III. Item 10. Directors and Executive Officers of the Registrant.......... 84 Item 11. Executive Compensation...................................... 84 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 84 Item 13. Certain Relationships and Related Transactions.............. 84 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 84 Exhibit Index............................................... 85 Signatures.................................................. 89
PART I FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include those concerning the following: our expectation of growth in demand for voice and data communications services and products in China and developing nations; our expectation of growth in the Chinese economy; our expectation that China will enter the World Trade Organization; our plan to expand our presence and increase investments in mainland China; our plan to leverage our installed base of systems and service provider relationships in China to deliver capabilities such as broadband and high-speed wireless data services; our expectation that our PAS network access system will continue to be allowed in China's county-level cities and counties and on a limited basis in certain large and medium-sized cities; our plans for penetration in other high-growth communications markets; our expectation that we will have permanent staff assigned to a UTStarcom office in New Delhi by mid-year 2001; our expectation of growth in voice and data communication technologies, including in IP-based switching; our expectation of continued significant investments in research and development; our plan to develop and introduce future products and technologies, including additional functionality for our WACOS IP-based switching platform; our intention to expand our manufacturing capabilities; our intention to develop the capacity to manufacture our own wireless handsets; our expectation that we will fill the majority of our current backlog orders during the 2001 fiscal year; our expectations regarding our future investment activities; and our belief that existing cash and cash equivalents, short-term investments and cash from operations will be sufficient to finance our operations through at least the next 12 months. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the "Factors Affecting Future Operating Results" section of this Form 10-K. UTStarcom undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K. ITEM 1--BUSINESS OVERVIEW We provide communications equipment for service providers that operate wireless and wireline networks in rapidly growing communications markets. To date, substantially all of our sales have been to service providers in Mainland China. Our integrated suite of network access systems, optical transmission products and subscriber terminal products allow service providers to offer efficient and expandable voice, data and Internet access services. Because our systems are based on key international communications standards, service providers can easily integrate our systems into their existing networks and deploy our systems in new broadband, Internet Protocol (IP), and wireless network rollouts. Our integrated suite of products consists of PAS, AN-2000, OMUX and WACOS. Our PAS network access system allows service providers to offer voice and data services over fixed wireless and city-wide wireless mobile networks. With approximately 3.0 million lines installed in 90 cities, and based on our knowledge of China's communications market, we believe that PAS is the most widely deployed wireless local access system in China. For wireline networks, we provide a broadband-ready access system called AN-2000. Nearly 2.3 million lines of our wireline AN-2000 access system have been deployed in China, including deployments in the six largest regional communications markets. Our optical multiplexing, or OMUX, products provide optical transmission and are often bundled with our AN-2000 and PAS systems. The OMUX, either as a stand-alone or bundled product, is currently installed at over 5,000 locations for over 200 communications service providers. Our newest product, WACOS, is an IP-based switch designed to deliver multiple voice and data services using a highly distributed architecture. We began initial shipments of WACOS in 2000. Our access and switching 3 systems are currently designed to address the unique performance requirements of rapidly expanding communications infrastructure markets such as China. INDUSTRY BACKGROUND COMMUNICATIONS NEEDS OF DEVELOPING COUNTRIES. Demand for voice and data communications services in developing nations continues to grow rapidly and is driven by both public sector infrastructure investment and private sector business growth. The governments of many developing countries have identified the development of a communications infrastructure as a key driver of modernization and economic growth. According to a 1998 report by the International Telecommunication Union, developing countries are investing in communications infrastructure at a rate of $53.1 billion annually, representing 31.9% of all communications infrastructure spending worldwide. Governments are increasingly implementing and funding infrastructure development through privatization of state-owned telecommunications service providers. These service providers, in turn, are deploying advanced networks for voice and data services. In addition, increasingly affluent businesses and residential consumers in the highest growth regions of these countries are demanding state-of-the-art voice and data communications solutions to interact and compete on a global basis. GROWTH IN CHINA'S COMMUNICATIONS MARKET. China has one of the fastest growing communications markets in the world. Growth in China's communications equipment and services markets is being driven by the government's commitment to developing a communications infrastructure, pent-up demand for communication services and robust economic growth. Dataquest estimates that the market for communications equipment and services in China will grow from $44.2 billion in 1998 to $89.9 billion in 2002, representing a compound annual growth rate of 19.4%. Dataquest forecasts that the market for access equipment in China will grow at a compound annual rate of 32.8% from 1998 to 2002. According to these Dataquest forecasts, this market represents the fastest growing segment of the communications market in China and the fastest growing access equipment market in the world. China's demand for communications services is highlighted by its relatively low teledensity rate, which is a measure of the number of lines per hundred people. According to 1999 statistics from the International Telecommunication Union, China, with a population of 1.3 billion, has a teledensity rate of only 8.6% compared to teledensity rates in Brazil of 14.9%, in the United Kingdom of 57.5%, in France of 57.9%, in Hong Kong of 57.6% and in the United States of 68.2%. While growth in the China communications market is currently driven predominantly by voice services, the increasing demand for data services presents a growing opportunity. The Strategis Group and BDA China Limited estimate that Internet subscribers in China will grow from 2.1 million in 1998 to 40.4 million in 2003, representing a compound annual growth rate of 80.6%. China's ability to invest heavily in its communications infrastructure is fueled by the country's strong economic activity. The Economist Intelligence Unit estimates that China's GDP will grow at a compound annual rate of 7.9% through 2002. STRUCTURE OF CHINA'S TELECOMMUNICATIONS INDUSTRY. Historically, the China Telecom system was the sole provider of public telecommunications services in China. In 1993, the State Council, in an effort to promote competition, began issuing licenses to new telecommunications operators including China United Telecommunications Corporation, or Unicom, a provider of mobile communication services, and Jitong Communications Co., Ltd., a provider of data communications and Internet access services. In February 1999, the State Council approved a restructuring plan for the China Telecom system. The plan separated the telecommunications operations of the China Telecom system along four business lines: fixed line, mobile, paging and satellite communications services. Under the new structure, a new state-owned company, China Mobile, holds and operates the nationwide mobile communications assets. China Mobile also controls China Mobile (Hong Kong) Limited, a public company, that operates cellular services in thirteen of China's provinces. A new state-owned company, China Satellite, holds and operates the satellite assets. The paging operations have been merged into Unicom. China Telecom 4 holds and operates the fixed line telephone and data communications assets. China Telecom operates through a network of approximately 2,400 local level telephone companies called Telecommunications Bureaus. Telecommunications Bureaus are responsible for purchasing, installing and operating the voice and data communications services in their local markets. GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS INDUSTRY. The China telecommunications industry is regulated at the national, provincial and local levels. At the national level, the Ministry of Information Industry, or MII, regulates the industry. The Ministry of Information Industry was established in March 1998 to assume the regulatory, administrative and other governmental duties of the former Ministry of Posts and Telecommunications. The Ministry of Information Industry has broad authority to regulate all aspects of the telecommunications and information technology industries in China including managing spectrum bandwidths, setting network equipment specifications and standards, regulating the Internet and drafting laws and regulations related to the electronics and telecommunications industries. Based on our industry experience, we believe that the Ministry of Information Industry's general telecommunications equipment strategy is to ensure that China's infrastructure is based on advanced open architectures that are expandable, cost efficient and quickly deployed. The Ministry of Information Industry also oversees the 33 Telecommunications Administrations that have regulatory responsibility over the telecommunications industry in their respective provinces. In China today, each Telecommunications Administration oversees all local Telecommunications Bureaus in its region and approves a subset of telecommunications products that meet Ministry of Information Industry standards from which Telecommunications Bureaus can then select the specific products they purchase, install and operate. Although historically the Ministry of Information Industry has shared regulation and operation of China's telecommunications industry with the China Telecom system, as part of the Chinese government's industry restructuring, the regulatory functions of the Ministry of Information Industry and the Telecommunications Administrations have been separated from the operational functions of the state-owned Telecommunications Bureaus under their control. Following this separation, the Ministry of Information Industry will act exclusively as the industry regulator and the local Telecommunications Bureaus will act exclusively as operators. Given the multi-level regulatory environment, equipment providers in China must generally market intensively to all three levels of the communications industry. COMMUNICATIONS NETWORK ARCHITECTURE IN CHINA. The development of China's communications infrastructure involves not only installing a nationwide network of high-bandwidth fiber-optic backbones, but also locally connecting each business and residential subscriber to these backbones. The systems of wireline or wireless connections that link local subscribers to these backbone networks are often referred to as the "last mile" or the local access network. Because of the high growth rate, geographic dispersion and diverse communications needs of residences and businesses in China, the direct wiring of subscribers to the backbone network using traditional copper connections is a lengthy, costly and inefficient process. Direct wiring of subscribers to traditional telephone switches often locks those subscribers into a limited set of communications services and limits expandability and migration to other services. In contrast, service providers in China require communications equipment that allows them to roll out different services quickly, efficiently and cost-effectively. Given the relative absence of a legacy communications infrastructure, these service providers are less constrained and thus often deploy the latest, "best-of-breed" systems with the flexibility to handle future services such as data. This is true in both the local access networks and the backbone networks. A new trend in access network design is the use of remote nodes that push network intelligence closer to a group of subscribers, thus making it easier and more efficient to deliver multiple services from the backbone network to subscribers at the local level. These nodes use a standard digital protocol known as V5.2 to communicate with backbone networks. This open protocol allows equipment from various vendors to be interconnected seamlessly and allows service providers to deliver a variety of services from multiple backbones over the same access network thus reducing costs. By deploying 5 small, intelligent nodes close to subscribers, service providers can deploy fewer central office switches, each covering larger areas, optimizing manageability and lowering per-subscriber cost. Because of these benefits, service providers in China are deploying open architecture switches capable of interacting with access networks at most new installations. Another new trend can be seen in the backbone network, where an increasing portion of traffic travels across IP-based systems instead of traditional voice systems using circuit switches. IP-based architectures differ fundamentally from circuit-switched architectures in the way information travels from point to point through networks. IP-based technology does not require a dedicated connection or circuit between the callers. Instead, the caller's voice is divided into numerous small packages of information called packets. These packets are sent over the network intermixed with other packets of data, such as fax, email or Internet content, to be reassembled at the destination of the call. In contrast, traditional telephone technology requires that a circuit between the callers be established and maintained during the length of the call, and voice and data cannot easily be transmitted simultaneously over this circuit. This is inefficient because much of a phone call is silence which effectively wastes capacity on the circuit. This inefficiency has caused service providers to seek new switches based on IP-based technology. NEEDS OF CHINA'S COMMUNICATIONS SERVICE PROVIDERS. Service providers in China often require network solutions with a suite of integrated products that address all of their access needs, including wireline and wireless, voice and data. These comprehensive product offerings enable service providers to quickly, and with minimal incremental investment, address the changing demands of their subscribers for expanded or more advanced services over time. Service providers also require solutions that are based on widely-adopted international communications standards to ease installation and avoid duplicate buildout of separate networks. In addition, given the rapid growth in China's emerging communications market, network solutions must be efficient and expandable so that the same architecture can provide an affordable entry level solution for as few as hundreds of subscribers yet economically extend to hundreds of thousands of subscribers over time. Additionally, service providers in China will often require the vendors to continually develop products to meet evolving market needs and to have a local service and support presence. Although markets such as China represent substantial opportunities for communications equipment vendors, to date, few companies have delivered the combination of leading technology, market specific products and a local presence that service providers require. THE UTSTARCOM SOLUTION Our wireless and wireline access and switching systems are designed to deliver the following key benefits to service providers: INTEGRATED, COMPREHENSIVE PRODUCT OFFERING. By offering communications systems that link the backbone network, the access network and subscribers' premises, we supply service providers with solutions that enable them to quickly deploy services to subscribers. For the implementation of completely new networks, which is typical in China, service providers can choose to deploy our complete suite of product offerings. By contrast, for locations where some network infrastructure is already in place, service providers can deploy a subset of our products and integrate them into their existing networks. Furthermore, as subscriber needs evolve from voice to data, we offer solutions to meet these needs. Our AN-2000, OMUX and PAS products can be managed from a single integrated management station through the use of our Netman software. WACOS has an advanced web-based management system which in the future will be adapted to support all of our product offerings. FLEXIBILITY FOR VOICE AND DATA SERVICES. We have designed our systems to offer a high degree of flexibility in terms of the number of subscribers and types of traffic delivered to those subscribers. Our 6 equipment can be flexibly configured to offer a variety of services in response to subscriber demand. This flexibility is particularly important in China, as the communications services market is undergoing rapid change and growth. As Internet usage achieves greater penetration in China, we believe service providers will desire systems which are designed to deliver high-speed data capability. Our access systems allow service providers to quickly and cost-effectively implement upgrades for new services, including high-speed data capability, compared to alternative solutions which may require the purchase of an entirely new system to provide these services. LEADING PRICE AND PERFORMANCE SOLUTION. All of our products are based on a modular design, using cost effective off-the-shelf components wherever possible and realizing most of the products' added value through our software. By delivering a modular system, we allow service providers to purchase only the functionality and capacity needed and to purchase additional functionality and capacity over time as subscriber demand warrants. In response to large pent-up demand, most service providers in China are currently delivering voice services. However, we expect demand for data services to increase dramatically in China. To meet this growing demand, service providers will be able to deliver data traffic with modular upgrades to our systems rather than through large-scale purchases of replacement equipment. Furthermore, as demand for communications services in China grows, our expandable systems will allow service providers to grow from a small initial subscriber base to hundreds of thousands of subscribers in a cost-effective and efficient manner. ARCHITECTURE BASED ON WIDELY ADOPTED COMMUNICATION STANDARDS. Our products are designed to comply with widely adopted international open communication standards for multi-vendor interoperability, which are consistent with standards established by the Ministry of Information Industry. For example, we were one of the first companies to deliver an access system to the China market that incorporated an open interface, known as the V5.2 protocol, to central office switches. The open interface is a technology that allows service providers to connect our products to equipment from multiple vendors and thus integrate multiple voice and data traffic types within one system. In this manner an operator can deploy our system for voice services first, but offer mobile or Internet services at a later time as the market for these services develops. Furthermore, our compliance with open standards lowers costs by permitting service providers to shorten evaluation times and ease integration of our products with other systems in the service providers' networks. LOCAL PRESENCE. We have established a strong local presence in China that allows us to be responsive to the needs of service providers and their subscribers. We manufacture our products primarily at two facilities located in the cities of Huizhou in Guangdong province and Hangzhou in Zhejiang province that are owned by joint ventures between us and affiliates of the corresponding Telecommunications Administrations. By using local facilities in China, we have helped create new jobs within the provinces and have strengthened our relationships with the Telecommunications Administrations in some of China's most modernized and rapidly growing provinces. We also maintain twelve sales and customer support sites in China that allow us to deploy a customer support representative onsite anywhere in China within 24 hours. Our sales force develops direct relationships with decision makers at both the provincial and the local levels through pre-sales design and consulting services, as well as performing more traditional product sales functions. Additionally, through our relationships at the national, provincial and local levels we receive a continuous flow of information on market changes and insight into unique service provider needs and related opportunities. STRATEGY Our objective is to be a leading provider of broadband, IP and wireless network equipment to high growth communications markets. The principal elements of our strategy are as follows: LEVERAGE OUR INSTALLED BASE AND CUSTOMER RELATIONSHIPS AS DEMAND FOR BROADBAND AND HIGH-SPEED DATA GROWS IN CHINA. We believe we are a leading supplier of both wireline and wireless access 7 systems in China. Communications service providers currently face a large subscriber demand for voice services. Accordingly, our systems are being used primarily for voice services. However, given the increasing demand for Internet and data access in China, we believe we are well positioned to leverage our installed base of systems and service provider relationships to deliver additional data capabilities. We intend to capitalize on this opportunity by supplying systems that enable service providers to offer broadband services over copper connections through digital subscriber line, or xDSL, technologies and over fiber optic connections. We also intend to enable high-speed data services over 64 Kilobits per second, or Kbps, wireless links. Moreover, we will supply products that complement our own products through original equipment manufacturer (OEM) relationships to market and sell leading-edge products utilizing our extensive sales and marketing organization in China. DEVELOP PRODUCTS AND TECHNOLOGIES FOR MARKET-DRIVEN SOLUTIONS; PENETRATE EMERGING IP-BASED SWITCHING MARKET. By working closely with multiple service providers over the last six years, we have gained unique insight into future service provider requirements. For example, we developed our PAS wireless access system in response to a market need for a low-cost, community-based mobile service. We believe increases in Internet usage, particularly voice over IP traffic, have resulted in a market need for a next-generation switching platform optimized for IP traffic. Accordingly, we have made a substantial investment in developing our WACOS IP-based switching system, which began initial shipments in 2000. WACOS is designed to integrate with our existing products and to scale over time in response to increased demand. We believe that WACOS can deliver value to service providers, both as a stand-alone system and in connection with expansions to our PAS system installations. We intend to deliver additional functionality on the WACOS platform in the future which we believe will enable us to enter new markets in China and around the world. We have a history of developing unique systems, such as PAS and WACOS, and we intend to continue to provide market-driven solutions to our customers. EXPAND PRESENCE IN MAINLAND CHINA. We intend to further capitalize on China's large population, low teledensity and increasing demand for communications services. Since our inception, we have focused our engineering, product development and sales and marketing efforts primarily on communications equipment for China. This focus has enabled us to be a leader in this market by quickly identifying the needs of service providers in China and rapidly developing market-specific products to address those needs. We intend to expand our presence in this market by: - increasing the number of sales and support staff and offices within China; - developing new products to address the demands of our existing and emerging customer base; - migrating our installed base from voice to data as market demand warrants; and - increasing our local research and development and manufacturing capabilities. LEVERAGE SUCCESS IN MAINLAND CHINA TO ADDRESS OTHER HIGH-GROWTH COMMUNICATIONS MARKETS. Since our products comply with many international standard protocols and are attractive and readily adaptable to the requirements of service providers in many markets outside of Mainland China, we intend to leverage our success in Mainland China to penetrate other high-growth communications markets. We anticipate supplying these markets through direct sales offices located in key market regions, by licensing our technology to local manufacturers where import taxation favors this approach, through the development of local sales agency and distributor relationships within specific market regions, and through original equipment manufacturer (OEM) sales relationships. Our International Sales Division is currently targeting expansion into Latin America, Europe, Africa, India, the Philippines, Taiwan and other Pacific Rim markets. We intend to have permanent staff assigned to a UTStarcom office in New Delhi by mid-year 2001 to further develop sales in India and nearby markets. We plan to continue to develop local direct sales representative offices in key regions around the world. 8 Recent examples of the success of these strategies include: - Worldwide OEM sales agreements for our AN-2000 system with the NEC Corporation, with Kyocera Corporation and with Airspan Networks Limited; - A licensing contract that will allow Himachal Futuristic Communications Ltd. (HFCL) of New Delhi, India to manufacture, sell and support our AN-2000 product in India. Together with HFCL, we have begun to supply AN-2000 to Infotel, a private operator in the Punjab state; - Installations of our AN-2000 system for telephone network operator EPM in Bogata, Colombia; - Sales agreement to provide our AN-2000 system to Mauritius Telecom Corp. to provide access to their national Data Services backbone network; - Deployment of our PAS network product for First International Telecommunications Corporation (FITEL) of Taipei, Taiwan in the first phase of a metropolitan wireless mobile telephone system for the greater Taipei area and other Taiwan cities; - Type approval to market our AN-2000 system in Russia, Brazil and Indonesia; and - Sales agreements to provide our AN-2000 system to Telmex, Mexico and to Sovintel, Peterstar and Combellga, all of Russia. PRODUCTS Our integrated suite of network access, optical multiplexing, subscriber terminal and IP-based switching products gives service providers in high-growth markets an efficient means to offer voice and data services. Our product lines include PAS, AN-2000, OMUX, Netman and WACOS. 9 PAS (PERSONAL ACCESS SYSTEM) PAS is a wireless access system that enables voice and data access over fixed and city-wide wireless links. The following diagram shows how our PAS system is deployed: [LOGO] A typical PAS installation consists of several remote terminals based on our AN-2000 architecture, each coupled through one or more digital radio port controllers to many small indoor and outdoor radio ports, and various subscriber terminals. The wireless access network formed by PAS components connects to the central office switch to provide local and long distance telephone service over a standard V5.2 interface or an analog 2-wire interface for switches without V5.2 capability. This provides for an open interface to the central office switch which benefits service providers by shifting network intelligence to the access network, thus reducing reliance on costly and proprietary distributed central office switch architectures. The remote terminals pass traffic through the radio port controllers to the radio ports, which each serves multiple subscribers. From the radio port, the signal is passed to a remote subscriber terminal or handset. The air traffic controller provides wireless traffic-channel and mobility management throughout the system. In 2000 we introduced a version of PAS using the WACOS platform instead of the AN-2000 platform. This eliminates the dependence on an existing local exchange switch, and uses a Signaling System 7 (SS7) interface to the Local or Long distance telephone network instead of V5.2 which the remote terminal uses. This deployment method has the advantage that it can be installed in a "greenfield" environment where existing switching capacity is not available, and can be scaled to larger sizes more easily. PAS enables rapid and reliable deployment of communications services to subscriber communities where the installation of a wireline alternative may be uneconomical. PAS can also be used in large indoor spaces such as office buildings, airports and shopping malls. PAS is optimized for high-capacity urban or suburban traffic densities and can deliver wireline equivalent voice quality, including voice-band modem and fax support, with the advantages of simple planning for radio siting, immunity to inter-radio interference, low power consumption and expandability. Our PAS system operates in China in the 1900-1915 MHz band allocated by the Radio Regulatory Bureau of the Ministry of Information Industry. PAS provides city-wide wireless mobile phone service for a community of up to several hundred thousand subscribers at traffic densities of upwards of 15,000 subscribers per square kilometer. PAS 10 targets first-time subscribers, second line subscribers and small businesses. PAS provides distinct benefits to both service providers and subscribers. Service providers can quickly illuminate entire communities with strategically located low-power radios, creating the potential for new revenue streams from city-wide mobile service. Additionally, compared to traditional cellular systems, PAS mobility functions are completely integrated into the access network architecture and thus require no central office switch modification or incremental mobile switching hardware. By integrating PAS into the existing access network, service providers can take advantage of unused central office switching capacity to carry incremental wireless traffic loads. This integration also allows a service provider to offer existing switch-based services, such as caller ID, call forwarding, and voice mail, to its wireless subscribers. Subscribers benefit from rapid service activation and enjoy the mobility of small handsets weighing less than three ounces. We purchase a variety of handsets manufactured by multiple Japanese vendors under the UTStarcom label. We also perform local assembly of the wireless infrastructure components and handsets in China, have entered into arrangements with third parties to manufacture handsets in China, and intend to develop the capacity to manufacture our own handsets. With the PAS system, a service provider does not need to modify its existing billing system. However, PAS does provide separate call detail records that the service provider can use for specific mobility-related billing policies such as premium billing for roaming calls or wireless data calls, or for pre-paid PAS services. An additional benefit of PAS is its support of wireless data transmission of up to 64Kbps. This enables wireless Internet access at speeds faster than those possible with many wireline dial-up modems. Based on our knowledge of China's communications market, we believe PAS allows faster Internet access than other wireless technologies currently commercially deployed in China. PAS also offers an advanced set of information-mode features including short message and email text messaging, browsing of Internet content and access to location-dependent information that, for example, allows subscribers to search for restaurants or hospitals near their current location. The information services can be delivered in English and Chinese character sets. As of December 31, 2000, service providers have installed our PAS system in 90 locations in Mainland China representing a total installed base of approximately 3.0 million lines. AN-2000 Our AN-2000 is a digital wireline network access system that delivers a variety of services to subscribers over copper, fiber or microwave radio links. These services include: - traditional analog voice; - dialed voice and data in digital format over integrated services digital network, or ISDN, lines; - analog and digital leased lines; - business data services over integrated digital subscriber line, or IDSL, and high-data-rate digital subscriber line, or HDSL; - fully integrated TDM and ATM broadband capability; and - high-performance, always-on Internet access for residential and business subscribers using advanced asymmetric digital subscriber line (ADSL) technology. 11 Service providers have deployed nearly 2.3 million AN-2000 subscriber lines. The following diagram depicts a typical AN-2000 deployment: [LOGO] The AN-2000 system consists of both central office terminals and remote terminals which are linked together to form a digital access network using copper, fiber or microwave radio. The AN-2000 connects to the access ring through a fully integrated synchronous digital hierarchy (SDH) optical interface. A central office AN-2000, or CT, connects the access ring to Internet access, local and long distance and dedicated data services. A remote AN-2000, or RT, connects to the access ring and offers voice and data services to the subscribers. A regional access network has the potential to contain hundreds of AN-2000s servicing hundreds of thousands of subscribers. The AN-2000 provides several important features that together form a cost-effective access platform for the delivery of voice and data services. We were among the earliest to offer a V5.2 switch interface to the China market. This capability benefits service providers by shifting network intelligence out into the access network, reducing reliance on costly and proprietary distributed central office switch architectures. In addition, we designed the AN-2000 to provide high capacity, expandability and redundancy, offering reliable operation and economical service management. For service providers whose switches are not yet V5.2 compliant, we provide a migration capability whereby the AN-2000 terminates analog and ISDN ports in the central office, effectively creating a V5.2 interface to the remote AN-2000s. Based on our industry knowledge, we believe that the AN-2000 is currently the leading system available that can convert existing analog central office interfaces to V5.2. Our OMUX product, which converts data transmission between electrical and optical formats, is often bundled with our PAS and AN-2000 systems. Together, these products can comprise a complete access system. In addition to bundled sales, the OMUX is used by cellular service providers to connect base station controllers to base stations and by other enterprises for private data networks and data collection applications. The primary advantage of the OMUX is its ability to offer highly competitive price and performance characteristics to service providers, particularly in low capacity implementations. The OMUX employs our SPDH technology, which provides the reliability of higher priced synchronous digital hierarchy, or SDH, networks for lower capacity access networks and enables highly reliable operations. The OMUX is available in varying capacities depending on network configuration and 12 service provider requirements. As of December 31, 2000, service providers have deployed the OMUX at over 5,000 locations, both as a stand-alone product and bundled with PAS and AN-2000. NETMAN Our Netman network management system, which is integrated with our network access products, provides for centralized management of our PAS, AN-2000 and OMUX products. Netman provides the ability to manage individual network components and to report the status of the network as a whole. With Netman, a service provider can add and drop subscribers and continuously monitor all access network elements, providing for real-time reporting and alarms in addition to performance management and optimization and distribution of software updates. Netman uses a scalable client/ server architecture in a Windows NT environment. Server hardware may be scaled to handle several thousand nodes. Netman can also be installed on a portable personal computer and may be used as the local on-site maintenance terminal wherever remote nodes are installed. WACOS Our WACOS system is an IP-based switching system designed to perform many of the functions performed today by traditional central office switches, including local wireline services and mobile switching services. The initial application serves as the mobility service switch for our PAS system. Future applications will support third-generation wideband W-CDMA and TD-SCDMA mobile services, a full suite of local exchange services, Voice over IP gateway functions and narrowband and broadband remote access services. The WACOS system supports communication between legacy telephone equipment and next-generation IP devices. In addition, operational support system software provided with WACOS enables management of WACOS equipment, billing for WACOS services and customer care for WACOS subscribers. WACOS has an advanced web-based management system which in the future will be adapted to support all our product offerings. The use of IP technology to transmit voice and data over a single network enables the use of lower cost equipment and improves bandwidth efficiency for service providers. This results in a wider variety of communications applications at lower per subscriber cost. The WACOS family includes: - PSTN Gateway devices which support connection to the public switched telephone network, or PSTN, through standard interfaces; - Voice-over-IP Gateway, which will support standard interfaces such as H.323 and MGCP; - Remote Access Server which will support analog modem, ISDN and wireless data applications; - Wireless Gateways which support expansion of PAS networks and future 3G networks; and - OSS Server Cluster which supports management, billing and customer care functions. 13 The following diagram depicts our WACOS system: [LOGO] MARKETS AND CUSTOMERS Market opportunities within China's 31 provinces vary greatly by region, with the more densely populated coastal provinces experiencing the strongest economic development. We provide our communications equipment to Telecommunications Bureaus in a wide variety of provinces. Historically we have focused on marketing and selling our products to Telecommunications Bureaus in Guangdong, Zhejiang, Fujian, Shandong and Jiangsu provinces and the municipality of Shanghai. The PRC State Statistical Bureau estimates that in 1997, these six regions represented 26.3% of China's population and 41.1% of China's gross domestic product. These regions also represent a disproportionately high percentage of China's wireline and wireless subscribers and influence adoption of technology among other regions. More recently we have expanded our marketing focus to the inland provinces as well. While each of the Telecommunications Bureaus is part of the China Telecom system and subject to its ultimate control, equipment purchasing decisions are generally made at the individual Telecommunications Bureau level. 14 The following table is a list of our customers in Mainland China who have each purchased more than $500,000 of our products during 2000. BEIJING MUNICIPALITY Beijing Telecommunications Administration JT Telecom FUJIAN PROVINCE Putian Telecommunications Bureau Quanzhou Telecommunications Bureau GUANGDONG PROVINCE Dongguan Telecommunications Bureau Foshan Telecommunications Bureau Jiangmen Telecommunications Bureau Meizhou Telecommunications Bureau Qingyuan Telecommunications Bureau Sanshui Telecommunications Bureau Shanwei Telecommunications Bureau Shaoguan Telecommunications Bureau Yunfu Telecommunications Bureau Zhangzhou Telecommunications Bureau Zhanjiang Telecommunications Bureau Zhaoqing Telecommunications Bureau Zhuhai Telecommunications Bureau GUANGXI PROVINCE Laibin Telecommunications Bureau Liuzhou Telecommunications Bureau Wuzhou Telecommunications Bureau GUIZHOU PROVINCE Luoding Telecommunications Bureau HEBEI PROVINCE Baoding Telecommunications Bureau Chengde Telecommunications Bureau Handan Telecommunications Bureau Qinhuangdao Telecommunications Bureau Xingtai Telecommunications Bureau Xuanhua Telecommunications Bureau HEILONGJIANG PROVINCE Haerbin Telecommunications Bureau HENAN PROVINCE Jiaozuo Telecommunications Bureau Luohe Telecommunications Bureau HUBEI PROVINCE Fengjie Telecommunications Bureau Yibing Telecommunications Bureau HUNAN PROVINCE Binzhou Telecommunications Bureau JIANGSU PROVINCE Changzhou Telecommunications Bureau Taizhou Telecommunications Bureau Xuzhou Telecommunications Bureau Yancheng Telecommunications Bureau JILIN PROVINCE Siping Telecommunications Bureau LIAONING PROVINCE Benxi Telecommunications Bureau Heshan Telecommunications Bureau Liaoyang Telecommunications Bureau Liaoyang Tel. Instrument Co. Panjin Telecommunications Bureau NINGXIA PROVINCE Shizhuishan Telecommunications Bureau Yinchuan Telecommunications Bureau SHAANXI PROVINCE Wuzhong Telecommunications Bureau Xian Telecommunications Bureau SHANDONG PROVINCE Dongying Telecommunications Bureau Jinan Telecommunications Bureau Jining Telecommunications Bureau Linyi Telecommunications Bureau Pingdu Telecommunications Bureau SHANGHAI MUNICIPALITY Cenxi Telecommunications Bureau SICHUAN PROVINCE Chongqing Telecommunications Bureau Neijiang Telecommunications Bureau Suining Telecommunications Bureau Xinhui Telecommunications Bureau YUNNAN PROVINCE Kunming Telecommunications Bureau ZHEJIANG PROVINCE Fuyang Telecommunications Bureau Hangzhou Telecommunications Bureau Quzhou Telecommunications Bureau Ruian Telecommunications Bureau Shaoxing Telecommunications Bureau Shengzhou Telecommunications Bureau Tonglu Telecommunications Bureau Wencheng Telecommunications Bureau Wenling Telecommunications Bureau Wenzhou Zongheng Corp. Xiaoshan Telecommunications Bureau Xinchang Telecommunications Bureau Yuhang Telecommunications Bureau Zhuji Telecommunications Bureau In 2000, sales to Hangzhou Telecommunications Bureau accounted for 12.1% of our revenues. No other individual customer accounted for 10% or more of our revenues in 2000. We also sell our network access equipment to service providers in high growth communications markets outside of China. Markets outside of China accounted for about 1.0% of our total sales in 2000. As of December 31, 2000, our backlog totaled approximately $192 million, compared to approximately $72 million as of December 31, 1999. We expect to fill the majority of our current backlog orders during the 2001 fiscal year. SALES, MARKETING AND CUSTOMER SUPPORT We pursue a direct sales and marketing strategy in China, targeting sales to individual Telecommunications Bureaus and to manufacturers or equipment distributors with closely associated customers. We maintain sales and customer support sites in Beijing, Shanghai, Guangzhou, Shenyang, Wuhan, Xian, Hangzhou, Jinan, Chengdu, Fuzhou, Kunming and Zhengzhou. We also sell through relationships with regional government-owned telecommunications manufacturing companies, which act as agents in the sale of our products to Telecommunications Bureaus. We believe our customer support services in Mainland China allow us to distinguish ourselves from competing equipment providers and build customer loyalty. The customer service operation in 15 Hangzhou is co-located with the manufacturing joint venture and serves as both a technical resource and liaison to our product development organization. In China, customer service technicians are distributed in the regional sales and customer support sites to provide a local presence. We provide additional support on a 24-hour, 365-day basis from the customer support center in Hangzhou in the form of field dispatch personnel, who also provide training on installation, operation and maintenance of equipment. As of December 31, 2000, we employed 550 people in sales, marketing and customer support in Mainland China. Our sales efforts in markets outside of Mainland China combine direct sales, original equipment manufacturer (OEM) sales, and manufacturing licensing. We maintain sales and customer support sites in Miami, Florida to address Latin American markets; in Tel Aviv, Israel to address European and African markets; in Manila, the Philippines to address the Philippine market; in Taipei, Taiwan to address the Taiwan market; and in Hong Kong to address other Pacific Rim markets. We intend to have permanent staff assigned to a UTStarcom office in New Delhi, India by mid-year 2001 to further develop sales in India and nearby markets. Our customer service operations in the U.S. and Hangzhou, China support our customers outside of Mainland China with training, project supervision and problem escalation. We maintain and will continue to expand our staff of local personnel near customers who require support on a 24-hour, 365-day basis. These facilities currently are deployed in Taipei, Manila and New Delhi. In many cases, such as in Mexico, Russia and UAE, our local in-country sales partners also provide customer support. TECHNOLOGY Our research and development efforts have led to the creation of key technologies that have contributed to the success of our products in the marketplace. V5.2 PROTOCOL AND DYNAMIC SWITCHING. The AN-2000 and PAS intelligent call processor and 2,048 timeslot interchange allow these systems to fully exploit the power of the V5.2 interface protocol between the central office switch and access node, which requests voice channel allocation from the switch on a call-by-call basis. Since most subscriber telephones are idle most of the time, a small number of channels can be shared by many subscribers, saving money and increasing reliability. The AN-2000 and PAS can economically split a large bundle of V5.2 voice channels from the central office switch into many smaller, more economical bundles to be transmitted to the remote access nodes that may contain fewer subscribers than the switch is optimized for. This capability increases switch utilization, reduces the number and expense of V5.2 interfaces provided by the central office switch and economically allows the deployment of many small remote access nodes. Our V5.2 interface product is extensively deployed throughout China and is interoperable with the products of major switch vendors. SDH OPTICAL TRANSMISSION. Service providers have widely chosen to adopt and deploy fiber optic transmission systems conforming to the synchronous digital hierarchy, or SDH, standard promulgated by the International Telecommunications Union. The SDH standard is the international equivalent of the North American SONET standard. The SDH standards for first tier capacity allow up to 1,953 information channels to be transmitted over optical fiber between nodes that can be structured in a redundant ring configuration. If the fiber in the ring is cut accidentally, the SDH system can recover its operation immediately and maintain service while the cut is repaired. The AN-2000 fully integrates the SDH fiber with self-healing ring capability into a single plug-in module in contrast to earlier generation equipment that required a separate external SDH multiplexer. This configuration saves expense and provides a simple unified management structure for the SDH and access node functions. PAS MOBILITY MANAGEMENT. We have developed a specially configured AN-2000 node, called the air traffic controller, or ATC, in the PAS product to provide the function of wireless traffic-channel and mobility management. PAS subscribers are assigned wireless traffic channels at the time they become 16 active on a call and the precise channel may be different from call to call or, in the case of PAS users, may change during a call, because of variable channel availability and also movement of the subscriber. The ATC collects all of these dynamically assigned channels and re-maps them to fixed channels on the access network interface, providing wireless benefits without alteration of the access network. Service providers can mix and match wireline and wireless service delivery in a seamless manner without regard for access network compatibility or special provisioning. PAS can manage hundreds of thousands of air traffic channels by arranging a network of ATCs into a two-stage configuration with regional nodes handling local traffic and a network of central nodes handling traffic between regional nodes. WACOS IP-BASED SWITCHING AND SERVICE DELIVERY PLATFORM. The WACOS system is deployed as a layered network architecture designed to support end-to-end communications and data services. This type of architecture is rapidly gaining worldwide acceptance with a large number of vendors and service providers cooperating in the creation of new standards for IP-based networks. In the WACOS implementation, unlike current telephone networks, service providers and subscribers are able to quickly and easily deploy new services and features based on these emerging standard protocols. WACOS is a complete telecommunications system that offers technology at several levels: - TRADITIONAL PHONES AND IP APPLIANCES. Innovative protocols used by WACOS provide support for traditional telephone service and provide the foundation for next-generation IP-based appliances such as IP-enabled cell phones and personal digital assistants. - IP ACCESS NETWORK. The WACOS gateway converts between legacy telephony protocols such as SS7 and V5.2 and modern IP-based services. The gateway provides an open platform for the development of enhanced services, such as unified messaging, by us or third party developers. - BACKBONE NETWORK. WACOS relies on industry standard IP-based network architecture. Initially based on widely deployed IP over asynchronous transfer mode, or ATM, technology, WACOS is capable of economical upgrade to emerging packet over SONET and gigabit ethernet standards. - OPERATIONAL SUPPORT SYSTEM. The operational support system, or OSS, is implemented using industry-standard computing platforms based on Windows NT or Unix, depending on customer preference. The OSS allows service providers to flexibly tailor billing policies and allows subscriber self-provisioning through on-line account access. Web-based graphic user interfaces provide precise management information to support staff with minimal training requirements, reducing operational costs. RESEARCH AND DEVELOPMENT We believe that continued and timely development and introduction of new and enhanced products are essential if we are to maintain our competitive position. While we use competitive analyses and technology trends as factors in our product development plans, the primary input for new products and product enhancements comes from soliciting and analyzing information about service providers' needs. Our Ministry of Information Industry, Telecommunications Administration and Telecommunications Bureau relationships and full-service post-sale customer support provide our research and development organization with insight into trends and developments in the marketplace. The insights provided from these relationships allowed us to develop unique, market-driven products such as PAS and WACOS. We maintain a strong relationship between our U.S. and China research centers. Projects are typically designed and developed in the United States by one team and tested in China by another, allowing us to conduct research and development activities 24 hours a day. We rotate engineers between the U.S. and China research centers to further integrate our research and development operations. We have been able to cost-effectively hire highly skilled technical employees from a large pool of qualified candidates in China. 17 In the past we have made, and expect to continue to make, significant investments in research and development. Our research and development expenditures totaled $41.5 million in 2000, $18.6 million in 1999 and $14.7 million in 1998. MANUFACTURING, ASSEMBLY AND TESTING We manufacture or engage in the final assembly and testing of our PAS systems, AN-2000, OMUX and WACOS products at the facilities of our two manufacturing joint ventures in China and under license to HFCL in India. In Zhejiang province, we have a joint venture with Zhejiang Telecommunication Equipment Factory. In Guangdong province, we have a joint venture with Guangdong Nanfang Communications Group Corporation. These manufacturing operations consist of circuit board assembly, final system assembly, software installation and testing. We assemble circuit boards primarily using surface mount technology. Assembled boards are individually tested prior to final assembly and tested again at the system level prior to system shipment. We use internally developed functional and parametric tests for quality management and process control and have developed an internal system to track quality statistics at a serial number level. Both the Guangdong and the Zhejiang manufacturing facilities are ISO 9002 certified. ISO 9002 certification requires that the certified entity establish, maintain and follow an auditable quality process including documentation, requirements, development, training, testing and continuous improvement and which is periodically audited by an independent outside auditor. We have contracted with Matsushita Electric Industrial Co., Ltd., which distributes products under the Panasonic brand, to manufacture the PAS wireless infrastructure components and handsets for distribution under the UTStarcom label. Other suppliers include Kyocera Corporation, Sanyo and JRC, which provide handsets under the UTStarcom label, and Sharp Corporation, which provides handsets and repeaters under the UTStarcom label. Our AN-2000 product line integrates some third party products for subscriber premises equipment and testing. In order to gain more control over the quality of the products, further reduce the cost and ease restrictions on China's import license quotas, we have started and will continue local assembly of the wireless infrastructure components and handsets in China, and have entered into arrangements with third parties to manufacture handsets in China. We also intend to develop the capacity to manufacture our own handsets. 18 STRATEGIC RELATIONSHIPS We benefit from strategic relationships with other major companies that act as our suppliers, investors and customers. SOFTBANK CORP. is a major investor in our company and holds a seat on our Board of Directors. We have invested in an investment fund established by SOFTBANK focused on investments in Internet companies in China. Matsushita Communication Industrial Co., Ltd. is a major supplier of radio and terminal equipment for the PAS system, and is also an investor and has funded custom developments related to the WACOS system. Mitsubishi Electric Corporation has also invested in our company. Affiliates of the Guangdong and Zhejiang Telecommunications Administrations are our manufacturing joint venture partners in China. NEC Corporation is marketing our AN-2000 system under a private label worldwide. HFCL is our partner in manufacturing and sales in India. We have strategic technology partnership agreements with Zaffire, Inc. which provides a DWDM optical networking platform, and with Foundry Networks, Inc. which provides Gigabit Ethernet and Fast Ethernet switching technology as well as Layer 2 & 3 switching. COMPETITION We face intense competition in our target markets and expect competition to increase. Our principal competitors in our various product lines include: - PAS: Lucent Technologies, Inc. and Zhongxing Telecommunications Equipment. - AN-2000: Advanced Fibre Communications, Inc.; Alcatel Alsthom CGE, S.A.; Huawei Technology Co., Ltd.; Lucent; NEC Corporation; and Zhongxing. - WACOS SYSTEM: Alcatel; Cisco Systems, Inc.; Clarent Corporation; Ericsson LM Telephone Co.; Huawei; Lucent; Motorola, Inc.; Nokia Corporation; Nortel Networks Corporation; Nuera Communications, Inc.; Siemens AG; and Vienna Systems Corp. We are increasingly facing competition from domestic companies in China. We believe that our strongest competition in the future may come from these companies, many of which operate under lower cost structures and more favorable governmental policies and have much larger sales forces than we do. Furthermore, other companies not presently offering competing products may also enter our target markets. Many of our competitors have significantly greater financial, technical, product development, sales, marketing and other resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in service provider requirements. Our competitors may also be able to devote greater resources than we can to the development, promotion and sale of new products. These competitors may also be able to offer significant financing arrangements to service providers, in some cases facilitated by government policies, which is a competitive advantage in selling systems to service providers with limited financial and currency resources. Increased competition is likely to result in price reductions, reduced gross profit as a percentage of net sales and loss of market share, any one of which could materially harm our business, financial condition and results of operations. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties, including Telecommunications Administrations, Telecommunications Bureaus and other local organizations, to increase the ability of their products to address the needs of prospective customers in our target markets. Accordingly, alliances among competitors or between competitors and third parties may emerge and rapidly acquire significant market share. To remain competitive, we believe that we must continue to partner with Telecommunications Administrations and other local organizations, maintain a high level of investment in research and development and in sales and marketing, and manufacture and deliver products to service providers on a timely basis and without significant defects. If we fail to meet any of these objectives, our business, financial condition and results of operations could be harmed. 19 The introduction of inexpensive wireless telephone service or other competitive services in China may also have an adverse impact on sales of our PAS system in China. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures in the future will not materially adversely effect our business, financial condition and results of operations. We believe that the principal competitive factors affecting the market for our network access products include: - total initial cost of solution; - short delivery and installation intervals; - design and installation support; - ease of integration with the backbone network; - flexibility in supporting multiple interfaces and services; - life-cycle cost determined by reliability; and - manageability of the solution and scalability. We believe we have in the past generally competed favorably with offerings of our competitors on the basis of these factors. However, we may not be able to compete effectively against current and future competitors based on these or any other competitive factors in the future, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. INTELLECTUAL PROPERTY Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property. We presently hold one U.S. patent for existing products. The term of the patent will expire as late as the year 2016, depending on whether we maintain the patent for the whole term. We have submitted fifteen U.S. patent applications and eight foreign patent applications. We cannot assure you that any of our patent applications will be granted or that any patents issued will cover the scope of the claims sought in the applications. Our U.S. patents do not afford any intellectual property protection in China or other international jurisdictions. Moreover, we have applied for but have not yet obtained patents in China. We can give no assurance that we will be able to obtain patents in China on our products or the technology that we use to manufacture our products. Our joint ventures in China rely upon our trademarks, technology and know-how to manufacture and sell our products. Under the terms of our joint venture agreements, any modifications or enhancements to or derivatives of our intellectual property developed by the joint ventures will be owned by the joint ventures. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the legal systems of some foreign countries, including China, do not protect our proprietary rights to the same extent as does the legal system of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights or to 20 determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could significantly harm our business. The communications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed. EMPLOYEES As of December 31, 2000, we employed a total of 1,573 full-time employees. We also from time to time employ part-time employees and hire contractors. Of the total number of full-time employees, 653 are in research and development, 204 in manufacturing, 573 in marketing, sales and support, and 143 in administration. We have 1,354 employees located in China, 211 employees located in the United States, and 8 employees in other countries. In addition to our total full-time employees, the Guangdong manufacturing joint venture has 110 employees. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are good. 21 ITEM 2--FACILITIES
LOCATION FUNCTIONS SQUARE FOOTAGE DATE OF LEASE EXPIRATION - -------- -------------------------------- -------------- ------------------------ HEADQUARTERS Alameda, CA Administration, Sales/Customer Support, Research and Development 25,576 January, 2003 Iselin, NJ Sales/Customer Support, Research and Development 27,238 July, 2002 Shenzhen, China Research and Development 16,060 June, 2002 Hefei, China Research and Development 2,153 July, 2001 Hangzhou, China Administration, Sales/Customer Support, Engineering and Manufacturing 83,926 March, 2002 Hangzhou, China Administration, Sales/Customer Support, Research and Development, and Manufacturing 89,340 February, 2002 Huizhou, China Manufacturing 44,250 December, 2001 Beijing, China UTSC Headquarters Administration, Sales/Customer Support 15,995 May, 2001 Shanghai, China Sales/Customer Support 5,070 December, 2002 Wuhan, China Sales/Customer Support 753 March, 2002 Guangzhou, China Sales/Customer Support 5,856 April, 2001 Chengdu, China Sales/Customer Support 1,851 December, 2001 Jinan, China Sales/Customer Support 750 March, 2001 Kunming, China Sales/Customer Support 2,676 February, 2003 Xian, China Sales/Customer Support 3,604 December, 2002 Shenyang, China Sales/Customer Support 3,122 May, 2003 Fuzhou, China Sales/Customer Support 6,030 June, 2002 Zhengzhou, China Sales/Customer Support 2,420 October, 2001 Taipei, Taiwan Sales/Customer Support 1,300 May, 2001 Hong Kong, China Sales/Customer Support 800 June, 2002
We have entered a 50-year lease for approximately 49 acres of land located in Zhejiang Science and Technology Industry Garden of Hangzhou Hi-tech Industry Development Zone. We are currently in the planning process of completing a design layout and preparing a construction cost estimate for a manufacturing facility. Once the planning is completed, our Board of Directors will then decide on the actual building of the manufacturing facility. In addition, as we expand into markets outside of Mainland China, our facility needs may increase according to business needs. 22 ITEM 3--LEGAL PROCEEDINGS We may become involved in legal proceedings from time to time in the ordinary course of business. As of the date of this report, we are not involved in any material legal proceedings. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS The following table sets forth certain information regarding our executive officers as of December 31, 2000:
NAME AGE POSITION - ---- -------- -------------------------------------------------------- Hong Liang Lu 46 President, Chief Executive Officer and Director Ying Wu 41 Vice Chairman of the Board of Directors, Executive Vice President and Chief Executive Officer, China Operations Michael Sophie 43 Vice President of Finance, Chief Financial Officer and Assistant Secretary Bill Huang 38 Vice President, Chief Technology Officer Shao-Ning J. Chou 38 Executive Vice President and Chief Operating Officer, China Operations Paul Berkowitz 48 Vice President, International Sales Gerald Soloway 52 Vice President, Engineering
HONG LIANG LU has been our President and Chief Executive Officer and a director since June 1991. Mr. Lu co-founded UTStarcom under its prior name, Unitech Telecom, Inc., in June 1991, which subsequently acquired StarCom Network Systems, Inc. in September 1995. From 1986 through December 1990, Mr. Lu was President and Chief Executive Officer of Kyocera Unison, a majority-owned subsidiary of Kyocera International, Inc. From 1983 until its merger with Kyocera in 1986, he was President and Chief Executive Officer of Unison World, Inc., a software development company. From 1979 to 1983 he was Vice President and Chief Operating Officer of Unison World, Inc. Mr. Lu holds a B.S. in Civil Engineering from the University of California at Berkeley. YING WU has been our Executive Vice President and Vice Chairman of the Board of Directors since October 1995. Mr. Wu has also been the President and Chief Executive Officer of one of our subsidiaries, UTStarcom China, since October 1995. From February 1991 to September 1995, Mr. Wu was a co-founder and Senior Vice President of StarCom Network Systems, Inc., a company that marketed and distributed third party telecommunications equipment. From 1988 to 1991, Mr. Wu was a member of the staff of Bellcore Laboratories. From 1987 through 1988, Mr. Wu was a consultant at AT&T Bell Labs. He holds a B.S. in Electrical Engineering from Beijing Industrial University and an M.S. in Electrical Engineering from the New Jersey Institute of Technology. MICHAEL SOPHIE has been our Vice President of Finance and Chief Financial Officer since August 1999. Prior to joining our company, Mr. Sophie held executive positions at P-Com, Inc. from August 1993 to August 1999 as Vice President Finance, Chief Financial Officer and Group President. From 1989 through 1993, Mr. Sophie was Vice President of Finance at Loral Fairchild Corporation. He holds a B.S. degree from California State University, Chico and an M.B.A. from the University of Santa Clara. 23 BILL HUANG has been our Chief Technology Officer since September 1999. From December 1996 to September 1999, he was our Vice President of Strategic Product Planning. From June 1995 to December 1996, Mr. Huang served as our Vice President, China Operations. From 1994 to June 1995, Mr. Huang was our Director, Engineering. From 1992 to 1994, he was a Member of the Technical Staff and Project Leader at AT&T Systems. Mr. Huang serves on the board of Shenzhen Gin De (Group) Ltd., a real estate investment company in China. Mr. Huang holds a B.S. in Electrical Engineering from Huazhong University of Science & Technology, and an M.S. in Electrical Engineering and Computer Sciences from the University of Illinois. SHAO-NING J. CHOU has been our Executive Vice President and Chief Operating Officer of China Operations since January 1999. From March 1997 to December 1998, he was Vice President of China Operations and from July 1996 to March 1997, he served as Vice President of Engineering. From March 1995 to June 1996, he was Director of Engineering for wireless systems and software with Lucent Technologies Microelectronics IC group. From April 1993 to March 1995, he was a Technical Manager for the Global Wireless product group with AT&T consumer products where he led multiple development teams for handset and wireless personal base station products. From July 1985 to April 1993, Mr. Chou was team leader and a member of the technical staff for advanced digital communication research in AT&T Bell Laboratories where he led and engaged in data communication equipment and multimedia product development. Mr. Chou holds a B.S. in Electrical Engineering from City College of New York, an M.S. in Engineering from Princeton University and an M.B.A. from the State University of New Jersey, Rutgers. PAUL BERKOWITZ has been our Vice President of International Sales since November 1998. From July 1996 to November 1998, he was our Vice President of Product Management & Planning, and from December 1995 to June 1996, he served as our Vice President of Engineering. From 1994 to 1995, Mr. Berkowitz was Director of Application Software of AT&T Network Systems where he managed, among other things, an international team in marketing, architecture, and development of software involving a portfolio of advanced GUI and client-server products for telecommunications services. Between 1992 and 1994, he led the planning and development effort for a 1 Gigabit/sec Asynchronous Transfer Mode switch support Wide Area Network services including TDM and Frame Relay in the AT&T Paradyne Unit. Mr. Berkowitz has been granted four patents and holds a B.S. and an M.S. in Electrical Engineering from Columbia University. GERALD SOLOWAY has been our Vice President of Engineering since January 1999. From April 1998 to January 1999, he served as our Director of Strategic Marketing. Prior to this, Dr. Soloway worked for Lucent Technologies, formerly Bell Labs, for 29 years. At Lucent, Dr. Soloway held executive positions in Consumer Products, Business Terminal Development, PBX Systems Engineering, Key System Development and Access Systems Development. He holds a Ph.D. from Polytechnic Institute of New York, an M.S. from New York University, and a B.S. from Cooper Union, all in Electrical Engineering. Dr. Soloway also holds seven patents in communications and computer graphics technology. 24 PART II ITEM 5-- MARKET FOR UTSTARCOM, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
FISCAL 2000 HIGH LOW - ----------- -------- -------- First Quarter from March 3, 2000........................... $ 93.50 $41.00 Second Quarter............................................. $79.625 $16.75 Third Quarter.............................................. $ 32.88 $18.00 Fourth Quarter............................................. $ 23.00 $12.31
Our common stock has been traded in The Nasdaq Stock Market under the symbol UTSI since our initial public offering on March 3, 2000. The preceding table sets forth the high and low closing sales prices per share of our common stock as reported on The Nasdaq National Market for the periods indicated. As of December 31, 2000 we had approximately 250 stockholders of record. To date, we have not paid any cash dividends on our common stock. We currently anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future. Certain present or future agreements may limit or prevent the payment of dividends on our common stock. We raised net proceeds of $189.4 million from our initial public offering on March 3, 2000. As of December 31, 2000, we had not used any of the net proceeds and the entire amount of net proceeds remains in our cash and cash equivalents and short-term investments accounts. The net proceeds are expected to be used for general corporate purposes, including working capital and capital expenditures. The amounts actually expended for such purposes may vary significantly and will depend on a number of factors, including our future revenues and cash generated by operations and the other factors described under "Factors Affecting Future Operating Results". Accordingly, we retain broad discretion in the allocation of the net proceeds of the offering. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies or product offerings. At December 31, 2000, there are no material agreements or commitments with respect to any acquisition or investment activities. 25 ITEM 6--SELECTED FINANCIAL DATA You should read the selected financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Financial Statements and the Notes thereto included elsewhere in this report. Historical results are not necessarily indicative of results that may be expected for any future period.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... $368,646 $187,516 $105,167 $75,597 $35,542 Cost of sales (includes deferred stock compensation expense of $90, $12, $0, $0 and $0)............................... 240,465 112,703 64,142 48,795 22,322 -------- -------- -------- ------- ------- Gross profit................................................ 128,181 74,813 41,025 26,802 13,220 Operating expenses: Selling, general and administrative (includes deferred stock compensation expense of $4,676, $4,256, $390, $0 and $0)................................................. 48,055 35,122 23,211 21,211 8,042 Research and development (includes deferred stock compensation expense of $6,795, $1,285, $22, $0 and $0)..................................................... 41,452 18,648 14,681 8,941 3,899 Amortization of intangible assets......................... 4,894 332 120 40 42 In-process research and development....................... -- 3,992 -- -- -- -------- -------- -------- ------- ------- Total operating expenses................................ 94,401 58,094 38,012 30,192 11,983 Operating income (loss)..................................... 33,780 16,719 3,013 (3,390) 1,237 Interest and other income (expenses)........................ 10,829 (2,212) (1,138) 2,033 858 Equity in net income (loss) of affiliated companies......... (288) 1,348 (773) 73 (291) -------- -------- -------- ------- ------- Income (loss) before income taxes and minority interest..... 44,321 15,855 1,102 (1,284) 1,804 Income tax expense.......................................... 14,021 626 1,423 400 575 Minority interest in (earnings) loss of consolidated subsidiaries.............................................. (2,307) (2,110) 914 301 (743) -------- -------- -------- ------- ------- Income (loss) from continuing operations.................... 27,993 13,119 593 (1,383) 486 Income (loss) from discontinued operations.................. -- (1,656) (893) 1,413 301 -------- -------- -------- ------- ------- Net income (loss)........................................... 27,993 11,463 (300) 30 787 Preferred stock dividend.................................... -- -- -- -- (1,097) Beneficial conversion feature of Series F preferred stock... -- (29,977) -- -- -- Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"......... (980) -- -- -- -- -------- -------- -------- ------- ------- Net income (loss) applicable to common stockholders......... $ 27,013 $(18,514) $ (300) $ 30 $ (310) Earnings (loss) per share: Basic....................................................... $ 0.34 $ (2.13) $ (0.04) $ -- $ (0.04) ======== ======== ======== ======= ======= Diluted..................................................... $ 0.27 $ (2.13) $ -- $ -- $ (0.04) ======== ======== ======== ======= ======= Proforma amounts assuming application of SAB101 "Revenue Rocognition in Financial Statements" is applied retroactively: Net income (loss) applicable to common stockholders......... $ 27,993 $(19,494) $ (300) $ 30 $ (310) Earnings (loss) per share: Basic....................................................... $ 0.35 $ (2.25) $ (0.04) $ -- $ (0.04) ======== ======== ======== ======= ======= Diluted..................................................... $ 0.27 $ (2.25) $ -- $ -- $ (0.04) ======== ======== ======== ======= ======= Shares used in per share calculations: Basic....................................................... 79,696 8,678 7,582 7,320 8,344 ======== ======== ======== ======= ======= Diluted..................................................... 101,867 8,678 77,050 7,320 8,344 ======== ======== ======== ======= =======
AS OF DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $149,112 $87,364 $17,626 $35,049 $18,246 Working capital............................................. 369,861 126,637 57,416 59,076 34,382 Total assets................................................ 591,837 271,788 142,121 101,097 49,610 Total short-term debt....................................... 43,381 43,338 38,426 1,579 1,127 Long-term debt.............................................. 12,048 -- -- -- -- Convertible preferred stock................................. -- -- -- -- 39,912 Total stockholders' equity.................................. 412,319 165,720 72,336 72,513 39,519
26 ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We provide communications equipment for service providers that operate wireless and wireline networks in rapidly growing communications markets. Our integrated suite of network access systems, optical transmission products and subscriber terminal products allows service providers to offer efficient and scalable voice, data and Internet access services. Service providers can easily integrate our standards-based systems into their existing networks and deploy our systems in new broadband, IP-based and wireless network rollouts. To date, substantially all of our sales have been to service providers in China. We incorporated in Delaware as Unitech Industries Inc. in 1991. Since our incorporation, we have focused our resources on developing products for China's communications market. We shipped our first network access products in 1993. In 1994, we changed our name to Unitech Telecom, Inc. In 1995, we acquired StarCom Network Systems, Inc. and changed our name to UTStarcom, Inc. During 1996, we introduced our advanced, V5.1 and V5.2 compliant, multi-service network access product, the AN-2000. Late in 1996, we introduced our PAS wireless access system. In December 1999, we completed the acquisition of Wacos, Inc., a research and development subsidiary that develops IP-based switching systems. As part of our business operations in China, we have established a wholly owned subsidiary and three joint ventures in that country. To date, we have derived substantially all of our revenues from sales of communications equipment to service providers in China. Each of the Telecommunications Bureaus to whom we sell our equipment in China is part of the China Telecom system and subject to its ultimate control. However, equipment purchasing decisions are generally made at the individual Telecommunications Bureau level. Our customers often make a large initial purchase of our equipment followed by supplemental purchases of enhancements and upgrades. As a result, our largest revenue-producing customers typically vary from period-to-period. Almost 99% of our sales for the twelve months ended December 31, 2000 were made in China. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in China, and by the general state of China's economy. Our operations in China are subject to special considerations and significant risks not typically associated with companies in the United States. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. Our results may be adversely affected by, among other things, changes in the political, economic and social conditions in China, and by changes in governmental policies with respect to laws and regulations, changes in China's telecommunications industry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation. Specifically, remittances from China which are of a capital nature, such as the repayment of bank loans denominated in foreign currencies, require approval from appropriate governmental authorities before Renminbi can be used to purchase foreign currency. Although the payment of cash dividends is permitted so long as our subsidiaries have sufficient reserves and adequate amounts of Renminbi to purchase foreign currency, regulations restrict the ability of our subsidiaries to transfer funds to us through intercompany loans and advances. We sell our products in China through a direct sales force. The evaluation period for our products may span a year or more. Revenue from sales of equipment is recognized on delivery when contractual obligations are substantially complete, remaining obligations are inconsequential and perfunctory, and collection of the resulting receivable is reasonably assured. Revenue recognition from equipment sales with installations are recognized on final acceptance when contractual obligations are substantially 27 complete, remaining obligations are inconsequential and perfunctory, and collection of the resulting receivable is reasonably assured. Where multiple elements exist, revenue is allocated to the different elements based upon verifiable objective evidence and recognized on completion of the element. Cost of sales consists primarily of material costs, third party commissions, costs associated with assembly and testing of products, costs associated with installation and customer training and overhead and warranty costs. Cost of sales also includes import taxes on components. Our gross profit has been affected by material costs, product mix, average selling prices, and the type of distribution channel through which we sell our products. Our gross profit, as a percentage of net sales, varies among our product families. The gross profits, as a percentage of net sales, on our mobile phone handsets are very low. We expect that our overall gross profit, as a percentage of net sales, will fluctuate from period to period as a result of shifts in product mix, anticipated decreases in average selling prices and our ability to reduce product costs. Selling, general and administrative expenses include compensation and benefits, professional fees, sales commissions, provision for uncollectible accounts receivable and travel and entertainment costs. We intend to pursue aggressive selling and marketing campaigns and to expand our direct sales organization and, as a result, our sales and marketing expenses will increase in future periods. We also expect that in support of our continued growth and our operations as a public company general and administrative expenses will continue to increase for the foreseeable future. Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, the cost of parts for prototypes, equipment depreciation and third party development expenses. We believe that continued investment in research and development is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in future periods. In connection with the grant of stock options to some of our employees, we recorded net deferred compensation of $2.4 million during 2000 and $15.9 million during 1999, representing the difference between the deemed fair value of common stock for accounting purposes and the option exercise price for these options at the date of grant. In connection with grants to non-employees during 1999, we recorded deferred compensation of $7.4 million. Deferred compensation is presented as a reduction of stockholders' equity, with amortization recorded over the vesting period of the option, which is generally four years. We recorded stock compensation expense of approximately $11.6 million during 2000 and $5.6 million during 1999. At December 31, 2000, approximately $6.5 million remained to be amortized. Amortization of intangible assets consists primarily of the amortization of intangible assets associated with acquisitions in China and our acquisition of the minority interest in our Wacos, Inc. subsidiary. Consolidated equity in net income (loss) of affiliated companies comprises our share of the earnings from our Guangdong manufacturing subsidiary, which is accounted for using the equity method as the Company does not have voting control over all significant matters. Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to additional tax incentives. These tax incentives vary in different locales and could include preferential national enterprise income tax treatment at 50% of the usual rates for different periods of time. All of our active subsidiaries in China were accredited as technologically advanced enterprises. Minority interest in (earnings) loss of consolidated subsidiaries represents the share of earnings in our Zhejiang manufacturing joint venture that is owned by our subsidiary partner. 28 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by certain items reflected in our consolidated statements of operations:
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- PERCENTAGE OF NET SALES: Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 65.2 60.1 61.0 ----- ----- ----- Gross profit................................................ 34.8 39.9 39.0 Operating expenses: Selling, general and administrative....................... 13.1 18.7 22.1 Research and development.................................. 11.2 10.0 13.9 Amortization of intangible assets......................... 1.3 0.2 0.1 In-process research and development....................... -- 2.1 -- ----- ----- ----- Total operating expenses................................ 25.6 31.0 36.1 Operating income............................................ 9.2 8.9 2.9 Interest and other income (expenses)........................ 2.9 (1.2) (1.1) Equity in net income (loss) of affiliated companies......... (0.1) 0.7 (0.7) ----- ----- ----- Income before income taxes and minority interest............ 12.0 8.4 1.1 Income tax expense.......................................... 3.8 0.3 1.4 Minority interest in (earnings) loss of consolidated subsidiaries.............................................. (0.6) (1.1) 0.9 ----- ----- ----- Income from continuing operations........................... 7.6 7.0 0.6 Loss from discontinued operations........................... -- (0.9) (0.8) ----- ----- ----- Net income (loss) before cumulative effect.................. 7.6 6.1 (0.2) Beneficial conversion feature of Series F preferred stock... (16.0) Cumulative effect on prior years of the application of SAB 101 "Revenue Recognition in Financial Statements"......... (0.3) -- -- ----- ----- ----- Net income (loss) applicable to common stockholders......... 7.3% (9.9)% (0.2)%
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 NET SALES. Our net sales increased 96.6% to $368.6 million in 2000 from $187.5 million in 1999. This increase was primarily due to an increase in sales volume of our PAS system. In 2000, sales to Hangzhou Telecommunications Bureau accounted for 12.1% of our net sales. In 1999, sales to Xian Telecommunications Bureau and Kunming Telecommunications Bureau accounted for 30.2% and 10.7% of our net sales, respectively. GROSS PROFIT. Gross profit increased 71.3% to $128.2 million in 2000 from $74.8 million in 1999. Gross profit, as a percentage of net sales, decreased to 34.8% in 2000 from 39.9% in 1999. The decrease in gross profit, as a percentage of net sales, was primarily due to increases in sales of lower margin handsets, which comprised 28.9% of sales in 2000 compared to 9.6% in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 36.8% to $48.1 million in 2000 from $35.1 million in 1999. The increase in selling, general and administrative expenses was primarily due to increased sales and administrative personnel and related expenses, including sales commissions, associated with the growth in net sales and the expansion of our overall level of business activities. Selling, general and administrative expenses as a percentage of net sales decreased to 13.1% in 2000 from 18.7% in 1999. The decrease in selling, general and 29 administrative expenses as a percentage of net sales was primarily due to economies of scale associated with the significant increases in net sales. We expect our selling, general and administrative expenses to increase in absolute dollar amounts in future periods as sales and marketing activities increase and we further invest in infrastructure and incur additional expenses related to anticipated growth of our business and operation as a publicly held company. RESEARCH AND DEVELOPMENT. Research and development expenses increased 122.3% to $41.5 million in 2000 from $18.6 million in 1999. The increase in research and development expenses was primarily due to the hiring of additional technical personnel, increased prototype expenses and licensing fees to support our research and development efforts, and non-cash stock compensation expense which increased to $6.8 million in 2000 from $1.3 million in 1999. Stock compensation expense is related to certain stock option grants to employees and non-employees that we are amortizing over the periods of the applicable options. As a percentage of net sales, research and development expenses increased to 11.2% in 2000 from 10.0% in 1999. We expect our research and development expenses to increase in absolute dollar amounts in future periods as we expand our research and development organization to support new product development. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased to $4.9 million in 2000 from $0.3 million in 1999. The increase in amortization of intangible assets was due to the increase in amortization associated with our December 1999 acquisition of the portion of our Wacos, Inc. subsidiary owned by the minority shareholders. IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In-process research and development costs resulted from our acquisition of the non-affiliated minority interest in our Wacos, Inc., subsidiary in December 1999. The aggregate purchase price of Wacos, Inc. was approximately $28.0 million which, based upon an independent appraisal by Willamette Management Associates of all the assets acquired and liabilities assumed, was allocated to the specifically identifiable tangible and intangible assets acquired. Intangible assets included approximately $4.0 million of in-process research and development which was charged to operations in December 1999, $0.2 million of assembled workforce and approximately $23.6 million of excess purchase price over the fair market values of the tangible and identified intangible assets, which is being amortized over periods of three to five years. INTEREST INCOME (EXPENSES), NET. Net interest income was $8.9 million in 2000 and net interest expenses were $1.0 million in 1999. The increase in interest income was primarily due to increased interest income from higher average cash balances as a result of the completion of our initial public offering in March 2000 and sale of our preferred stock in November and December 1999. OTHER INCOME (EXPENSES), NET. Net other income was $1.9 million in 2000 and net other expenses were $1.2 million in 1999. The increase in other income was primarily due to a one-time gain on non-trade receivables which related to receipts of balances previously considered uncollectible. EQUITY IN INCOME (LOSS) OF AFFILIATED COMPANIES. Consolidated equity in net loss of affiliated companies was $0.3 million in 2000 and consolidated equity in net income of affiliated companies was $1.3 million in 1999. The change between the two periods was primarily due to the decrease of net income at our Guangdong manufacturing subsidiary. INCOME TAX EXPENSES. Income tax expenses were $14.0 million in 2000 and $0.6 million in 1999. The increase in the income tax expenses was due to our increasing income. MINORITY INTEREST IN EARNINGS OF CONSOLIDATED SUBSIDIARIES. Minority interest in earnings of consolidated subsidiaries was $2.3 million in 2000 and $2.1 million in 1999. The change between the two periods was primarily due to the increased profitability at our Zhejiang manufacturing subsidiary. 30 BENEFICIAL CONVERSION FEATURE. The issuance of Series F preferred stock in 1999 included a beneficial conversion feature pursuant to which the preferred shares converted into common shares on a one-for-one basis at a price below the expected offering price upon the completion of our initial public offering. This resulted in a charge to net income in 1999 of approximately $30.0 million, reducing diluted earnings per share available to common stockholders by $3.45. CUMULATIVE EFFECT. Effective January 1, 2000, we adopted Staff Accounting Bulletin 101 (SAB 101) issued by the Securities and Exchange Commission in December 1999. As a result of adopting SAB 101, we changed the way we recognize revenue in certain contracts that had previously led to revenue being recognized as contract stages were completed and accepted. In light of the guidance issued in SAB 101, we changed our method of revenue recognition to the point of contractual final acceptance. In addition, certain contracts include service requirements for which revenue was previously recognized, and costs accrued, on contractual acceptance. In consideration of SAB 101, revenues associated with these service requirements are being deferred until the service obligations are completed. Due to these changes, we recorded a cumulative adjustment in first quarter 2000 of $1.0 million (net of income taxes of $0) or $0.01 per share, basic and diluted. The impact in 2000 of adopting SAB 101 was to reduce net income before the cumulative effect of the accounting change by $0.3 million with no effect on basic or diluted net income per share. COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 NET SALES. Our net sales increased 78.2% to $187.5 million in 1999 from $105.2 million in 1998. This increase was primarily due to an increase in sales volume of our PAS system. In 1999, sales to Xian Telecommunications Bureau and Kunming Telecommunications Bureau accounted for 30.2% and 10.7% of our net sales, respectively. In 1998, no customers accounted for over 10% of our net sales. GROSS PROFIT. Gross profit increased 82.4% to $74.8 million in 1999 from $41.0 million in 1998. Gross profit, as a percentage of net sales, increased to 39.9% in 1999 from 39.0% in 1998. The increase in gross profit, as a percentage of net sales, was primarily due to manufacturing economies of scale and significant increases in sales of higher margin network access products and a shift in product mix toward higher margin network access products. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 51.3% to $35.1 million in 1999 from $23.2 million in 1998. The increase in selling, general and administrative expenses was primarily due to increased sales and administrative personnel and related expenses, including sales commissions, associated with the growth in net sales and the expansion of our overall level of business activities, and non-cash stock compensation expense which increased to $4.3 million in 1999 from $0.4 million in 1998. Selling, general and administrative expenses as a percentage of net sales decreased to 18.7% in 1999 from 22.1% in 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to economies of scale associated with the significant increases in net sales. We expect our selling, general and administrative expenses to increase in absolute dollar amounts in future periods as sales and marketing activities increase and we further invest in infrastructure and incur additional expenses related to anticipated growth of our business and operation as a publicly held company. RESEARCH AND DEVELOPMENT. Research and development expenses increased 26.5% to $18.6 million in 1999 from $14.7 million in 1998. The increase in research and development expenses was primarily due to the hiring of additional technical personnel, increased prototype expenses and licensing fees to support our research and development efforts, and non-cash stock compensation expense which increased to $1.3 million in 1999 from $22,000 in 1998. As a percentage of net sales, research and development expenses decreased to 10.0% in 1999 from 13.9% in 1998. We expect our research and development expenses to increase in absolute dollar amounts in future periods as we expand our research and development organization to support new product development. 31 AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased to $0.3 million in 1999 from $0.1 million in 1998. The increase in amortization of intangible assets was due to the increase in amortization associated with our December 1999 acquisition of the portion of our Wacos, Inc. subsidiary owned by the minority shareholders. IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In-process research and development costs resulted from our acquisition of the non-affiliated minority interest in our Wacos, Inc., subsidiary in December 1999. The aggregate purchase price of Wacos, Inc. was approximately $28.0 million which, based upon an independent appraisal by Willamette Management Associates of all the assets acquired and liabilities assumed, was allocated to the specifically identifiable tangible and intangible assets acquired. Intangible assets included approximately $4.0 million of in-process research and development which was charged to operations in December 1999, $0.2 million of assembled workforce and approximately $23.6 million of excess purchase price over the fair market values of the tangible and identified intangible assets, which is being amortized over periods of three to five years. INTEREST INCOME (EXPENSES), NET. Net interest expenses were $1.0 million in 1999 and $0.1 million in 1998. The increase in interest expense was primarily due to increased interest charges on higher average debt balances combined with decreased interest income from lower average cash balances. OTHER INCOME (EXPENSES), NET. Net other expenses were $1.2 million in 1999 and $1.0 million in 1998. The 1999 other expense was primarily due to a loss on asset sales. The 1998 other expense was primarily due to a loss on one investment. EQUITY IN INCOME (LOSS) OF AFFILIATED COMPANIES. Consolidated equity in net income of affiliated companies was $1.3 million in 1999 and consolidated equity in net loss of affiliated companies was $0.8 million in 1998. The change between the two periods was primarily due to the increase of net income at our Guangdong manufacturing subsidiary. INCOME TAX EXPENSES. Income tax expenses were $0.6 million in 1999 and $1.4 million in 1998. The decrease in income tax expenses was due to required adjustments to our deferred tax asset valuation allowance, and also reflected tax incentives and a one-time tax refund of $0.4 million in China in 1999. MINORITY INTEREST IN (EARNINGS) LOSS OF CONSOLIDATED SUBSIDIARIES. Minority interest in earnings of consolidated subsidiaries was $2.1 million in 1999 and minority interest in loss of consolidated subsidiaries was $0.9 million in 1998. The change between the two periods was primarily due to the increased profitability at our Zhejiang manufacturing subsidiary. LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was $1.7 million in 1999 compared to $0.9 million in 1998. BENEFICIAL CONVERSION FEATURE. The issuance of Series F preferred stock in 1999 included a beneficial conversion feature pursuant to which the preferred shares converted into common shares on a one-for-one basis at a price below the expected offering price upon the completion of our initial public offering. This resulted in a charge to net income in 1999 of approximately $30.0 million, reducing diluted earnings per share available to common stockholders by $3.45. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations through the sales of preferred stock, bank lines of credit and our initial public offering in March 2000. In November and December 1999, we secured private equity financing totaling $55.0 million. In March 2000, we raised $189.4 million in net proceeds from our initial public offering. In April 2000, we made a payment of $8.7 million to SOFTBANK to repay a stockholder loan. In July 2000, we established a line of credit with Commercial Bank of Hangzhou to 32 borrow up to $24.1 million. As of December 31, 2000, we have borrowed $12.0 million under this line of credit and classified this $12.0 million borrowings as long-term debt. As of December 31, 2000, we had working capital of $369.9 million, including $149.1 million in cash and cash equivalents, $83.9 million of short-term investments and $43.4 million of Renminbi-denominated bank borrowings. We have invested $8.0 million and may invest up to an additional $7.0 million in an investment fund established by SOFTBANK focused on investments in Internet companies in China. Our investment constitutes 10% of the funding for Softbank China Holdings Pte., Ltd. ("Softbank China"), with SOFTBANK contributing the remaining 90%. We are a passive investor and have no decision-making authority with respect to investments by the fund. The fund has a separate management team, and none of our employees is employed by the fund. One of our directors serves as the Chief Executive Officer of the fund, and our Chief Executive Officer is the chairman of the board of the fund. We are not obligated to pay, nor do we receive, any fees in connection with services provided to the fund. We do not know what material fees will be paid to or by SOFTBANK or any other parties in connection with services provided to the fund. Many of the fund's investments will be in privately held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products the companies have under development are typically in the early stages and may never materialize. As a result, we may experience losses in connection with this investment in Softbank China. Net cash used in operations in 2000 of $46.2 million was primarily due to an increase in inventories, accounts receivable and other current and non-current assets of $60.7 million, $81.1 million and $4.9 million, respectively. The uses of cash were partially offset by depreciation and amortization expense of $9.5 million, amortization of deferred stock compensation expense of $11.6 million, and an increase in accounts payable, income taxes payable and other current liabilities and deferred revenue of $14.1 million, $5.9 million and $28.0 million, respectively. Net cash used in investing activities in 2000 of $111.4 million was primarily due to acquisition of property, plant and equipment of $19.5 million, our $8.0 million investment in Softbank China, and the purchase of short-term investments of $83.8 million. Net cash provided by financing activities in 2000 of $219.3 million was primarily due to net proceeds of $198.2 million from the issuance of common stock through our initial public offering and exercise of stock options, and net proceeds of $20.8 million from borrowing under our lines of credit. Our international sales are generally denominated in local currencies. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China. Although the impact of currency fluctuations to date has been insignificant, we cannot guarantee that fluctuations in currency exchange rates in the future will not have a material adverse effect on revenues from international sales and, correspondingly, on our business, financial condition and results of operations. We also have contracts negotiated in Japanese Yen for purchasing portions of our inventories and supplies. We have a multi-currency bank account in Japanese Yen for purchasing portions of our inventories and supplies. The balance of this Japanese Yen account as of December 31, 2000 is approximately $10.6 million. We believe that our existing cash and cash equivalents, short-term investments and cash from operations will be sufficient to finance our operations through at least the next 12 months. If additional financing is needed, there can be no assurance that such financing will be available to us on commercially reasonable terms, or at all. 33 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. We adopted SFAS No. 133 on January 1, 2001, and the adoption is not expected to materially impact the financial statements. In September 2000, the FASB issued SFAS No. 140 (SFAS 140), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires entities that have securitized financial assets to provide specific disclosures. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. We adopted SFAS No. 140 on January 1, 2001, and the adoption is not expected to materially impact the financial statements. FACTORS AFFECTING FUTURE OPERATING RESULTS OUR FUTURE SALES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate in the future due to a variety of factors, some of which are outside of our control. As a result, period to period comparisons of our operating results are not necessarily meaningful or indicative of future performance. Furthermore, it is likely that in some future quarters our operating results will fall below the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could decline. Factors that may affect our future operating results include: - the timing, number and size of orders for our products, as well as the relative mix of orders for each of our products, particularly the volume of lower margin telephone handsets; - the evolving and unpredictable nature of the economic, regulatory and political environments in China and other countries in which we market or plan to market our products; - aggressive price reductions by our competitors; - currency fluctuations; - market acceptance of our products and product enhancements; - the lengthy and unpredictable sales cycles associated with sales of our products combined with the impact of this variability on our suppliers' ability to provide us with components on a timely basis; and - longer collection periods of accounts receivable in China and other countries. The limited performance history of some of our products, our limited forecasting experience and processes and the emerging nature of our target markets make forecasting our future sales and operating results difficult. Our expense levels are based, in part, on our expectations regarding future sales, and these expenses are largely fixed, particularly in the short term. In addition, to enable us to 34 promptly fill orders, we maintain inventories of finished goods, components and raw materials. As a result, we commit to considerable costs in advance of anticipated sales. In the past, a substantial portion of our sales in each quarter resulted from orders received and shipped in that quarter, and we have operated with a limited backlog of unfilled orders. Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales. Any significant shortfall of sales may require us to maintain higher levels of inventories of finished goods, components and raw materials than we require, thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs. Although we have reserved against inventory obsolescence, we cannot guarantee that these reserves will be adequate to offset all write-downs or write-offs. WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT As of December 31, 2000, we had an accumulated deficit of approximately $7.8 million. We anticipate continuing to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we will need to generate higher revenues to sustain profitability. Numerous factors could negatively impact our results of operations, including a decrease in sales, price pressures and a fixed cost structure which could limit our ability to respond to declining revenues. Although our sales have grown in recent quarters, our past results should not be relied on as indications of our future performance. We cannot assure you that we will be able to remain profitable in future periods. COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES, REVENUES AND MARKET SHARE We face intense competition in our target markets and expect competition to increase. Our principal competitors in our various product lines include: - PAS: Lucent Technologies, Inc. and Zhongxing Telecommunications Equipment. - AN-2000: Advanced Fibre Communications, Inc.; Alcatel Alsthom CGE, S.A.; Huawei Technology Co., Ltd.; Lucent; NEC Corporation; and Zhongxing. - WACOS SYSTEM: Alcatel; Cisco Systems, Inc.; Clarent Corporation; Ericsson LM Telephone Co.; Huawei; Lucent; Motorola, Inc.; Nokia Corporation; Nortel Networks Corporation; Nuera Communications, Inc.; Siemens AG; and Vienna Systems Corp. We are increasingly facing competition from domestic companies in China. We believe that our strongest competition in the future may come from these companies, many of which operate under lower cost structures and more favorable governmental policies and have much larger sales forces than we do. Furthermore, other companies not presently offering competing products may also enter our target markets. Many of our competitors have significantly greater financial, technical, product development, sales, marketing and other resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in service provider requirements. Our competitors may also be able to devote greater resources than we can to the development, promotion and sale of new products. These competitors may also be able to offer significant financing arrangements to service providers, in some cases facilitated by government policies, which is a competitive advantage in selling systems to service providers with limited financial and currency resources. Increased competition is likely to result in price reductions, reduced gross profit as a percentage of net sales and loss of market share, any one of which could materially harm our business, financial condition and results of operations. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties, including Telecommunications Administrations, 35 Telecommunications Bureaus and other local organizations, to increase the ability of their products to address the needs of prospective customers in our target markets. Accordingly, alliances among competitors or between competitors and third parties may emerge and rapidly acquire significant market share. To remain competitive, we believe that we must continue to partner with Telecommunications Administrations and other local organizations, maintain a high level of investment in research and development and in sales and marketing, and manufacture and deliver products to service providers on a timely basis and without significant defects. If we fail to meet any of these objectives, our business, financial condition and results of operations could be harmed. The introduction of inexpensive wireless telephone service or other competitive services in China may also have an adverse impact on sales of our PAS system in China. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures in the future will not materially adversely effect our business, financial condition and results of operations. We believe that the principal competitive factors affecting the market for our network access products include: - total initial cost of solution; - short delivery and installation intervals; - design and installation support; - ease of integration with the backbone network; - flexibility in supporting multiple interfaces and services; - life-cycle cost determined by reliability; and - manageability of the solution and scalability. We believe we have in the past generally competed favorably with offerings of our competitors on the basis of these factors. However, we may not be able to compete effectively against current and future competitors based on these or any other competitive factors in the future, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. THE SUCCESS OF OUR BUSINESS DEPENDS ON A RELATIVELY SMALL NUMBER OF LARGE SYSTEM DEPLOYMENTS, AND ANY CANCELLATION, REDUCTION OR DELAY IN THESE DEPLOYMENTS COULD HARM OUR BUSINESS Our business is characterized by large system deployments for a relatively small number of service providers. In 2000, one customer, Hangzhou Telecommunications Bureau, accounted for 12.1% of our net sales. Our dependence on large system deployments makes our ability to provide systems in a timely and cost-effective manner critically important to our business. We have in the past experienced delays and encountered other difficulties in the installation and implementation of our systems. Various factors could cause future delays, including technical problems and the shortage of qualified technicians. Any delays or difficulties in deploying our systems, or the cancellation of any orders by service providers, could significantly harm our business. WE DO NOT HAVE SOME OF THE LICENSES WE ARE REQUIRED TO HAVE TO SELL OUR NETWORK ACCESS PRODUCTS IN CHINA Beginning January 1, 1999, China's government required that all telecommunications equipment connected to public or private telecommunications networks within China be approved by the Ministry of Information Industry and the manufacturer of the equipment obtain a network access license for each of its products. Sellers are prohibited from selling or advertising for sale equipment for which its 36 manufacturer has not obtained a network access license and may be liable for penalties in an amount up to three times earnings from the sale of any equipment sold beginning January 1, 1999 without a license. In addition, any unlicensed equipment may be required to be removed from the network. Failure to obtain the required licenses could require us to remove previously installed equipment and would prohibit us from making further sales of the unlicensed products in China, which would substantially harm our business. The regulations implementing these requirements are not very detailed, have not been applied by a court and may be interpreted and enforced by regulatory authorities in a number of different ways. Accordingly, we have obtained an opinion from our counsel in China as to which licenses we are required to obtain. Based upon this counsel's advice, we believe that we have obtained the required network access licenses for our AN-2000 system, bundled OMUX product and standard OMUX product. We have applied for a network access license for our PAS system. In June 2000, the Ministry of Information Industry issued an internal notice concluding its review of PHS-based equipment. Our PAS system will continue to be allowed in China's county-level cities and counties, which are our primary markets for our PAS system. In large and medium-sized cities, our PAS system may be used on a limited basis where there is a high concentration of population, such as communities, commercial buildings and special development zones. New city-wide PAS system deployments will not be allowed in large and medium-size cities. The evaluation group for access networks under the Ministry of Information Industry has recommended that the Ministry of Information Industry issue a license for our PAS system. However, we do not yet have this network access license and we cannot provide any assurance that such a license will be issued for our PAS system. In addition, there is no assurance that the Ministry of Information Industry will not conduct any further review/evaluation of PHS-based equipment or change its order regarding PHS-based systems in the future. We have also applied for network access licenses for other products which we are no longer manufacturing but had previously sold to service providers in China. Network access licenses will be required for any additional products that we may develop for sale in China, including our WACOS system. Based upon verbal inquiries made by our counsel in China to the Ministry of Information Industry, we believe that for products which we sold before January 1, 1999, such as the PAS system, no penalties will be imposed by the Ministry of Information Industry for sales we have made or will make during the period in which an application for a network access license is pending. However, our counsel in China has advised us that China's governmental authorities may interpret or apply the regulations with respect to which licenses are required and the ability to sell a product while an application for a network access license is pending in a manner that is inconsistent with the verbal representation received by our counsel in China, either of which could have a material adverse effect on our business and financial condition. The State Council issued the Telecommunications Regulations of the People's Republic of China on September 25, 2000 ("Telecom Regulations"). The Telecom Regulations restate that the government implements license systems for telecommunications terminal equipment, wireless communications equipment and equipment used in network interconnection that is connected to public telecommunications networks. The above equipment must meet government standards, and a network access license must be obtained. The Telecom Regulations require that telecommunications equipment producers must ensure that the quality of the telecommunications equipment for which they have obtained a network access license is stable and reliable and they may not lower the quality or performance of their products. The State Council's product quality supervision department in concert with the Ministry of Information Industry shall perform spot checks to track and supervise the quality of telecommunications equipment for which a network access license has been obtained and publish the results of such spot checks. Because the Telecom Regulations are new and quite general and have not been further interpreted by the government, we have been unable to ascertain detailed guidance on the license system for telecommunications equipment connected to the network. 37 OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO COLLECT PAYMENTS FROM OUR CUSTOMERS ON A TIMELY BASIS Our customers often must make a significant commitment of capital to purchase our products. As a result, any downturn in a customer's business that affected the customer's ability to pay us could harm our financial condition. Moreover, accounts receivable collection cycles historically tend to be much longer in China than in other markets. The failure of any of our customers to make timely payments could require us to write-off accounts receivable or increase our accounts receivable reserves, either of which could adversely affect our financial condition. A DECLINE IN BUSINESS ACTIVITY DURING CHINA'S LUNAR NEW YEAR MAY RESULT IN DECREASED SALES DURING OUR FIRST QUARTER Business activity in China declines considerably during the first quarter of each year in observance of the Lunar New Year. As a result, sales during the first quarter of our fiscal year have in the past typically been lower than sales during the fourth quarter of the preceding year and we expect this trend to continue in the future. We will continue to face this seasonality in the future and do not have the ability to forecast with any degree of certainty the impact of the decreased business activity during the Lunar New Year on our sales and operating results. OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE The emerging market for communications equipment in developing countries is characterized by rapid technological developments, frequent new product introductions and evolving industry and regulatory standards. Our success will depend in large part on our ability to enhance our network access and switching technologies and develop and introduce new products and product enhancements that anticipate changing service provider requirements and technological developments. We may need to make substantial capital expenditures and incur significant research and development costs to develop and introduce new products and enhancements. If we fail to timely develop and introduce new products or enhancements to existing products that effectively respond to technological change, our business, financial condition and results of operations could be materially adversely affected. From time to time, we or our competitors may announce new products or product enhancements, services or technologies that have the potential to replace or shorten the life cycles of our products and that may cause customers to defer purchasing our existing products, resulting in inventory obsolescence. Future technological advances in the communications industry may diminish or inhibit market acceptance of our existing or future products or render our products obsolete. Even if we are able to develop and introduce new products, we cannot assure you that they will gain market acceptance. Market acceptance of our products will depend on various factors including: - our ability to obtain necessary approvals from regulatory organizations; - the perceived advantages of the new products over competing products; - our ability to attract customers who have existing relationships with our competitors; - product cost relative to performance; and - the level of customer service available to support new products. Specifically, sales of our AN-2000 system outside of China depend, in part, on the adoption of the V5.2 standard in these markets. Additionally, sales of our Personal Access System, or PAS, the mobile component of our PAS wireless system, will depend in part upon consumer acceptance of the mobility 38 limitations of this service. The introduction of inexpensive wireless telephone service or other competitive services in China may have a material adverse effect on sales of our PAS systems in China. If our existing or new products fail to achieve market acceptance for any reason, our business could be seriously harmed. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO DELIVER QUALITY PRODUCTS ON A TIMELY AND COST EFFECTIVE BASIS Our operating results depend on our ability to manufacture products on a timely and cost effective basis. In the past, we have experienced reductions in yields as a result of various factors, including defects in component parts and human error in assembly. If we experience a deterioration in manufacturing performance or a delay in production of any of our products, we could experience delays in shipments and cancellations of orders. Moreover, networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with service providers' products which incorporate a variety of components produced by third parties. As a result, when a problem occurs, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, any one of which could harm our business. If future demand for our products requires additional manufacturing capacity, we may invest in and build additional manufacturing facilities, most likely in China. However, we cannot assure you that the new manufacturing facilities will attain the same quality or level of efficiencies as our existing facilities. Alternatively, or in addition, we may contract with third party manufacturing facilities over which we may be unable to exercise the same degree of quality control as we can over our own facilities. We currently have no arrangements with any independent manufacturing facility, and we may not be able to obtain independent manufacturing sources on commercially attractive terms if and when needed. WE DEPEND ON SOME SOLE SOURCE AND OTHER KEY SUPPLIERS FOR HANDSETS, COMPONENTS AND MATERIALS USED IN OUR PRODUCTS, AND IF THESE SUPPLIERS FAIL TO PROVIDE US WITH ADEQUATE SUPPLIES OF HIGH QUALITY PRODUCTS AT COMPETITIVE PRICES, OUR COMPETITIVE POSITION, REPUTATION AND BUSINESS COULD BE HARMED Some components and materials used in our products are purchased from a single supplier or a limited group of suppliers. If any supplier is unwilling or unable to provide us with high quality components and materials in the quantities required and at the costs specified by us, we may not be able to find alternative sources on favorable terms, in a timely manner, or at all. Our inability to obtain or to develop alternative sources if and as required could result in delays or reductions in manufacturing or product shipments. Moreover, these suppliers may delay product shipments or supply us with inferior quality products. If any of these events occur, our competitive position, reputation and business could suffer. OUR ABILITY TO SOURCE A SUFFICIENT QUANTITY OF HIGH QUALITY HANDSETS AND OTHER COMPONENTS USED IN OUR PRODUCTS MAY BE LIMITED BY CHINA'S IMPORT RESTRICTIONS AND DUTIES AS WELL AS OUR ABILITY TO OBTAIN SUFFICIENT DOMESTIC MANUFACTURING CAPACITY We require a significant number of imported components to manufacture our products in China. Imported electronic components and other imported goods used in the operation of our business are subject to a variety of permit requirements, approval procedures and import duties. Failure to obtain 39 necessary permits or approvals, administrative actions by China's government to limit imports of certain components, or non-payment of required import duties could subject us to penalties and fines and could adversely affect our ability to manufacture and sell our products in China. In addition, import duties increase the cost of our products and may make them less competitive. In particular, an integral component of our PAS system is the handset used by subscribers to make and receive mobile telephone calls. Our inability to obtain a sufficient number of high quality handsets could severely harm our business. A worldwide shortage of handsets existed in 2000, and there continues to be a shortage in low-priced handsets, which we have found to be popular with many consumers in China. Although we have contracted with Japanese vendors to manufacture handsets under the UTStarcom label, we cannot assure you that they will be able to supply adequate quantities of handsets. Moreover, we must pay an import duty on each handset that we import into China, which may result in a competitive cost advantage for our competitors who produce handsets in China. As a result, we are evaluating various manufacturing alternatives within China. We are in the early stages of utilizing third parties to manufacture handsets for us in China. However, these manufacturers may be unable to produce adequate quantities of high-quality handsets to meet the demand of our customers. We continue to develop the capacity to manufacture our own handsets. However, we may be unsuccessful in our efforts to do so. Additionally, to comply with manufacturing regulations in China we will need to obtain components for our handsets from local sources. These sources may not be able to produce adequate quantities of components that meet our quality standards. IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION IN CHINA AND INDIRECT DISTRIBUTION CHANNELS ELSEWHERE OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR OPERATING RESULTS MAY SUFFER Our distribution strategy focuses primarily on developing and expanding our direct sales organization in China and our indirect distribution channels outside of China. We may not be able to successfully expand our direct sales organization in China and the cost of any expansion may exceed the revenue generated from these efforts. Even if we are successful in expanding our direct sales organization in China, we may not be able to compete successfully against the significantly larger and better-funded sales and marketing operations of current or potential competitors. In addition, if we fail to develop relationships with significant international resellers or manufacturers' representatives, or if these resellers or representatives are not successful in their sales or marketing efforts, we may be unsuccessful in our expansion efforts outside China. WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE OUR REVENUES, AND, AS A RESULT, WE MUST INTRODUCE NEW PRODUCTS AND REDUCE OUR COSTS IN ORDER TO MAINTAIN PROFITABILITY The average selling prices for communications access and switching systems and subscriber terminal products, such as handsets, in China have been declining as a result of a number of factors, including: - increased competition; - aggressive price reductions by competitors; - rapid technological change; and - price and performance enhancements. 40 We have in the past experienced and expect in the future to experience substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices of our products will decrease in the future in response to product introductions by us or our competitors or other factors, including price pressures from customers. Therefore, we must continue to develop and introduce new products and enhancements to existing products that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our revenues and gross profit, as a percentage of net sales, to decline. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures or lead to improved gross profit, as a percentage of net sales. In order to be competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce the prices of our products to remain competitive or to improve or maintain our gross profit, as a percentage of net sales. SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGIN PERCENTAGE OF NET SALES Our gross profit margin percentage of net sales varies among our product groups. Our gross margin percentage of net sales is generally higher on our access network system products and our gross margin percentage of net sales is significantly lower on our handset products. We also anticipate that the gross margin percentage of net sales may be lower for our newly developed products due to start-up costs and may improve as unit volumes increase and efficiency can be realized. Our overall gross margin percentage of net sales has fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs. As a result of a growth in sales of handset products over the past few quarters, we have experienced a sustained product shift toward a greater percentage of handset products resulting in a decline in overall gross margin percentage of net sales. In addition, we expect to introduce new products in the future periods. As a result of these recent trends, a potential decrease in overall gross margin percentage of net sales may be experienced. SERVICE PROVIDERS SOMETIMES EVALUATE OUR PRODUCTS FOR LONG AND UNPREDICTABLE PERIODS WHICH CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE UNPREDICTABLE The period of time between our initial contact with a service provider and the receipt of an actual purchase order may span a year or more. During this time, service providers may subject our products to an extensive and lengthy evaluation process before making a purchase. The length of these qualification processes may vary substantially by product and service provider, making our results of operations unpredictable. We may incur substantial sales and marketing expenses and expend significant management effort during this process, which ultimately may not result in a sale. These qualification processes often make it difficult to obtain new customers, as service providers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. OUR INABILITY TO EXERCISE COMPLETE CONTROL OVER OUR SUBSIDIARIES MAY BE DETRIMENTAL TO OUR BUSINESS A considerable portion of our operations is and will continue to be conducted through direct and indirect subsidiaries. For example, we own an 88% interest in a joint venture which operates the Zhejiang manufacturing facility and a 51% interest in a joint venture which operates the Guangdong manufacturing facility. Even though we may own a majority interest in these joint ventures, we do not have sole power to control all of the policies and decisions of these jointly-owned subsidiaries. 41 Under the law of China governing Sino-foreign joint ventures, equity holders exercise rights primarily through the board of directors, which constitutes the highest authority of the joint venture. Although we own a majority of the Guangdong joint venture, we are only entitled to appoint a minority of the directors to the joint venture's board of directors, which prevents us from controlling the actions of the board. Moreover, even though we hold a majority of the board seats in the Zhejiang joint venture, China law requires unanimous approval of the board of directors for some significant corporate actions, including: - amendment of the Articles of Association of the joint venture; - liquidation or dissolution of the joint venture; - any increase, decrease or transfer of equity interests of any party to the joint venture; and - a merger of the joint venture with another economic entity. Our operating results and cash flow depend on the operating results and cash flow of our subsidiaries and the payment of funds by those subsidiaries to us. These subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay dividends or otherwise provide financial benefits to us. Moreover, with respect to our Guangdong manufacturing joint venture, any payment of dividends to us must be agreed to by our joint venture partner, whose interests in receiving dividend distributions may not coincide with ours. In addition, applicable law in some countries including China limits the ability of a subsidiary to pay dividends for various reasons including the absence of sufficient distributable reserves. In the event of any insolvency, bankruptcy or similar proceedings, creditors of the subsidiaries would generally be entitled to priority over us with respect to assets of the affected subsidiary. In addition, because our joint venture partners in both Zhejiang and Guangdong provinces are affiliated with the provincial Telecommunications Administrations that operate the telecommunication networks in these areas, if we fail to maintain these joint ventures, sales to our customers located in these areas may decrease. OUR MULTI-NATIONAL OPERATIONS SUBJECT US TO VARIOUS ECONOMIC, POLITICAL, REGULATORY AND LEGAL RISKS We market and sell our products in China and other markets. The expansion of our existing multi-national operations and entry into additional international markets will require significant management attention and financial resources. Multi-national operations are subject to inherent risks, including: - difficulties in designing products that are compatible with varying international communications standards; - longer accounts receivable collection periods and greater difficulty in accounts receivable collection; - unexpected changes in regulatory requirements; - changes to import and export regulations, including quotas, tariffs and other trade barriers; - delays or difficulties in obtaining export and import licenses; - potential foreign exchange controls and repatriation controls on foreign earnings; - exchange rate fluctuations and currency conversion restrictions; - the burdens of complying with a variety of foreign laws and regulations; - difficulties and costs of staffing and managing multi-national operations; - reduced protection for intellectual property rights in some countries; 42 - potentially adverse tax consequences; and - political and economic instability. Multinational companies are required to establish intercompany pricing for transactions between their separate legal entities operating in different taxing jurisdictions. These intercompany transactions are subject to audit by taxing authorities in the jurisdictions in which multinational companies operate. An additional tax liability may be incurred if it is determined that intercompany pricing was not done at arm's length. We believe we have adequately estimated and recorded our liability arising from intercompany pricing, but we cannot assure you that an additional tax liability will not result from audits of our intercompany pricing policies. In markets outside of China, we rely on a number of original equipment manufacturers, or OEMs, and third-party distributors and agents to market and sell our network access products. If these OEMs, distributors or agents fail to provide the support and effort necessary to service developing markets effectively, our ability to maintain or expand our operations outside of China will be negatively impacted. We cannot assure you that we will successfully compete in these markets, that our products will be accepted or that we will successfully overcome the risks associated with international operations. Our international sales are generally denominated in local currencies. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China. Although the impact of currency fluctuations to date has been insignificant, fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations. We have a multi-currency bank account in Japanese Yen for purchasing portions of our inventories and supplies. As of December 31, 2000, this Japanese Yen bank account is valued at $10.6 million. OUR FAILURE TO MEET INTERNATIONAL AND GOVERNMENTAL PRODUCT STANDARDS COULD BE DETRIMENTAL TO OUR BUSINESS Many of our products are required to comply with numerous government regulations and standards, which vary by market. As standards for products continue to evolve, we will need to modify our products or develop and support new versions of our products to meet emerging industry standards, comply with government regulations and satisfy the requirements necessary to obtain approvals. Our inability to obtain regulatory approval and meet established standards could delay or prevent our entrance into or force our departure from markets. OUR RECENT GROWTH HAS STRAINED OUR RESOURCES, AND IF WE ARE UNABLE TO MANAGE AND SUSTAIN OUR GROWTH, OUR OPERATING RESULTS WILL BE NEGATIVELY AFFECTED We have recently experienced a period of rapid growth and anticipate that we must continue to expand our operations to address potential market opportunities. If we fail to implement or improve systems or controls or to manage any future growth and expansion effectively, our business could suffer. Our expansion has placed and will continue to place a significant strain on our management, operational, financial and other resources. Many of the members of our management team have limited experience in the management of rapidly growing companies. To manage our growth effectively, we will need to take various actions, including: - enhancing management information systems and forecasting procedures; - further developing our operating, administrative, financial and accounting systems and controls; - maintaining close coordination among our engineering, accounting, finance, marketing, sales and operations organizations; 43 - expanding, training and managing our employee base; and - expanding our finance, administrative and operations staff. OUR SUCCESS IS DEPENDENT ON CONTINUING TO HIRE AND RETAIN QUALIFIED PERSONNEL, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, OUR BUSINESS WOULD BE HARMED The success of our business depends in significant part upon the continued contributions of key technical and senior management personnel, many of whom would be difficult to replace. In particular, our success depends in large part on the knowledge, expertise and services of Hong Liang Lu, our President and Chief Executive Officer, and Ying Wu, our Executive Vice President and Chief Executive Officer of China Operations. The loss of any key employee, the failure of any key employee to perform satisfactorily in his or her current position or our failure to attract and retain other key technical and senior management employees could have a significant negative impact on our operations. To effectively manage our recent growth as well as any future growth, we will need to recruit, train, assimilate, motivate and retain qualified employees. Competition for qualified employees is intense, and the process of recruiting personnel with the combination of skills and attributes required to execute our business strategy can be difficult, time-consuming and expensive. We are actively searching for research and development engineers and sales and marketing personnel, who are in short supply. Additionally, we have a need for and have experienced difficulty in finding qualified accounting personnel knowledgeable in U.S. and China accounting standards. If we fail to attract, hire, assimilate or retain qualified personnel, our business would be harmed. Competitors and others have in the past and may in the future attempt to recruit our employees. In addition, companies in the communications industry whose employees accept positions with competitors frequently claim that the competitors have engaged in unfair hiring practices. We may be the subject of these types of claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation and disruption to our operations. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND HARM OUR OPERATING RESULTS We continually evaluate acquisition prospects that would complement our existing product offerings, augment our market coverage, enhance our technological capabilities, or that may otherwise offer growth opportunities. Acquisitions of other companies may result in dilutive issuances of equity securities, the incurrence of debt and the amortization of expenses related to goodwill and other intangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies, products and personnel of the acquired company, diversion of management's attention from other business concerns, risks of entering markets in which we have no direct or limited prior experience, and the potential loss of key employees of ours and the acquired company. WE MAY EXPERIENCE DIFFICULTY IN IDENTIFYING, FORMING AND MAINTAINING NEW BUSINESS VENTURES THAT ARE IMPORTANT TO THE DEVELOPMENT OF OUR BUSINESS, AND INVESTMENTS IN THESE VENTURES MAY NOT GENERATE RETURNS We have invested, and expect to continue to invest, significant capital in new business ventures that are important to the development of our business. We cannot assure you that we will be able to continue to identify suitable parties for new ventures and investments in the future. The failure to form or maintain new ventures, or to identify suitable investment opportunities, could significantly limit our ability to expand our operations. Many of our investments have been in privately held companies, many 44 of which can still be considered in the start-up or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. Moreover, these new ventures or investments require significant management time and will present significant challenges. We cannot assure you that these activities will be successful or that we will realize returns on these activities. Additionally, if any venture or investment fails, our business could be negatively impacted. WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND MAY BE SUBJECT TO CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY OF OTHERS, EITHER OF WHICH COULD SUBSTANTIALLY HARM OUR BUSINESS We rely on a combination of patents, copyrights, trade secret laws and contractual obligations to protect our technology. Although we have applied for several patents in the United States, one of which has been issued, as well as in other countries, we cannot assure you that any additional patents will be issued as a result of pending patent applications or that our issued patents will be upheld. Moreover, we have not yet obtained patents in China. We can give no assurance that we will be able to obtain patents in China on our products or the technology that we use to manufacture our products. Our subsidiaries and joint ventures in China rely upon our trademarks, technology and know-how to manufacture and sell our products. We cannot guarantee that these and other intellectual property protection measures will be sufficient to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to ours. In addition, the legal systems of many foreign countries, including China, do not protect intellectual property rights to the same extent as the legal system of the United States. If we are unable to adequately protect our proprietary information, our business, financial condition and results of operations could be materially adversely affected. The increasing dependence of the communications industry on proprietary technology has resulted in frequent litigation based on allegations of the infringement of patents and other intellectual property. In the future we may be subject to litigation to defend against claimed infringements of the rights of others or to determine the scope and validity of the proprietary rights of others. Future litigation also may be necessary to enforce and protect our trade secrets and other intellectual property rights. Any intellectual property litigation could be costly and could cause diversion of management's attention from the operation of our business. Adverse determinations in any litigation could result in the loss of our proprietary rights, subject us to significant liabilities or require us to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. We could also be subject to court orders preventing us from manufacturing or selling our products. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. Our headquarters facility in the State of California is currently subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event these blackouts continue or increase in severity, they could disrupt the operations at our headquarters. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. RISKS RELATING TO CONDUCTING OPERATIONS IN CHINA Sales in China account for substantially all of our sales. Approximately $364.0 million, or 98.8%, of our sales in 2000, $186.1 million, or 99.3%, of our sales in 1999, and $102.9 million, or 97.9%, of our sales in 1998 occurred in China. Additionally, a substantial portion of our fixed assets are located in China. Of our total fixed assets, approximately 69.4% as of December 31, 2000, 53.7% as of 45 December 31, 1999 and 46.4% as of December 31, 1998 were in China. We expect to make further investments in China in the future. Therefore, our business, financial condition and results of operations are to a significant degree subject to economic, political and social events in China. DEVALUATION IN THE VALUE OF THE RENMINBI AND FLUCTUATIONS IN EXCHANGE RATES COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS Exchange rate fluctuations could have a substantial negative impact on our financial condition and results of operations. We purchase substantially all of our materials in the United States and Japan and a significant portion of our cost of goods sold is incurred in U.S. dollars and Japanese yen. A significant portion of our operating expenses are incurred in U.S. dollars. At the same time, most of our sales are denominated in Renminbi. The value of the Renminbi is subject to changes in China's governmental policies and to international economic and political developments. Although the official exchange rate for the conversion of Renminbi to U.S. dollars has remained stable, with the Renminbi appreciating slightly against the U.S. dollar since 1994, the exchange rate experienced significant volatility prior to 1994 including periods of sharp devaluation. There can be no assurance that exchange rates will not become volatile or that the Renminbi will not devalue again against the U.S. dollar. In the past, financial markets in many Asian countries have experienced severe volatility and, as a result, some Asian currencies have experienced significant devaluation from time to time. The devaluation of some Asian currencies may have the effect of rendering exports from China more expensive and less competitive and therefore place pressure on China's government to devalue the Renminbi. Any devaluation of the Renminbi could result in an increase in volatility of Asian currency and capital markets. Future volatility of Asian financial markets could have an adverse impact on our ability to expand our product sales into Asian markets outside of China. Moreover, due to the limitations on the convertibility of Renminbi, we are limited in our ability to engage in currency hedging activities in China and do not currently engage in currency hedging activities with respect to international sales outside of China. CURRENCY RESTRICTIONS IN CHINA MAY LIMIT THE ABILITY OF OUR SUBSIDIARIES AND JOINT VENTURES IN CHINA TO OBTAIN AND REMIT FOREIGN CURRENCY NECESSARY FOR THE PURCHASE OF IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN AND REMIT FOREIGN CURRENCY IN EXCHANGE FOR RENMINBI EARNINGS China's government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Under the current foreign exchange control system, sufficient foreign currency may not be available to satisfy our currency needs. Shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries to obtain and remit sufficient foreign currency to pay dividends to us, or otherwise satisfy their foreign currency denominated obligations such as payments to us for components which we export to them and for technology licensing fees. We may also experience difficulties in completing the administrative procedures necessary to obtain and remit needed foreign currency. Moreover, we cannot assure you that China's government will continue the policy of making the Renminbi convertible under current accounts. Our inability to convert and remit our sales received in Renminbi into U.S. dollars and make necessary remittances could have a material adverse effect on our business, financial condition and results of operations. Our business could be substantially harmed if we are unable to convert our sales received in Renminbi into U.S. dollars. Under existing foreign exchange laws, Renminbi held by our China subsidiaries can be converted into foreign currencies and remitted out of China to pay current account items such as payments to suppliers for imports, labor services, payment of interest on foreign exchange loans and distributions of dividends so long as the subsidiaries have adequate amounts of Renminbi to purchase the foreign currency. Expenses of a capital nature such as the repayment of bank loans 46 denominated in foreign currencies, however, require approval from appropriate governmental authorities before Renminbi can be used to purchase foreign currency and then remitted out of China. This system could be changed at any time by executive decision of the State Council to impose limits on current account convertibility of the Renminbi or other similar restrictions. Moreover, even though the Renminbi is intended to be freely convertible under the current account, the State Administration of Foreign Exchange, which is responsible for administering China's foreign currency market, has a significant degree of administrative discretion in implementing the laws. From time to time, the State Administration of Foreign Exchange has used this discretion in ways which effectively limit the convertibility of current account payments and restrict remittances out of China. Furthermore, in many circumstances the State Administration of Foreign Exchange must approve foreign currency conversions and remittances. Under the current foreign exchange control system, sufficient foreign currency may not be available at a given exchange rate to satisfy our currency demands. CHANGES WITHIN CHINA'S COMMUNICATIONS MARKET COULD HARM OUR BUSINESS We derive substantially all of our sales from local telecommunications service providers in China which utilize network access equipment in the continued expansion and upgrading of China's communications infrastructure. The continued development of the communications infrastructure in China correspondingly depends, in part, on the demand for voice and data services in China and China's governmental policy. Although this industry has grown rapidly in the past, we cannot assure you that it will continue to grow in the future. Any reduced demand for voice and data services, any other downturn or other adverse changes in the China communications industry or the adoption or enforcement of government policies that limit or prohibit our ability to manufacture, market or sell our products could severely harm our business. CHINA'S TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND HAS RECENTLY BEEN RESTRUCTURED, WHICH HAS LED TO UNCERTAINTY China's telecommunications industry is heavily regulated by the Ministry of Information Industry. The Ministry of Information Industry controls the 33 provincial Telecommunications Administrations that exercise regulatory responsibility over the telecommunications industries in their respective provinces. The Ministry of Information Industry has broad discretion and authority to regulate all aspects of the telecommunications and information technology industry in China including managing spectrum bandwidths, setting network equipment specifications and standards and drafting laws and regulations related to the electronics and telecommunications industries. As part of the Chinese government's industry restructuring initiatives, the regulatory functions of the Ministry of Information Industry and the Telecommunications Administrations were separated from the operational functions of the state-owned companies under their control. Following this separation, the Ministry of Information Industry acts exclusively as the industry regulator and will no longer manage the day-to-day operations of telecommunications service providers in China. China does not yet have a national telecommunications law. The Ministry of Information Industry, under the direction of the State Council, is currently preparing a draft of the Telecommunications Law of the People's Republic of China for ultimate submission to the National People's Congress for review and adoption. It is unclear if and when the Telecommunications Law will be adopted. If the Telecommunications Law is adopted, we expect it to become the basic telecommunications statute and the source of telecommunications regulations in China. Although we expect that a Telecommunications Law would have a positive effect on the overall development of the telecommunications industry in China, we do not know the nature and scope of regulation that it would create. Accordingly, we cannot predict whether it will have a positive or negative effect on us or on some or all aspects of our business. 47 The Telecom Regulations are deemed as the basic telecommunications regulations covering telecommunications services and market regulations, pricing, interconnection and connection, as well as telecommunications construction and security issues. Although we expect that the Telecom Regulations would have a positive effect on the overall development of the telecommunications industry in China, the enforcement and interpretation of these regulations by government authorities may negatively affect our business. The Ministry of Information Industry has broad discretion to apply standards in deciding what types of equipment may be connected to the national telecommunications networks, the forms and types of services that may be offered to the public and the content of material available in China over the Internet. If the Ministry of Information Industry sets standards with which we are unable to comply, our ability to sell product in China may be limited, resulting in substantial harm to our operations. For example, at the end of May 2000, we became aware of an internal notice, circulated within the Ministry of Information Industry, announcing a review of PHS-based telecommunications equipment for future installation into China's telecommunications infrastructure in which the Ministry of Information Industry requested service providers to temporarily halt new deployments of PHS-based telecommunications equipment, including our PAS system, pending conclusion of the Ministry of Information Industry review. Subsequently, at the end of June 2000, we learned that the Ministry of Information Industry had issued an internal notice concluding its review of PHS-based equipment and allowing the continued deployment of our PAS system in China's county-level cities and counties, the primary markets for our PAS system. In addition, deployments in large and medium-sized cities will be allowed on a limited basis where there is a high concentration of population, such as campuses, commercial buildings and special development zones, however, new city-wide deployments of our PAS system will not be allowed in such large and medium-sized cities. Failure of the Ministry of Information Industry to allow the deployment of our PAS system in the future could have a material adverse effect on our business and financial condition. CHINA CLOSELY RESTRICTS ACTIVITIES OF FOREIGN INVESTORS IN THE TELECOMMUNICATIONS INDUSTRY China's government and its agencies, including the Ministry of Information Industry and the State Council, regulate foreign investment in the telecommunications industry through the promulgation of various laws and regulations and the issuance of various administrative orders and decisions. Foreign investment enterprises, companies and individuals are prohibited from investing and participating in the operation and management of telecommunications networks without special approval by the State Council. We cannot assure you that China will not promulgate new laws or regulations, or issue administrative or judicial decisions or interpretations, which would further restrict or bar foreigners from engaging in telecommunications-related activities. The promulgation of laws or regulations or the issuance of administrative orders or judicial decisions or interpretations restricting or prohibiting telecommunications activities by foreigners could have a substantial impact on our ongoing operations. MOST OF OUR CUSTOMERS IN CHINA ARE PART OF THE CHINA TELECOM SYSTEM AND ARE SUBJECT TO ITS ULTIMATE CONTROL Each of the local Telecommunications Bureaus in China which comprise most of our existing or potential customers is part of the China Telecom system and subject to its ultimate control. Accordingly, China Telecom may issue policy statements or make other decisions which govern the equipment purchasing decisions of most of our customers in China. For example, in late 1999 China Telecom prohibited all Telecommunications Bureaus from purchasing PHS systems, such as our PAS systems, which are classified as low-mobility wireless access systems for implementation in large cities. In June 2000, the Ministry of Information Industry issued an internal notice concluding its review of PHS-based equipment. Our PAS system will continue to be allowed in China's county-level cities and 48 counties, which are our primary markets for our PAS system. In large and medium-sized cities, our PAS system may be used on a limited basis where there is a high concentration of population. New city-wide PAS system deployments will not be allowed in large and medium-size cities. As virtually all of our sales are generated from our operations in China, a change of this decision of China Telecom and the Ministry of Information Industry or other decisions by China Telecom and the Ministry of Information Industry could cause substantial harm to our business. CHANGES IN TELECOMMUNICATIONS TARIFFS MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS In November 2000, the Ministry of Information Industryannounced significant changes in telephone rates in China. While long distance, international, leased line and Internet connection fees were cut by up to 70%, the rates for wireless access services, such as those delivered over our PAS system, were increased, from approximately $0.01 per minute to approximately $0.02 per minute. The increase in rates for wireless access services may result in a reduced demand for our PAS system and other wireless access products. Additionally, the Ministry of Information Industry may implement future rate changes for wireline or wireless services in China, any of which may lead to reduced demand for our systems and products and result in a material adverse effect on our business or results of operations. CHINA'S GOVERNMENT POLICIES COULD IMPACT OUR BUSINESS Since 1978, China's government has been and is expected to continue reforming its economic and political systems. These reforms have resulted in and are expected to continue to result in significant economic and social development in China. Many of the reforms are unprecedented or experimental and may be subject to change or readjustment due to a number of political, economic and social factors. We believe that the basic principles underlying the political and economic reforms will continue to be implemented and provide the framework for China's political and economic system. New reforms or the readjustment of previously implemented reforms could have a significant negative effect on our operations. Changes in China's political, economic and social conditions and governmental policies which could have a substantial impact on our business include: - new laws and regulations or the interpretation of those laws and regulations; - the introduction of measures to control inflation or stimulate growth; - changes in the rate or method of taxation; - the imposition of additional restrictions on currency conversion and remittances abroad; and - any actions which limit our ability to develop, manufacture, import or sell our products in China, or to finance and operate our business in China. CHINA'S ECONOMIC POLICIES COULD IMPACT OUR BUSINESS The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in various respects such as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position. In the past, the economy of China has been primarily a planned economy subject to one- and five-year state plans adopted by central government authorities and largely implemented by provincial and local authorities which set production and development targets. Since 1978, increasing emphasis had been placed on decentralization and the utilization of market forces in the development of China's economy. Economic reform measures adopted by China's 49 government may be inconsistent or ineffectual, and we may not in all cases be able to capitalize on any reforms. Further, these measures may be adjusted or modified in ways which could result in economic liberalization measures that are inconsistent from time to time or from industry to industry or across different regions of the country. China's economy has experienced significant growth in the past decade. This growth, however, has been accompanied by imbalances in China's economy and has resulted in significant fluctuations in general price levels, including periods of inflation. China's government has implemented policies from time to time to increase or restrain the rate of economic growth, control periods of inflation or otherwise regulate economic expansion. While we may be able to benefit from the effects of some of these policies, these policies and other measures taken by China's government to regulate the economy could also have a significant overall impact on economic conditions in China with a resulting negative impact on our business. CHINA'S EXPECTED ENTRY INTO THE WTO CREATES UNCERTAINTY AS TO THE FUTURE ECONOMIC AND BUSINESS ENVIRONMENTS IN CHINA China is expected to enter the WTO as early as some time in 2001. Although China has been reducing tariff levels over the past several years, entry into the WTO will require China to further reduce tariffs and eliminate other trade restrictions. While China's entry into the WTO and related relaxation of trade restrictions may lead to increased foreign investment, it may also lead to increased competition in China's markets from international companies. Whether or not China is accepted into the WTO, the impact on China's economy and our business is uncertain. IF TAX BENEFITS AVAILABLE TO OUR SUBSIDIARIES LOCATED IN CHINA ARE REDUCED OR REPEALED, OUR BUSINESS COULD SUFFER Our subsidiaries and joint ventures located in China enjoy tax benefits in China which are generally available to foreign investment enterprises, including full exemption from national enterprise income tax for two years starting from the first profit-making year and/or a 50% reduction in national income tax rate for the following three years. In addition, local enterprise income tax is often waived or reduced during this tax holiday/incentive period. Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to additional tax incentives. These tax incentives vary in different locales and could include preferential national enterprise income tax treatment at 50% of the usual rates for different periods of time. All of our active subsidiaries in China were accredited as technologically advanced enterprises. These tax incentives may be repealed or reduced in the future. If these tax incentives are abolished before our subsidiaries in China can take full advantage of them, the tax liability of these subsidiaries will increase, which will negatively impact our financial condition and results of operations. CHINA'S LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD NEGATIVELY IMPACT OUR BUSINESS China has a civil law legal system. Although often used by judges for guidance, decided court cases do not have binding legal effect on future decisions. Since 1979, many new laws and regulations covering general economic matters have been promulgated in China. Despite this activity to develop the legal system, China's system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic and it may be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China's judiciary in many cases creates additional uncertainty as to the outcome of any litigation. Further, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. China has adopted a broad range of related laws, administrative rules and regulations that govern the conduct and operations of foreign investment enterprises and restrict the ability of foreign 50 companies to conduct business in China. These laws, rules and regulations provide some incentives to encourage the flow of investment into China, but also subject foreign companies, and foreign investment enterprises including our subsidiaries in China, to a set of restrictions which may not always apply to domestic companies in China. Although China is increasingly according foreign companies and foreign investment enterprises established in China the same rights and privileges as Chinese domestic companies in anticipation of China's entry into the WTO, these special laws, administrative rules and regulations governing foreign companies and foreign investment enterprises may still place us and our subsidiaries at a disadvantage in relation to Chinese domestic companies and may adversely affect our competitive position. Moreover, as China's legal system develops, the promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors and companies. Many of our activities and products in China are subject to administrative review and approval by various national and local agencies of China's government. Because of the changes occurring in China's legal and regulatory structure, there can be no assurance that we will be able to secure the requisite governmental approval for our activities and products. Failure to obtain the requisite government approval for any of our activities or products could substantially harm our business. STOCK PERFORMANCE OUR STOCK PRICE IS HIGHLY VOLATILE The trading price of our common stock has fluctuated significantly since our initial public offering in March 2000. Our stock price could be subject to wide fluctuations in the future in response to many events or factors, including those discussed in the preceding risk factors relating to our operations, as well as: - actual or anticipated fluctuations in operating results; - changes in expectations as to future financial performance or changes in financial estimates or buy/sell recommendations of securities analysts; - our, or a competitor's, announcement of new products, services or technological innovations; and - the operating and stock price performance of other comparable companies. General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, following periods of volatility in a company's securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management time and resources. 51 ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK UTStarcom is exposed to the impact of interest rate changes and changes in foreign currency exchange rates. INTEREST RATE RISK. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The fair value of our investment portfolio would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the short term nature of our investment portfolio. However, our interest income can be sensitive to changes in the general level of U.S. interest rates since the majority of our funds are invested instruments with maturities less than one year. Our policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market risk. Funds in excess of current operating requirements are invested in government sponsored entities notes, commercial paper, floating rate corporate bonds and fixed income corporate bonds. The table below represents carrying amounts and related weighted-average interest rates of maturity of our investment portfolio at December 31, 2000:
(IN THOUSANDS, EXCEPT INTEREST RATES) - ------------------------------------- Cash and cash equivalents................................... $149,112 Average interest rate....................................... 4.1% Short-term investments...................................... $ 83,858 Average interest rate....................................... 6.7% Total investment securities................................. $232,970 Average interest rate..................................... 5.0%
FOREIGN EXCHANGE RATE RISK. We are exposed to foreign exchange rate risk because our sales to China are denominated in Renminbi and portions of our accounts payable are denominated in Japanese Yen. Due to the limitations on converting Renminbi, we are limited in our ability to engage in currency hedging activities in China. Although the impact of currency fluctuations of Renminbi to date has been insignificant, fluctuations in currency exchange rates in the future may have a material adverse effect on our results of operations. We have a multi-currency bank account in Japanese Yen for purchasing portions of our inventories and supplies. The balance of this Japanese Yen account as of December 31, 2000 is approximately $10.6 million. 52 ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE -------- Financial Statements: Independent Accountants' Report........................... 54 Consolidated Balance Sheets at December 31, 2000 and December 31, 1999....................................... 55 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998....................... 56 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998........... 57 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998....................... 58 Notes to Consolidated Financial Statements................ 59 Pro Forma Combined Financial Information (Unaudited)...... 81 Unaudited Pro Forma Combined Statements of Operations--Year Ended December 31, 1999................ 82 Notes to Unaudited Pro Forma Combined Financial Information............................................. 83
53 REPORT OF INDEPENDENT ACCOUNTANTS: To the Board of Directors and Stockholders of UTStarcom, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and stockholders' equity and cash flows present fairly, in all material respects, the financial position of UTStarcom, Inc. and its subsidiaries (the Company) at December 31, 2000 and 1999, and the results of their operations and of their cash flows for each of the three years ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California January 24, 2001 54 UTSTARCOM, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $149,112 $ 87,364 Short-term investment..................................... 83,858 -- Accounts receivable, net of allowances for doubtful accounts of $12,835 and $6,789 at December 31, 2000 and 1999, respectively...................................... 161,330 77,823 Receivable from related parties........................... 406 892 Inventories, net.......................................... 118,995 55,204 Other current assets...................................... 17,674 10,109 -------- -------- Total current assets........................................ 531,375 231,392 Property, plant and equipment, net.......................... 21,999 8,168 Long-term investments....................................... 12,397 4,460 Goodwill and intangible assets, net......................... 20,238 25,132 Other long term assets...................................... 5,828 2,636 -------- -------- Total assets.............................................. $591,837 $271,788 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 44,564 $ 21,745 Debt...................................................... 43,381 34,593 Debt to shareholder....................................... -- 8,745 Income taxes payable...................................... 7,170 2,985 Deferred revenue.......................................... 31,678 5,249 Other current liabilities................................. 34,721 29,102 -------- -------- Total current liabilities................................... 161,514 102,419 -------- -------- Long-term debt.............................................. 12,048 -- Minority interest in consolidated subsidiaries.............. 5,956 3,649 Stockholders' equity: Convertible preferred stock: $.00125 par value; authorized: 99,200,000 shares; issued and outstanding 70,377,322 at December 31, 1999......................................... -- 88 Common stock: $.00125 par value; authorized: 250,000,000 shares; issued and outstanding: 95,032,657 at December 31, 2000 and 8,929,837 at December 31, 1999................... 120 13 Additional paid-in capital.................................. 426,665 218,692 Deferred stock compensation................................. (6,491) (17,792) Accumulated deficit......................................... (7,808) (34,821) Notes receivable from shareholders.......................... (314) (555) Other comprehensive income.................................. 147 95 -------- -------- Total stockholders' equity.................................. 412,319 165,720 -------- -------- Total liabilities and stockholders' equity................ $591,837 $271,788 ======== ========
See accompanying notes to consolidated financial statements. 55 UTSTARCOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net sales................................................... $368,646 $187,516 $105,167 Cost of sales (includes stock compensation expense of $90, $12, and $0).............................................. 240,465 112,703 64,142 -------- -------- -------- Gross profit................................................ 128,181 74,813 41,025 -------- -------- -------- Operating expenses: Selling, general and administrative expenses (includes stock compensation expense of $4,676, $4,256, $390)..... 48,055 35,122 23,211 Research and development expenses (includes stock compensation expense of $6,795, $1,285, and $22)........ 41,452 18,648 14,681 Amortization of intangible assets......................... 4,894 332 120 In-process research and development costs................. -- 3,992 -- -------- -------- -------- Total operating expenses.................................... 94,401 58,094 38,012 -------- -------- -------- Operating income............................................ 33,780 16,719 3,013 Interest income............................................. 12,195 2,010 1,817 Interest expenses........................................... (3,311) (3,057) (1,924) Other income (expenses)..................................... 1,945 (1,165) (1,031) Equity in net income (loss) of affiliated companies......... (288) 1,348 (773) -------- -------- -------- Income before income taxes, minority interest and cumulative effect of a change of accounting principle................ 44,321 15,855 1,102 Income tax expense.......................................... 14,021 626 1,423 -------- -------- -------- Income (loss) before minority interest...................... 30,300 15,229 (321) Minority interest in (earnings) loss of consolidated subsidiaries.............................................. (2,307) (2,110) 914 -------- -------- -------- Income from continuing operations........................... 27,993 13,119 593 Loss from discontinued operations........................... -- (1,656) (893) -------- -------- -------- Net income (loss) before cumulative effect of a change of accounting principle...................................... 27,993 11,463 (300) Cumulative effect of change in accounting principle, net of income taxes (note 3)..................................... (980) -- -- -------- -------- -------- Net income (loss)........................................... 27,013 11,463 (300) Beneficial conversion feature of Series F convertible preferred stock........................................... -- (29,977) -- -------- -------- -------- Net income (loss) applicable to common stockholders......... $ 27,013 $(18,514) $ (300) ======== ======== ======== Basic earnings (loss) per share: Income (loss) from continuing operations before cumulative effect of accounting change............................. $ 0.35 $ (1.94) $ 0.08 Loss from discontinued operations......................... -- (0.19) (0.12) Cumulative effect of change in accounting principle....... (0.01) -- -- -------- -------- -------- Net income (loss)......................................... $ 0.34 $ (2.13) $ (0.04) ======== ======== ======== Diluted earnings (loss) per share: Income (loss) from continuing operations before cumulative effect of accounting change............................. $ 0.28 $ (1.94) $ 0.01 Loss from discontinued operations......................... -- (0.19) (0.01) Cumulative effect of change in accounting principle....... (0.01) -- -- -------- -------- -------- Net income (loss)......................................... $ 0.27 $ (2.13) $ (0.00) ======== ======== ======== Weighted average shares used in per-share calculation: --Basic................................................... 79,696 8,678 7,582 ======== ======== ======== --Diluted................................................. 101,867 8,678 77,050 ======== ======== ========
See accompanying notes to consolidated financial statements. 56 UTSTARCOM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ---------------------- ---------------------- ADDITIONAL ISSUED AMOUNT SHARES AMOUNT PAID-IN-CAPITAL ----------- -------- ----------- -------- --------------- Balances, December 31, 1997........................ 57,518,068 $ 72 9,807,006 $ 12 $ 88,393 Common stock issued upon exercise of options....... 483,544 1 479 Stock dividend..................................... 945,850 1 54,150 Exchange of common for preferred stock............. 1,171,836 1 (1,171,836) (1) Deferred compensation related to grant of stock options to non-employees......................... 1,041 Cancellation of non-employee stock options......... (612) Amortization of deferred stock compensation related to grant of stock options to non-employees....... Reacquired common stock............................ (453) Notes receivable from stockholders................. Net loss........................................... Other comprehensive income: Translation adjustment........................... Total comprehensive income....................... ----------- ---- ----------- ---- -------- Balances, December 31, 1998........................ 59,635,754 74 9,172,864 12 88,848 Common stock issued upon exercise of options....... 548,219 530 Reacquired common stock............................ 7,692 (7) Stock reclassification............................. (549,448) (1) 549,448 1 Notes receivable from stockholders................. Deferred stock compensation related to grant of stock options to employees....................... 15,937 Amortization of deferred stock compensation........ Deferred stock compensation related to grant of stock options to non-employees................... 7,391 Distribution to stockholders....................... (6,550) Issuance of preferred stock, net of issuance costs of $41........................................... 6,152,106 8 49,951 Issuance of preferred stock for Wacos acquisition...................................... 4,523,700 6 27,616 Preferred stock issued upon exercise of options.... 615,210 1 4,999 Dividend related to beneficial conversion feature to issuance of Series F preferred stock in December 1999.................................... 29,977 Retirement of Treasury Stock....................... (1,348,386) Net income......................................... ----------- ---- ----------- ---- -------- Balances, December 31, 1999........................ 70,377,322 88 8,929,837 13 218,692 Common stock issued upon Initial Public Offering net of expenses.................................. 11,500,000 14 189,391 Conversion of preferred stock to common stock upon Initial Public Offering.......................... (70,377,322) (88) 70,377,322 88 Exercise of common stock warrant................... 500,000 1 3,124 Common stock issued upon exercise of options....... 3,651,687 4 4,551 Common stock issued from ESPP...................... 73,811 1,130 Distribution to stockholders....................... 1,889 Deferred stock compensation related to grant of stock options.................................... 260 Amortization of deferred stock compensation........ Tax benefits for non-qualified stock option exercises........................................ 7,628 Repayment of notes receivable from stockholders.... Net income......................................... Other comprehensive income: Unrealized holding gain.......................... Total comprehensive income....................... ----------- ---- ----------- ---- -------- Balances, December 31, 2000........................ -- $ -- 95,032,657 $120 $426,665 =========== ==== =========== ==== ======== NOTES RECEIVABLE ACCUMULATED OTHER ACCUMULATED DEFERRED STOCK FROM COMPREHENSIVE DEFICIT COMPENSATION STOCKHOLDERS INCOME ------------ -------------- ---------------- ------------------ Balances, December 31, 1997........................ $(16,007) $ -- $(129) $172 Common stock issued upon exercise of options....... Stock dividend..................................... Exchange of common for preferred stock............. Deferred compensation related to grant of stock options to non-employees......................... (1,041) Cancellation of non-employee stock options......... 612 Amortization of deferred stock compensation related to grant of stock options to non-employees....... 412 Reacquired common stock............................ Notes receivable from stockholders................. (240) Net loss........................................... (300) Other comprehensive income: Translation adjustment........................... (77) Total comprehensive income....................... -------- -------- ----- ---- Balances, December 31, 1998........................ (16,307) (17) (369) 95 Common stock issued upon exercise of options....... Reacquired common stock............................ Stock reclassification............................. Notes receivable from stockholders................. (186) Deferred stock compensation related to grant of stock options to employees....................... (15,937) Amortization of deferred stock compensation........ 5,553 Deferred stock compensation related to grant of stock options to non-employees................... (7,391) Distribution to stockholders....................... Issuance of preferred stock, net of issuance costs of $41........................................... Issuance of preferred stock for Wacos acquisition...................................... Preferred stock issued upon exercise of options.... Dividend related to beneficial conversion feature to issuance of Series F preferred stock in December 1999.................................... (29,977) Retirement of Treasury Stock....................... Net income......................................... 11,463 -------- -------- ----- ---- Balances, December 31, 1999........................ (34,821) (17,792) (555) 95 Common stock issued upon Initial Public Offering net of expenses.................................. Conversion of preferred stock to common stock upon Initial Public Offering.......................... Exercise of common stock warrant................... Common stock issued upon exercise of options....... Common stock issued from ESPP...................... Distribution to stockholders....................... Deferred stock compensation related to grant of stock options.................................... (260) Amortization of deferred stock compensation........ 11,561 Tax benefits for non-qualified stock option exercises........................................ Repayment of notes receivable from stockholders.... 241 Net income......................................... 27,013 Other comprehensive income: Unrealized holding gain.......................... 52 Total comprehensive income....................... -------- -------- ----- ---- Balances, December 31, 2000........................ $ (7,808) $ (6,491) $(314) $147 ======== ======== ===== ==== TOTAL STOCKHOLDERS' EQUITY ------------- Balances, December 31, 1997........................ $ 72,513 Common stock issued upon exercise of options....... 480 Stock dividend..................................... 1 Exchange of common for preferred stock............. -- Deferred compensation related to grant of stock options to non-employees......................... -- Cancellation of non-employee stock options......... -- Amortization of deferred stock compensation related to grant of stock options to non-employees....... 412 Reacquired common stock............................ (453) Notes receivable from stockholders................. (240) Net loss........................................... (300) Other comprehensive income: Translation adjustment........................... (77) Total comprehensive income....................... (377) -------- Balances, December 31, 1998........................ 72,336 Common stock issued upon exercise of options....... 530 Reacquired common stock............................ (7) Stock reclassification............................. -- Notes receivable from stockholders................. (186) Deferred stock compensation related to grant of stock options to employees....................... -- Amortization of deferred stock compensation........ 5,553 Deferred stock compensation related to grant of stock options to non-employees................... -- Distribution to stockholders....................... (6,550) Issuance of preferred stock, net of issuance costs of $41........................................... 49,959 Issuance of preferred stock for Wacos acquisition...................................... 27,622 Preferred stock issued upon exercise of options.... 5,000 Dividend related to beneficial conversion feature to issuance of Series F preferred stock in December 1999.................................... -- Retirement of Treasury Stock....................... -- Net income......................................... 11,463 -------- Balances, December 31, 1999........................ 165,720 Common stock issued upon Initial Public Offering net of expenses.................................. 189,405 Conversion of preferred stock to common stock upon Initial Public Offering.......................... -- Exercise of common stock warrant................... 3,125 Common stock issued upon exercise of options....... 4,555 Common stock issued from ESPP...................... 1,130 Distribution to stockholders....................... 1,889 Deferred stock compensation related to grant of stock options.................................... -- Amortization of deferred stock compensation........ 11,561 Tax benefits for non-qualified stock option exercises........................................ 7,628 Repayment of notes receivable from stockholders.... 241 Net income......................................... 27,013 Other comprehensive income: Unrealized holding gain.......................... 52 Total comprehensive income....................... 27,065 -------- Balances, December 31, 2000........................ $412,319 ========
See accompanying notes to consolidated financial statements. 57 UTSTARCOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 27,013 $ 11,463 $ (300) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss from discontinued operations......................... -- 1,656 893 Depreciation and amortization............................. 9,494 3,013 2,486 Write-off of in-process research and development costs.... -- 3,992 -- Net loss on sale of assets................................ 807 611 73 Cumulative effect of change in accounting principle....... 980 -- -- Stock compensation expense................................ 11,561 5,553 412 Equity in net (income) loss of affiliated companies....... 288 (1,348) 1,700 Minority interest in consolidated subsidiary.............. 2,307 2,110 (2,084) Changes in operating assets and liabilities: Accounts receivable and receivable from related parties............................................... (81,132) (1,591) (51,782) Inventories............................................. (60,693) (34,560) (5,518) Other current and non-current assets.................... (4,850) (8,317) (1,668) Accounts payable and payable to related parties......... 14,143 6,644 (917) Income taxes payable.................................... 5,907 1,127 930 Other current liabilities............................... 5,659 21,024 8,561 Deferred revenue........................................ 22,351 (13) -- --------- -------- -------- Net cash (used in) provided by continuing operations........ (46,165) 11,364 (47,214) Net cash (used in) provided by discontinued operations...... -- (530) 207 --------- -------- -------- Net cash (used in) provided by operating activities......... (46,165) 10,834 (47,007) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.................. (19,513) (3,607) (2,250) Investment in affiliates, net of cash acquired.............. (8,226) (720) (1,093) Proceeds from disposal of property.......................... 164 997 -- Purchase of short-term investments.......................... (83,806) -- -- --------- -------- -------- Net cash used in continuing operations...................... (111,381) (3,330) (3,343) Net cash (used in) provided by discontinued operations...... -- 179 (36) --------- -------- -------- Net cash used in investing activities....................... (111,381) (3,151) (3,379) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock, net of expenses.......................... 198,213 55,480 480 Reacquired common stock..................................... -- -- (453) Proceeds from borrowing, net................................ 20,836 23,729 8,245 Proceeds (payments) from shareholder notes.................. 245 (17,505) 24,939 --------- -------- -------- Net cash provided by financing activities of continuing operations................................................ 219,294 61,704 33,211 Effects of exchange rates on cash........................... -- -- (77) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 61,748 69,387 (17,252) Investments and (advances to) from discontinued operations................................................ -- (351) 171 --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 61,748 69,738 (17,423) Cash and cash equivalents at beginning of period............ 87,364 17,626 35,049 --------- -------- -------- Cash and cash equivalents at end of period.................. $ 149,112 $ 87,364 $ 17,626 ========= ======== ========
See accompanying notes to consolidated financial statements. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF BUSINESS UTStarcom, Inc. (the Company), a Delaware corporation, provides communications equipment including network access systems, optical transmission products and subscriber terminal products for service providers that operate wireless and wireline networks. The Company's operations are conducted primarily by its foreign subsidiaries that manufacture, distribute, and support the Company's products in international markets, principally the People's Republic of China (China). The following lists the Company's active subsidiaries, its percentage ownership, and the business each subsidiary operates as of December 31, 2000:
PERCENTAGE NAME OWNED TYPE OF OPERATIONS - ---- ---------- --------------------------------------------------- UTStarcom-China (UTSC) 100% Marketing and sales of telecom equipment Hangzhou UTStarcom, Ltd. (HUTS) 88% Manufacturing of telecom equipment Guangdong UTStarcom, Ltd. (GUTS) 51% Manufacturing of telecom equipment
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority (over 50 percent) owned subsidiaries, except for GUTS which is accounted for using the equity method as the Company does not have voting control over all significant matters. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. Minority interest in consolidated subsidiaries and equity in affiliated companies are shown separately in the consolidated financial statements. Investments in affiliated companies, of which none represent greater than 10 percent ownership, are accounted for using the cost method. RESTATEMENT AND RECLASSIFICATION: The consolidated financial statements of the Company have been restated to reflect the disposition of Nanjing UTStarcom, Ltd. (NUTS) in September 1999. (See Note 5). Accordingly, the revenues, costs and expenses, assets and liabilities and cash flows of these discontinued operations have been excluded from the respective captions in the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows, and have been reported through the date of disposition as "Net assets of discontinued operations", "Income (loss) from discontinued operations" and "Net cash (used in) provided by discontinued operations" for all periods presented. The Company has retroactively accounted for its December 1999 acquisition of Wacos as if the original investment in Wacos by SOFTBANK Corporation (SOFTBANK) in December 1997 had been made by the Company (See Note 7). Certain reclassifications have been made in the prior years financial statements to conform with the 2000 presentation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist primarily of highly liquid monetary instruments with a maturity of three months or less at the date of purchase. Restricted cash consisted of the following at December 31:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Collateral for letters of credit............................ $3,103 $ 640 Cash in escrow.............................................. -- 2,410 Cash collateral............................................. 1,500 1,500 ------ ------ $4,603 $4,550 ====== ======
Restricted cash balances are expected to be released within three months of being recorded and are treated as part of cash and cash equivalents. SHORT-TERM INVESTMENTS: Short-term investments, consisting primarily of investments with original maturities of less than twelve months, are accounted for in accordance with Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities". This statement requires that securities are classified as "held to maturities", "available for sale" or "trading". Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of stockholders' equity. Realized holdings gains and losses on securities classified as available-for-sale are reported as earnings. The fair value of investments is determined based on quoted market prices. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, interest income, realized gains and losses and declines in value judged to be other than temporary are included in interest and other income. The cost of securities is based on specific identification.
DECEMBER 31, 2000 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Government and agency obligations.................... $ 4,000 $ 20 $ -- 4,020 Other debt securities................................ 78,827 1,011 -- 79,838 ------- ------ ---------- ------- Total current available-for-sale securities.......... $82,827 $1,031 $ -- $83,858
INVENTORIES: Inventories are stated at the lower of cost or market, net of allowance for obsolescence. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION: Revenue from sales of equipment is recognized on delivery when contractual obligations are substantially complete, remaining obligations are inconsequential and perfunctory, and collection of the resulting receivable is reasonably assured. Revenue recognition from equipment sales where installations are performed, are recognized on final acceptance when contractual obligations are substantially complete, remaining obligations are inconsequential and perfunctory, and collection of the resulting receivable is reasonably assured. Where multiple elements exist, revenue is allocated to the different elements based upon verifiable objective evidence and recognized on completion of the element. WARRANTY COSTS: A warranty is provided under the terms of the Company's contract for a period not greater than one year. The Company provides for these costs at the time of revenue recognition based upon prior experience. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets, generally ranging from two to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the term of the lease. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in the results of operations. The Company generally depreciates its assets over the following periods:
YEARS ------------------------- Furniture, test or manufacturing equipment.......... 5 Research and development equipment.................. 2 Computers and software.............................. 3 Leasehold improvements.............................. 5 or remaining lease life
GOODWILL AND INTANGIBLE ASSETS: Goodwill and intangible assets include the excess of costs of acquired companies over the fair value of net assets acquired and acquired workforce, which are amortized on a straight-line basis generally over 3 to 5 years. Valuation of goodwill and intangible assets is based on forecasted discounted cash flows and is reassessed when circumstances warrant. IMPAIRMENT OF LONG-LIVED ASSETS: Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), requires that long-lived assets and certain intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss is to be recognized 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) based on the fair value of the assets. The Company considers the requirements of SFAS 121 on an ongoing basis. STOCK-BASED COMPENSATION: The Company accounts for employee stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The value of warrants, options or stock exchanged for services from non-employees is generally expensed over the period benefited. The warrants and options are valued using Black-Scholes option pricing model. To calculate the expense, the Company uses either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. COMPREHENSIVE INCOME: Comprehensive income, as defined, includes all changes in equity (net assets) during a period from nonowner sources. Accumulated other comprehensive income or loss is shown in the consolidated statement of shareholders equity in December 31, 2000, 1999 and 1998. INCOME TAXES: Deferred income taxes are recognized for the differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company does not provide for U.S. Federal taxes on undistributed earnings of its foreign subsidiaries or affiliates as they are considered to be reinvested for an indefinite period. SEGMENT REPORTING: The Company has determined that they operate in a single segment, providing communications equipment through an integrated suite of network access systems, optical transmission products and subscriber terminal products. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable and payable, and debt. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and payable approximate their fair values because of the short term nature of those instruments. The carrying amounts of debt approximate their fair values because of either the short maturity, the variable interest rates of those instruments, or that the difference between the fixed interest rate payable and the current prevailing rate is not significant. FOREIGN CURRENCY TRANSLATIONS: Operations of the Company's subsidiaries are conducted primarily in China and the financial statements of those subsidiaries are translated from China's Renminbi, as functional currency, into U.S. Dollars in accordance with the Statement of Financial Accounting Standards No. 52, "Foreign Currency 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Translation" ("SFAS 52"). Accordingly, all foreign currency assets and liabilities are translated at the average exchange rate for the period. The effects of translating the financial statements of foreign subsidiaries into U.S. dollars are reported as a cumulative translation adjustment, a separate component of comprehensive income in stockholders' equity. Foreign currency translation gains and losses have not been material for any of the years presented. EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is computed by dividing income or loss applicable to common stockholders by the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the numbers of shares is increased by potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of employee stock options, warrants and restricted stock. ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001, and the adoption is not expected to materially impact the financial statements. In September 2000, the FASB issued SFAS No. 140 (SFAS 140), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires entities that have securitized financial assets to provide specific disclosures. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company adopted SFAS No. 140 on January 1, 2001, and the adoption is not expected to materially impact the financial statements. NOTE 3--ACCOUNTING CHANGES Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101 (SAB 101) issued by the Securities and Exchange Commission in December 1999. As a result of adopting SAB 101, the Company changed the way it recognizes revenue in certain contracts that had previously led to revenue being recognized as contract stages were completed and accepted. In light of the guidance issued in SAB 101, the Company changed its method of revenue recognition to the point of contractual final acceptance. In addition, certain contracts include service requirements for which revenue was previously recognized, and costs accrued, on contractual acceptance. In consideration of SAB 101, revenues associated with these service requirements are being deferred until the service obligations are completed. Due to these changes, the Company recorded a cumulative adjustment in first quarter 2000 of $1.0 million (net of income taxes of $0) or $0.01 per share, basic and diluted. The impact in 2000 of adopting SAB 101 was to reduce net income before the cumulative effect of the accounting change by $0.3 million with no effect on basic or diluted net income per share. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACCOUNTING CHANGES (CONTINUED) Adopting this new method of accounting as of January 1, 1998 would have produced the following pro forma results (in thousands, except per share amounts):
AS REPORTED, 1999 1998 - ------------ -------- -------- Net loss.................................................. $(18,514) $ (300) Net loss per share, basic................................. $ (2.13) $(0.04) Net income (loss) per share, diluted...................... $ (2.13) $ 0.00
PRO FORMA, 1999 1998 - ---------- -------- -------- Net loss.................................................. $(19,494) $ (300) Net loss per share, basic................................. $ (2.25) $(0.04) Net income (loss) per share, diluted...................... $ (2.25) $ 0.00
NOTE 4--COMPLETION OF INITIAL PUBLIC OFFERING On March 3, 2000, the Company completed its initial public offering ("IPO"). In the IPO, the Company sold an aggregate of 11,500,000 shares of common stock (including an over-allotment option of 1,500,000 shares) at $18.00 per share. The sale of the shares of common stock generated net proceeds of approximately $189.4 million, after deducting underwriting discounts and commissions and expenses of the offering of approximately $17.6 million. As of the effective date of the offering, all of the convertible preferred stock outstanding was converted into 70,377,322 shares of common stock. NOTE 5--DISCONTINUED OPERATIONS During September 1999, the Company closed UTStarcom Nanjing, Inc. (NUTS), its wholly owned subsidiary. NUTS was engaged in telephone network and internet network services unrelated to the remaining Company operations. NUTS sold substantially all of its assets prior to closure. The close of NUTS was accounted for as a discontinued operation. The Company's previous interests in the net revenues and expenses of NUTS' operations prior to September 30, 1999 are classified separately as income (loss) from discontinued operations in the income statements. The components of the income or loss are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------- (IN THOUSANDS) 1999 1998 - -------------- -------- -------- Net sales.................................................. $ 298 $4,457 Operating expenses and cost of sales....................... 1,369 5,345 ------- ------ Operating loss............................................. (1,071) (888) Other expenses............................................. (585) (5) ------- ------ Loss from discontinued operations.......................... $(1,656) $ (893) ======= ======
The Company's cash flow statements include separately the cash flows from discontinued operations. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, ------------------------------ (IN THOUSANDS) 2000 1999 1998 - -------------- -------- -------- -------- Cash paid during the period for: Interest.................................................... $3,289 $3,723 $ 564 Income taxes................................................ $8,038 $1,386 $1,076
Noncash investing and financing activities were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ (IN THOUSANDS) 2000 1999 1998 - -------------- -------- -------- -------- Share in additional paid in capital of minority shareholder in Wacos.................................................. $ -- $ -- $2,867 Distribution of net assets to shareholders.................. $ -- $ 4,956 $1,983 Issuance of shares upon the Wacos acquisition............... $ -- $27,953 $ -- Payment of shareholders' loan............................... $ -- $ 1,640 $ -- Retirement of treasury stock................................ $ -- $ 3,060 $ -- Non-qualified stock option exercise tax benefits............ $7,628 $ -- $ --
NOTE 7--ACQUISITION OF COMPANIES In September 1996, the Company purchased a 49% interest in GUTS for approximately $1.2 million. In February 1998, the Company acquired an additional 2% interest in GUTS for $80,000, increasing its ownership interest to 51%. However, because the Company does not have voting control over all significant matters of GUTS, the investment in and results of operations of GUTS are included in the consolidated financial statements using the equity method of accounting. The purchase of the additional interest has been accounted for as a purchase resulting in an intangible asset for the insignificant excess of the purchase price over the fair value of the net assets. In February and October 1997, the Company purchased a total of 49% of the voting stock of Wacos for approximately $0.3 million. In October and December 1997, SOFTBANK, the then major stockholder of the Company, acquired a 40% voting interest in Wacos for $5.1 million. In December 1999, the Company issued 3,691,534 shares of Series G preferred stock in exchange for SOFTBANK's 4,103,465 shares in Wacos. As a result of the common control that existed between the Company, SOFTBANK and Wacos during this period of ownership this exchange of shares was made at historic cost. The Company has retroactively accounted for its acquisition of Wacos as if the original investment by SOFTBANK had been made by the Company. In December 1999, the Company completed the purchase of the non-affiliated minority interests in its Wacos subsidiary with the issuance of 832,166 shares of Series G preferred stock and $9.7 million of common stock options valued using a Black-Scholes model. The aggregate purchase price of Wacos was approximately $28.0 million which, based upon an independent appraisal by Willamette Management Associates of all assets acquired and liabilities assumed, was allocated to the specifically identifiable tangible and intangible assets acquired. Intangible assets included approximately $4.0 million of in-process research and development which was charged to operations in December 1999, $0.2 million of assembled workforce and approximately $23.6 million of excess purchase price over the fair market values of the tangible and identified intangible assets, being amortized over periods of three to five years. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--ACQUISITION OF COMPANIES (CONTINUED) The values of Wacos' in-process research and development projects were estimated by an excess income approach. Management revenue and operating expense projections were reduced by appropriate amounts to reflect a fair return on the net tangible and collateral intangible assets to be employed in realizing the forecasted net incomes. The resulting forecasted "excess" income figures were discounted to present value using a 40% rate of return, reflecting the technological, market and other risks associated with the subject technologies and future products. The discounted excess incomes were summed and then, in accordance with methodology approved by the Securities and Exchange Commission, reduced by an appropriate percentage completion factor for each project to account for the anticipated remaining research and development factors. At the time of the Wacos acquisition, Wacos was engaged in three distinct in-process research and development projects in relation to its Internet Protocol based switching system. These projects were in various stages of development but none had reached the point where technological feasibility had been established. The following presents the allocation of the purchase price for Wacos:
(IN THOUSANDS) - -------------- Purchased in-process research and development............... $ 3,992 Fair value of net assets acquired........................... 83 Fair value of identified intangible assets.................. 240 Excess of costs of acquiring Wacos over fair value of net assets.................................................... 23,638 ------- $27,953 =======
NOTE 8--DISTRIBUTION TO SHAREHOLDERS In August 1999 the Company distributed to its shareholders the net assets of a previously consolidated yet unrelated business which had been acquired in 1997. This business, which operated in a dissimilar market segment, had been managed and financed, in all significant respects, as if it were autonomous from the Company. These financial statements have been prepared as if the acquired business was distributed on the original date of purchase in 1997. NOTE 9--INVENTORIES As of December 31, 2000 and 1999 inventories consist of the following:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Raw materials............................................ $ 41,876 $31,461 Work-in-process.......................................... 23,432 4,356 Finished goods........................................... 62,888 25,802 -------- ------- $128,196 $61,619 Less allowance for obsolete inventory.................... (9,201) (6,415) -------- ------- $118,995 $55,204 ======== =======
66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--PROPERTY, PLANT AND EQUIPMENT As of December 31, 2000, and 1999 property, plant and equipment consists of the following:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Buildings................................................. $ 224 $ 145 Land...................................................... 7,319 -- Leasehold improvements.................................... 2,237 1,640 Automobiles............................................... 3,035 1,173 Equipment and furniture................................... 18,698 11,720 ------- ------- $31,513 $14,678 Less accumulated depreciation and amortization............ (9,514) (6,510) ------- ------- $21,999 $ 8,168 ======= =======
Depreciation and amortization expense was $4.6 million, $2.7 million and $2.4 million for the years ended December 31, 2000, 1999 and 1998 respectively. NOTE 11--LONG-TERM INVESTMENTS The Company's long term investments were as follows:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Investment in GUTS......................................... $ 2,026 $2,314 Investment in Softbank China............................... 8,002 -- Investment in others....................................... 2,369 2,146 ------- ------ Total...................................................... $12,397 $4,460 ======= ======
In September 1996, the Company purchased a 49% interest in GUTS. In February 1998, the Company acquired an additional 2% interest in GUTS, increasing its ownership interest to 51%. However, because the Company does not have voting control over all significant matters of GUTS, the investment in and results of operations of GUTS are accounted for using the equity method. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--LONG-TERM INVESTMENTS (CONTINUED) Condensed financial information for the unconsolidated investments in GUTS is as follows:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Current assets............................................ $ 9,885 $13,738 Noncurrent assets......................................... 516 866 Current liabilities....................................... (5,503) (9,071) ------- ------- Total shareholders' equity................................ 4,898 5,533 Other shareholders' shares of equity...................... 2,400 2,711 ------- ------- UTStarcom's share of equity............................... 2,498 2,822 Elimination of intercompany profit........................ (472) (508) ------- ------- Investment in unconsolidated subsidiary................... $ 2,026 $ 2,314 ======= =======
(IN THOUSANDS) 2000 1999 1998 - -------------- -------- -------- -------- Net sales........................................ $16,523 $16,004 $10,995 Gross profit..................................... 931 2,366 2,123 Operating income................................. (638) 1,067 1,040 Net income (loss)................................ (441) 820 734 ------- ------- ------- UTStarcom's share of net income (loss)........... (225) 418 374 Elimination of intercompany profit............... (63) 930 (1,147) ------- ------- ------- Equity in net income (loss) of subsidiary........ $ (288) $ 1,348 $ (773) ======= ======= =======
Product sales to GUTS for the years ended December 31, 2000, 1999 and 1998 were $13.1 million, $8.4 million and $5.6 million, respectively. Product purchases from GUTS for the years ended December 31, 2000, 1999 and 1998 were $6.8 million, $7.9 million and $8.9 million, respectively. In May 2000, the Company purchased a 10% interest in Softbank China Holdings Pte., Ltd. ("Softbank China"). The investment in Softbank China and other investments less than 20% owned are accounted for using the cost method. See Note 13 for discussion of Related Party Transactions. NOTE 12--GOODWILL AND INTANGIBLE ASSETS As of December 31, 2000 and 1999 goodwill and intangible assets resulting from the Company's acquisition of Wacos consist of the following:
2000 1999 -------- -------- (IN THOUSANDS) Excess of purchase price over net assets acquired......... $25,695 $25,695 Less accumulated amortization............................. (5,457) (563) ------- ------- $20,238 $25,132 ======= =======
Amortization expense was $4.9 million, $0.3 million and $0.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--RELATED PARTY TRANSACTIONS Debt to shareholder at December 31, 2000 and 1999 consist of the following:
2000 1999 --------- -------- (IN THOUSANDS) Debt to shareholder--SOFTBANK............................... $ -- $8,745 ========= ======
Jitong, a company in China with which the Company had a management consulting agreement, paid UTSC $8.7 million for the repayment of a loan made by to Jitong. SOFTBANK is the Company's principal stockholder. In April, 2000, the Company made a repayment in full to Softbank Corporation. The payable was a non-interest bearing balance. In May 2000, the Company purchased a 10% interest in Softbank China, which is 90% owned by SOFTBANK, for $8.0 million. In June 1998, the Company entered into a loan agreement with SOFTBANK for a total of $25.0 million. As of December 31, 1999, the entire loan was paid off and the loan agreement was terminated. NOTE 14--THIRD PARTY DEBT The following represents the outstanding borrowings at December 31, 2000 and 1999:
NOTE RATE MATURITY 2000 1999 - ---- -------------------- ------------------- -------- -------- (IN THOUSANDS) Bank of China(1)................ From 5.56% to 5.85% From 01/01 to 12/01 $28,917 $27,108 China Merchants Bank(2)......... 6.44% 03/01 3,614 -- Commercial Bank of Hangzhou(3).. 6.44% 10/00 -- 6,024 Commercial Bank of Hangzhou(4).. 6.21% 06/10 12,048 -- Industrial & Commercial Bank of China(5)...................... 5.85% 05/01 6,024 1,446 China Construction Bank(6)...... 6.44% 06/01 4,819 -- Other........................... Various Various 7 15 -------------------- ------------------- ------- ------- Total debt...................... $55,429 $34,593 Long-term debt.................. 12,048 -- ------- ------- Short-term debt................. $43,381 $34,593 ======= =======
- ------------------------ (1) Guaranteed by the Company and the minority shareholder of HUTS. This represents drawings on the Company's line of credit with the bank. This line allows for borrowings of up to $108,434. (2) Collateralized by $1,500 deposited with the bank and guaranteed by HUTS. This line allows for borrowings of up to $3,614 and matures on March 1, 2001. (3) Guaranteed by HUTS. This line allows for borrowings of up to $6,024 and matured in October 2000. (4) Guaranteed by UTStarcom-China. This line allows for borrowings of up to $24,096 and matures in June 2010. (5) Guaranteed by HUTS. This line allows for borrowings of up to $6,024 and matures in May 2001. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--THIRD PARTY DEBT (CONTINUED) (6) Guaranteed by HUTS. This line allows for borrowings of up to $4,819 and matures in June 2001. NOTE 15--OTHER CURRENT LIABILITIES Other current liabilities at December 31, 2000 and 1999 consist of the following:
(IN THOUSANDS) 2000 1999 - -------------- -------- -------- Accrued contract costs.................................... $22,858 $19,373 Accrued payroll and compensation.......................... 4,500 3,493 Accrued other taxes....................................... -- 618 Warranty costs............................................ 3,133 1,236 Other..................................................... 4,230 4,382 ------- ------- $34,721 $29,102 ======= =======
NOTE 16--PROVISION FOR INCOME TAXES United States and foreign income (loss) before income taxes, minority interest, loss on discontinued operations, and cumulative effect of a change in accounting principles were as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) United States.................................... $(9,973) $(15,664) $(4,928) Foreign.......................................... 54,294 31,519 6,030 ------- -------- ------- $44,321 $ 15,855 $ 1,102 ======= ======== =======
Undistributed foreign earnings at December 31, 2000 amounted to $91.3 million. The components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) CURRENT: Federal......................................... $13,369 $ 1,100 $ 9 State........................................... 782 533 1 Foreign......................................... 6,046 1,700 934 DEFERRED: Federal......................................... (4,433) (2,453) 632 State........................................... 2 (10) (239) Foreign......................................... (1,745) (244) 86 ------- ------- ------ $14,021 $ 626 $1,423 ======= ======= ======
70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16--PROVISION FOR INCOME TAXES (CONTINUED) Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. A summary of the components of net deferred tax assets is as follows:
U.S. CHINA TOTAL -------- -------- -------- DECEMBER 31, 2000: Deferred tax assets: Current assets Allowances and reserves........................... $ 1,749 $2,438 $ 4,187 Valuation allowance............................... 2,311 -- 2,311 ------- ------ ------- Net current deferred tax assets................. $ 4,060 $2,438 $ 6,498 ======= ====== ======= Non current assets Net operating loss carryforward................... $ 2,231 $ -- $ 2,231 Future period compensation deductions............. 1,395 -- 1,395 Tax credit carryforwards.......................... 3,574 -- 3,574 Fixed assets...................................... 205 205 Other............................................. 508 508 ------- ------ ------- Total non-current deferred tax assets........... 7,913 -- 7,913 Valuation allowances.............................. (4,153) -- (4,153) ------- ------ ------- Net non-current deferred tax assets............. $ 3,760 $ -- $ 3,760 ======= ====== =======
U.S. CHINA TOTAL -------- -------- -------- DECEMBER 31, 1999: Deferred tax assets: Current assets Allowances and reserves........................... $ 1,638 $1,222 $ 2,860 Valuation allowance............................... -- (524) (524) ------- ------ ------- Net current deferred tax assets................. $ 1,638 $ 698 $ 2,336 ======= ====== ======= Non current assets Future period compensation deductions............. $ 1,205 $ -- $ 1,205 Net operating loss carryforward................... 2,231 -- 2,231 Tax credit carryforwards.......................... 2,513 -- 2,513 ------- ------ ------- Total deferred tax assets....................... 5,949 -- 5,949 Deferred tax liabilities: Accelerated depreciation.......................... (277) -- (277) ------- ------ ------- 5,672 -- 5,672 Valuation allowances.............................. (3,656) -- (3,656) ------- ------ ------- Net non-current deferred tax assets............. $ 2,016 $ -- $ 2,016 ======= ====== =======
As of December 31, 2000, the Company had research and development credit carryforwards of approximately $2.1 million for federal tax purposes expiring in varying amounts between 2017 and 2019. As of December 31, 2000 the Company had federal and state net operating loss carryovers of 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16--PROVISION FOR INCOME TAXES (CONTINUED) $5.4 million and $11.2 million, respectively which were acquired from Wacos in a merger on December 14, 1999. The federal net operating loss carryovers will expire in 2019. The state net operating loss carryovers will expire in varying amounts between 2002 and 2004. Management believes that the Company's ability to use their deferred tax assets is limited based on the expectation that they will not be able to fully utilize either the tax net operating losses or the research and development credits generated by Company's other research and development center in the U.S. The Company has created a full valuation allowance against these deferred tax assets. UTSC and HUTS were granted tax holidays which started to phase out in 1999. The net impact of these tax holidays was to increase net income by approximately $4.5 million, $4.5 million, and $0.3 million for the years ended December 31, 2000, December 31, 1999, and December 31, 1998, respectively. The difference between the Company's effective income tax rate and the United States of America Federal statutory rate is reconciled below:
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Federal statutory rate..................................... 34% 34% 34% State taxes, net of federal income tax benefit............. (1) (3) (11) Permanent differences...................................... 7 15 17 Amortization of deferred compensation...................... 8 -- -- Effect of difference in foreign taxes rates................ (18) (31) (19) Change in valuation allowance.............................. -- 11 110 Other...................................................... 2 (22) (3) --- --- --- Effective rate............................................. 32% 4% 128% === === ===
The high effective tax rate in 1998 reflects valuation allowances on net operating losses generated by Wacos for which management expects to receive no future benefit. The effect of the valuation allowances on the Company's consolidated effective tax rates in 1998 is pronounced because the Company's income (loss) before taxes and minority interest was relatively small in comparison to the Wacos net operating losses in those years. NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS STOCK OPTION PLANS. 1992 OMNIBUS EQUITY INCENTIVE PLAN. On April 12, 1992, the Board of Directors adopted the Company's 1992 Omnibus Equity Incentive Plan, which the Company's stockholders ratified on December 9, 1994. Under the 1992 plan, directors, employees and consultants were eligible to acquire shares of common stock pursuant to options, stock purchase rights and stock appreciation rights. At the time of adoption, 2,400,000 shares of common stock were reserved for issuance under the 1992 plan. As of December 31, 2000, there were 1,620,328 shares authorized for issuance under the 1992 plan, and no options outstanding to purchase any shares of common stock. On July 31, 1995, the Board of Directors elected not to grant any further options under the 1992 plan. THE 1995 STOCK PLAN. On July 31, 1995, the Board of Directors adopted, and in October 1995, the Company's stockholders approved, the Company's 1995 Stock Plan. Under the 1995 plan, officers, 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS (CONTINUED) employees and consultants were eligible to acquire shares of common stock pursuant to options or stock purchase rights. At the time of adoption, 3,705,232 shares of common stock were reserved for issuance under the 1995 plan. In 1995 and 1996, the Company's Board and stockholders added an additional 5,400,000 shares to the 1995 plan, raising the total number of authorized shares reserved under the 1995 plan to 9,105,232. As of December 31, 2000, there were 6,711,744 shares authorized for issuance under the 1995 plan and options to purchase 3,185,650 shares of common stock were outstanding under the 1995 plan. On January 31, 1997, the Board of Directors elected not to grant any further options under the 1995 plan. Upon the adoption of the 1997 plan, all remaining unissued shares under the 1995 plan not already subject to options or other awards ceased to be reserved for issuance under the 1995 plan. THE 1997 STOCK PLAN. On January 31, 1997, the Board of Directors adopted, and the Company's stockholders approved, the Company's 1997 Stock Plan. Under the 1997 plan, officers, employees and consultants are eligible to receive options to purchase shares of common stock and stock purchase rights. In December 1999, the Board of Directors amended the 1997 plan, which the Company's stockholders approved in February 2000. As of December 31, 2000 the Company is authorized to issue up to 12,903,841 shares subject to options. During the term of the 1997 plan, the number of shares issuable under the plan will be increased annually on the first day of each fiscal year beginning in 2001 by an amount equal to the lesser of 6,000,000 shares or 4% of the outstanding shares of our common stock on that date, or a lesser amount determined by the Board. The plan terminates in January 2007, but may be terminated earlier by the Board of Directors. As of December 31, 2000, there were options to purchase 11,989,074 shares of common stock outstanding under the 1997 plan. The Compensation Committee administers the 1997 plan. Options granted under the 1997 plan may be incentive stock options, or ISOs, which are intended to qualify for favorable federal income tax treatment under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options, or NSOs, which do not so qualify. The Compensation Committee selects the eligible persons to whom options will be granted and determines the grant date, amounts, exercise prices, vesting periods and other relevant terms of the options, including whether the options will be ISOs or NSOs. The exercise price of ISOs granted under the 1997 plan may not be less than 100% of the fair market value of our common stock on the grant date, while the exercise price of NSOs can be determined by the Compensation Committee in its discretion. Options are generally not transferable during the life of the optionee. Options vest and become exercisable as determined by the Compensation Committee. Options may generally be exercised at any time after they vest and before their expiration date as determined by the Compensation Committee. However, no option may be exercised more than 10 years after the grant date. Options will generally terminate (i) 12 months after the death or permanent disability of an optionee and (ii) 90 days after termination of employment for any other reason. The aggregate fair market value of the shares of common stock represented by ISOs that become exercisable in any calendar year may not exceed $100,000. Options in excess of this limit are treated as NSOs. In the event the Company is merged with or into another corporation, or all or substantially all of the Company's assets are sold, each outstanding option will be assumed or an equivalent option or right will be substituted by the successor corporation or its parent or subsidiary. If the successor corporation refuses to assume or substitute for the option or right, the options or rights will automatically vest and become exercisable in full for a period of at least fifteen days, after which time the option will terminate. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS (CONTINUED) Under the 1997 plan, the Company may grant stock purchase rights to eligible participants. Any shares purchased pursuant to stock purchase rights will be subject to a restricted stock purchase agreement. Unless the Compensation Committee determines otherwise, this agreement will grant the Company a right to repurchase the stock upon the voluntary or involuntary termination of the employee for any reason, including death or disability. The purchase price for repurchased shares will be the original price paid and may be paid by cancellation of any indebtedness owed to the Company. The shares of stock subject to the right of repurchase lapse over time. As of December 31, 2000, an aggregate of 21,235,913 shares of common stock were authorized for issuance under the Company's stock plans, 15,174,724 of which were subject to outstanding options and 155,035 of which were available for grant. A summary of activity under the Plans follows:
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE FOR GRANT SHARES EXERCISE PRICE ---------------- ---------- ---------------- Options Outstanding, December 31, 1997.............. 3,788,284 8,951,348 $ 1.31 Options Granted..................................... (2,611,198) 2,611,198 $ 3.53 Options Exercised................................... -- (483,544) $ 1.00 Options Forfeited or Expired........................ 1,120,010 (1,424,380) $ 2.71 ---------- ---------- ------ Options Outstanding, December 31, 1998.............. 2,297,096 9,654,622 $ 1.72 Options Authorized in 1999.......................... 3,209,556 -- -- Options Granted..................................... (6,055,310) 6,055,310 $ 5.65 Options Exercised................................... -- (555,911) $ 0.95 Options Forfeited or Expired........................ 720,901 (748,307) $ 3.54 ---------- ---------- ------ Options Outstanding, December 31, 1999.............. 172,243 14,405,714 $ 3.25 Options Authorized in 2000.......................... 4,404,823 -- -- Options Granted..................................... (4,848,697) 4,848,697 $15.74 Options Exercised................................... -- (3,651,687) $ 1.25 Options Forfeited or Expired........................ 426,666 (428,000) $12.52 ---------- ---------- ------ Options Outstanding, December 31, 2000.............. 155,035 15,174,724 $ 7.54 ========== ========== ======
Options to purchase 6,937,475 shares were exercisable as of December 31, 2000. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS (CONTINUED) The following table summarizes information with respect to stock options outstanding as of December 31, 2000:
OUTSTANDING OPTIONS AS OF DECEMBER 31, 2000 ------------------------------------------------- EXERCISABLE AT DECEMBER 31, 2000 WEIGHTED AVERAGE --------------------------------- RANGE OF NUMBER WEIGHTED AVERAGE REMAINING NUMBER WEIGHTED AVERAGE EXERCISE PRICES OF SHARES EXERCISE PRICE CONTRACTUAL LIFE OF SHARES EXERCISE PRICE - --------------------- ----------- ---------------- ---------------- ------------- ----------------- (IN YEARS) $ 0.06 - $ 0.06 277,188 $ 0.06 7.6 182,028 $ 0.06 0.25 - 0.25 185,672 0.25 8.2 83,005 $ 0.25 0.85 - 0.94 2,528,342 0.86 2.7 2,528,342 $ 0.86 1.71 - 2.50 1,886,201 2.16 3.7 1,789,285 $ 2.14 3.54 - 4.50 3,633,858 4.27 8.3 1,570,675 $ 4.23 9.38 - 13.00 3,998,405 11.10 9.4 574,200 $ 9.45 15.00 - 21.31 2,076,266 15.80 9.4 147,248 $17.97 22.75 - 30.13 563,792 25.33 9.5 62,692 $24.18 36.50 - 47.50 25,000 43.10 9.3 -- -- - ------------------ ---------- ------ --- --------- ------ $ 0.06 - $47.50 15,174,724 $ 7.54 7.2 6,937,475 $ 3.21
The Company has elected to account for employee stock-based compensation under APB 25 and has provided the following information as required by SFAS 123, "Accounting for Stock-Based Compensation." The following assumptions were used to calculate the fair value of the options granted:
2000 1999 1998 -------- -------- -------- Expected remaining term in years....................... 3.00 2.41 3.51 Weight average risk-free interest rate................. 5.86% 6.10% 4.91% Expected dividend rate................................. 0.00% 0.00% 0.00% Volatility............................................. 100.00% 0.00% 0.00%
The weighted average fair value per share of those options granted in 2000, 1999 and 1998 was $7.54, $3.25, and $0.82, respectively. The Company was not public in 1999 and 1998, as such a zero volatility rate was used. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS (CONTINUED) Using the above method and assumptions, the Company's net income (loss) applicable to common stock and earnings (loss) per share, on a pro forma basis, would have been:
EARNINGS (LOSS) EARNINGS (LOSS) NET INCOME PER SHARE PER SHARE (LOSS) BASIC DILUTED ---------- --------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended: December 31, 1998: Actual............................... $ (300) $(0.04) $ -- ======== ====== ====== Pro forma............................ $ (775) $(0.10) $(0.01) ======== ====== ====== December 31, 1999: Actual............................... $(18,514) $(2.13) $(2.13) ======== ====== ====== Pro forma............................ $(21,395) $(2.47) $(2.47) ======== ====== ====== December 31, 2000: Actual............................... $ 27,013 $ 0.34 $ 0.27 ======== ====== ====== Pro forma............................ $ 22,976 $ 0.29 $ 0.23 ======== ====== ======
These pro forma results are not necessarily indicative of results which may be expected in the future as additional grants are made each year and options vest over several years. 2000 EMPLOYEE STOCK PURCHASE PLAN. In February 2000, the Company's stockholders approved the 2000 Employee Stock Purchase Plan. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. The Company has reserved 2,000,000 shares of common stock for sale under the stock purchase plan. The number of shares reserved for sale under the plan will be increased annually on the first day of each fiscal year beginning in 2001 by an amount equal to the lesser of 4,000,000 shares or 2% of the outstanding shares of the Company's common stock on that date, or a lesser amount determined by the Board of Directors. The stock purchase plan will be administered by the Board or a committee appointed by the Board. The stock purchase plan is implemented by offering periods, the duration of which may not exceed 24 months. Offering periods may contain interim purchase periods. Shares purchased under the stock purchase plan will be held in separate accounts for each participant. The first offering period began in March 2000 and shall end on the last trading day on or before April 30, 2002. Employees will be eligible to participate in the stock purchase plan if they are employed by the Company for more than 20 hours per week and more than five months in a calendar year. The stock purchase plan permits eligible employees to purchase the Company's common stock through payroll deductions, which may not exceed 15% of the employee's total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of the Company's stock on either the date of purchase or the first day of the offering period, whichever is lower. However, the Board of Directors may in its discretion provide that the price at which shares of common stock are purchased under the plan shall be 85% of the fair market value of the Company's shares on the date of purchase. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17--COMMON STOCK AND STOCK INCENTIVE PLANS (CONTINUED) Participants may not purchase shares of common stock having a value greater than $25,000 during any calendar year. Participants may increase or decrease their payroll deductions at any time during an offering period, subject to limits imposed by the Board of Directors. If a participant withdraws from the stock purchase plan, any contributions that have not been used to purchase shares shall be refunded. A participant who has withdrawn may not participate in the stock purchase plan again until the next offering period. In the event of retirement or cessation of employment for any reason, any contributions that have not yet been used to purchase shares will be refunded to the participant, or to the participant's designated beneficiary in the case of death, and a certificate will be issued for the full shares in the participant's account. The Board of Directors may terminate or amend the stock purchase plan, subject to stockholder approval in some circumstances. Unless terminated earlier by the Board, the stock purchase plan will have a term of 10 years. At December 31, 2000 there were rights to purchase approximately 73,811 shares outstanding under the Purchase Plan and there were 1,926,189 shares available for purchase under the plan. DEFERRED STOCK COMPENSATION In connection with the grant of certain stock options to employees, non-employees and members of the Board of Directors, the Company recorded deferred stock compensation of $0.3 million in 2000 representing the difference between the deemed fair value of common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholders' equity, with amortization recorded over the four-year vesting period. At December 31, 2000 approximately $6.5 million remained to be amortized over the corresponding vesting period of each respective option, generally four years. The deferred stock compensation amortization expense for 2001, 2002, and 2003 is expected to be $4.1 million, $1.9 million, and $0.5 million, respectively. NOTE 18--401(K) PLAN On January 1, 2000, the Company adopted the UTStarcom Inc. 401(k) Savings Plan (the "401(k) Plan") a cash-or-deferred arrangement which covers the Company's eligible employees. The 401(k) Plan permits, but does not require, that the Company may make matching contributions on behalf of all eligible employees who make salary reduction contributions to the 401(k) Plan. Commencing with the plan year beginning January 1, 2001, the Company has elected to begin making matching contributions on behalf of qualified employees who participate in the 401(k) Plan. The Company will contribute $0.50 for each dollar contributed by qualified employees to the 401(k) Plan, to a maximum of $3,000 per employee per plan year. The Company's matching contributions are subject to a vesting schedule based upon longevity of employee service with the Company. The Company made no contribution to the plan for any of the year presented. NOTE 19--COMMITMENTS AND CONTINGENCIES On July 24, 2000, the Company entered into an agreement totaling approximately $10.7 million. The Company agreed to purchase software intellectual property from Hua You Starcom Communication Co., Ltd. and Stable Gain International Ltd., and to purchase certain related fixed 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19--COMMITMENTS AND CONTINGENCIES (CONTINUED) assets from Hainan Xinhuangpu Investment Co., Ltd. Also development employees were transferred from Hainan Xinhuangpu Investment Co., Ltd. to the Company. The transfer of the software intellectual property will be recorded upon the completion of government approvals. Upon completion of the transaction, the Company expects to use purchase accounting. LEASES: The Company leases certain facilities under non-cancelable operating leases, which expire at various dates through 2003. The minimum future lease payments under the leases at December 31, 2000 are as follows:
OPERATING LEASES ---------------- Years ending: 2001...................................................... $1,926 2002...................................................... 1,104 2003...................................................... 34 2004...................................................... -- ------ Total minimum lease payments.............................. $3,064
Rent expense for the years ended December 31, 2000, 1999, and 1998 was $2.2 million, $1.8 million, and $1.8 million, respectively. LITIGATION: The Company and its subsidiaries may become involved in legal proceedings, claims and litigation from time to time arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceedings, claims and litigation will not have a material effect on the Company's consolidated operating results, cash flows, or financial position. GUARANTEE: In conjunction with a sale of equipment, HUTS has guaranteed a bank loan incurred by a UTSC customer. As of December 31, 2000, the total amount of debt guaranteed by the Company was $1.0 million. The debt carries an interest rate of 6.993% per annum and is payable in three installments with the final installment due December 30, 2001. NOTE 20--OPERATING RISKS Financial Risks: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its temporary cash and short-term investments with several financial institutions. Approximately $44.3 million and $43.6 million of the Company's cash was on deposit in foreign accounts at December 31, 2000 and 1999, respectively. The Company invests excess cash in highly liquid investments with original maturity of twelve months or less, such as certificates of deposit, government sponsored entities notes, commercial paper, floating rate corporate bonds, fixed income corporate bonds, and money market funds, which the Company believes have limited exposure to risk. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20--OPERATING RISKS (CONTINUED) Concentration of Credit Risk and Major Customers: The Company's first and second largest customers accounted for 12.1% and 6.0% of the Company's sales as of December 31, 2000 and 7.0% and 0.2% of the accounts receivable respectively, as of December 31, 2000. The Company's first and second largest customers accounted for 30.0% and 11.0% of the Company's sales and 39.0% and 6.0% of the accounts receivable respectively, as of December 31, 1999. No customer in the continuing operations accounted for more than 10% of the Company's sales during 1998. Over 90% of the Company's sales during 2000 were to entities affiliated with the government of China or state owned enterprises. Accounts receivable balances from these China government affiliated entities or state owned enterprises were $153.8 million as of December 31, 2000 and $83.8 million as of December 31, 1999. The Company extends credit to its customers generally without requiring collateral. The Company monitors its exposure for credit losses and maintains allowances for uncollectible accounts. One vendor, a related party, accounted for 28.4% of the Company's cost of sales and there was no amount outstanding as of December 31, 2000. Country Risks: Almost 99% of the Company's sales for the year ended December 31, 2000 were made in China. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in China, and by the general state of China's economy. The Company's operations in China are subject to special considerations and significant risks not typically associated with companies in the United States. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by, among other things, changes in the political, economic and social conditions in China, and by changes in governmental policies with respect to laws and regulations, changes in China's telecommunications industry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation. Beginning in January 1, 1999, China's government required that all manufacturers of telecommunications equipment connected to public or private telecommunications networks within China obtain a network access license for each of its products. Sellers are prohibited from selling or advertising for sale equipment for which its manufacturer has not obtained a network access license and may be liable for penalties in an amount up to three times earnings from the sale of any equipment sold beginning January 1, 1999 without a license. Failure to obtain the required licenses could permit the authorities to force the Company to remove previously installed equipment and could preclude the Company from making further sales of the unlicensed products in China, which would substantially harm the Company's business. In June 2000, the Ministry of Information Industry issued an internal notice concluding its review of PHS-based equipment. The Company's PAS system will continue to be allowed in China's county-level cities and counties, which are the Company's primary markets for the Company's PAS system. In large and medium-sized cities, the Company's PAS system may be used on a limited basis where there is a high concentration of population, such as campuses, commercial buildings and special development zones. New city-wide PAS system deployments will not be allowed in large and medium-size cities. The evaluation group for access networks under the Ministry of Information Industry has recommended that the Ministry of Information Industry issue a license for the Company's PAS system. However, the Company does not yet have this network access license and the Company cannot provide any assurance 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20--OPERATING RISKS (CONTINUED) that such a license will be issued for the Company's PAS system. In addition, there is no assurance that the Ministry of Information Industry will not conduct any further review/evaluation of PHS-based equipment or change its order regarding PHS-based system in the future. Management has also applied for network access licenses for other products which the Company is no longer manufacturing but had previously sold. However, the Company has not yet received these access licenses and has no assurance that a license will be issued. Management believes that no penalties or fines will be payable for non-compliance with the licensing requirements for both the PAS system and other products and that there will be no adverse effect on the Company's business or financial condition. NOTE 21--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The table below has been revised to account for the application of SAB 101 "Revenue Recognition in Financial Statements" (SAB 101).
FOR THE THREE MONTHS ENDED: ----------------------------------------------------------------------------------------- DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, 2000 2000 2000 2000 1999 1999 1999 1999 -------- --------- -------- --------- -------- --------- -------- --------- REVISED REVISED REVISED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.............................. $126,997 $107,386 $75,676 $58,587 $ 62,815 $55,019 $42,131 $27,551 Gross profit.......................... $ 43,014 $ 37,292 $27,262 $20,613 $ 23,902 $23,060 $18,254 $ 9,597 Net income/(loss)..................... $ 13,887 $ 12,355 $ 5,020 $(3,269) $(27,359) $ 6,646 $ 3,625 $(1,426) Net income/(loss) per share:* Basic............................... $ 0.15 $ 0.13 $ 0.05 $ (0.09) $ (3.11) $ 0.76 $ 0.42 $ (0.17) Diluted............................. $ 0.13 $ 0.12 $ 0.05 $ (0.09) $ (3.11) $ 0.09 $ 0.05 $ (0.17)
- ------------------------------ * Net income/(loss) per share is computed independently for each of the quarters presented, therefore, the sum of the quarterly net income/(loss) per share may not equal the annual net income/(loss) per share. Revised quarterly results (unaudited) The results of operations and statements of financial position as previously reported in the Company's interim 2000 financial statements filed on Form 10-Q have been revised to reflect the application of SAB 101 "Revenue Recognition in Financial Statements" effective January 1, 2000. The proforma results of operations for the three months ended December 31, 1999 is presented for comparison purposes as if the application of SAB 101 were adopted October 1, 1999. The net effect of the revision was:
FOR THE THREE MONTHS ENDED ------------------------------------------------------------------------------ SEPTEMBER 30, 2000 JUNE 30, 2000 MARCH 31, 2000 ------------------------ ------------------------ ------------------------ AS REPORTED AS REVISED AS REPORTED AS REVISED AS REPORTED AS REVISED ----------- ---------- ----------- ---------- ----------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues.................. $103,812 $107,386 $80,008 $75,676 $58,759 $58,587 Gross profit.............. $ 35,940 $ 37,292 $28,356 $27,262 $20,860 $20,613 Net income/(loss)......... $ 10,870 $ 12,355 $ 6,208 $ 5,020 $(2,983) $(3,269) Net income/(loss) per share:* Basic................... $ 0.12 $ 0.13 $ 0.07 $ 0.05 $ (0.08) $ (0.09) Diluted................. $ 0.11 $ 0.12 $ 0.06 $ 0.05 $ (0.08) $ (0.09) DECEMBER 31, 1999 -------------------------- AS REPORTED AS PROFORMA ----------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) Revenues.................. $ 62,815 $ 61,218 Gross profit.............. $ 23,902 $ 23,607 Net income/(loss)......... $(27,359) $(27,654) Net income/(loss) per share:* Basic................... $ (3.11) $ (3.15) Diluted................. $ (3.11) $ (3.15)
80 PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma information presents the combined results of operations as if the acquisition of the minority interest in Wacos had occurred at the beginning of 1999. The pro forma information is not necessarily indicative of what would have occurred had the acquisition taken place as of January 1, 1999, nor is it indicative of future results of operations. See notes to unaudited pro forma combined financial information for further detail on the accounting treatment. 81 UTSTARCOM, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------- PRO FORMA UTSTARCOM WACOS(A) COMBINED ADJUSTMENTS TOTAL ---------- --------- --------- ----------- -------- Net sales............................................. $187,516 $187,516 $187,516 Cost of sales (includes amortization of deferred stock compensation of $12)................................ 112,703 112,703 112,703 -------- -------- -------- ------- -------- Gross profit.......................................... 74,813 74,813 74,813 Operating expenses: Selling, general and administrative expenses (includes amortization of deferred stock compensation of $4,256)........................... 35,122 35,122 35,122 Research and development expenses (includes amortization of deferred stock compensation of $1,285)........................................... 18,648 18,648 18,648 Amortization of intangible assets................... 332 332 $ 4,608(1) 4,940 In-process research and development costs........... 3,992 3,992 (3,992)(2) -- -------- -------- -------- ------- -------- Total operating expenses.............................. 58,094 58,094 616 58,710 -------- -------- -------- ------- -------- Operating income (loss)............................... 16,719 16,719 (616) 16,103 Interest income (expenses)............................ (1,047) (1,047) (1,047) Other income (expenses)............................... (1,165) (1,165) (1,165) Equity in net income of affiliated companies.......... 1,348 1,348 1,348 -------- -------- -------- ------- -------- Income (loss) before income taxes and minority interest............................................ 15,855 15,855 (616) 15,239 Income tax expense (benefit).......................... 626 626 626 -------- -------- -------- ------- -------- Income (loss) before minority interest................ 15,229 15,229 (616) 14,613 Minority interest in (earnings) loss of consolidated subsidiaries........................................ (2,110) (2,110) (2,110) -------- -------- -------- ------- -------- Income (loss) from continuing operations.............. 13,119 13,119 (616) 12,503 Beneficial conversion feature of Series F convertible preferred stock..................................... (29,977) (29,977) (29,977) -------- -------- -------- ------- -------- Income (loss) from continuing operations applicable to common stockholders................................. $(16,858) $(16,858) $ (616) $(17,474) ======== ======== ======== ======= ======== Earnings per common share--basic...................... $ (0.24) ======== Earnings per common share--diluted.................... $ (0.24) ======== Shares used in pro forma per-share calculation--basic................................ 72,947 ======== Shares used in pro forma per-share calculation--diluted.............................. 72,947 ========
(A) Wacos statement of operations are consolidated within UTStarcom's statement of operations and no further adjustment is required. See accompanying notes to unaudited pro forma combined financial information. 82 UTSTARCOM, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Pro forma adjustments for the unaudited pro forma statement of operations for the year ended 1999 are as follows: (1) Represents the allocation of purchase price for Wacos to assembled workforce and the excess of costs of acquiring Wacos over the fair value of net assets acquired, which will be amortized over a period of three to five years; and (2) Represents the in-process research and development charge resulting from the acquisition of the minority interest in Wacos, removed from the pro forma statement of operations as a non-recurring charge. The pro forma combined statement of operations data presents the Company's consolidated results of operations as if the Company's acquisition of Wacos had occurred as of January 1, 1999 and the assumed conversion of all the Company's outstanding preferred stock into shares of the Company's common stock that will be effective upon the closing of the Company's initial public offering as if such conversion had occurred on January 1, 1999 or at the date of issuance. The pro forma information is not necessarily indicative of what would have occurred had the acquisition been made as of such period, nor is it indicative of future results of operations. ITEM 9-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 83 PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF UTSTARCOM, INC. The information required by this section is incorporated by reference from the information in the section entitled "Election of Directors" in the Proxy Statement. The required information concerning our executive officers is contained in the section entitled "Executive Officers" in Part I of this Form 10-K. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is contained in the section entitled "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. ITEM 11--EXECUTIVE COMPENSATION The information required by this section is incorporated by reference from the information in the sections entitled "Election of Directors--Directors' Compensation", "Executive Compensation" and "Stock Price Performance Graph" in the Proxy Statement. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this section is incorporated by reference from the information in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this section is incorporated by reference from the information in the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS--See Index to Consolidated Financial Statements and Financial Statement Schedules at page 53 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULE(S)--See Index to Consolidated Financial Statements and Financial Statement Schedules at page 53 of this Form 10-K. (3) EXHIBITS--See Exhibit Index at page 85 of this Form 10-K. 84 EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1(1) Thirteenth Amended and Restated Certificate of Incorporation of UTStarcom, Inc. 3.2(1) Amended and Restated Bylaws of UTStarcom, Inc. 4.1 See exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws defining the rights of holders of Common Stock. 4.2(1) Specimen Common Stock Certificate. 4.3(1) Third Amended and Restated Registration Rights Agreement dated December 14, 1999. 10.1(1) Form of Indemnification Agreement. 10.2(1) 1992 Omnibus Equity Incentive Plan and form of related agreement. 10.3(1) 1995 Stock Plan and forms of related agreements. 10.4(1) 1997 Stock Plan, as amended, and forms of related agreements. 10.5(1) 2000 Employee Stock Purchase Plan and forms of related agreements. 10.6(1) Common Stock Purchase Warrant dated February 5, 1998 between UTStarcom, Inc. and Lintech Limited. 10.7(1) Common Stock Purchase Warrant dated September 20, 1999 between UTStarcom, Inc. and Talent Group International, Ltd. 10.8(1) Employment and Non-Competition Agreement dated October 6, 1995 between UTStarcom, Inc. and Hong Lu. 10.9(1) Employment and Non-Competition Agreement dated October 6, 1995 between UTStarcom, Inc. and Ying Wu. 10.10(1)* Product Manufacture & License Agreement dated May 13, 1997 between UTStarcom, Inc. and Tollgrade Communications, Inc. 10.11(1)* Sales Agreement dated February 12, 1999 between UTStarcom (China) Ltd. and BaoDing Telecommunication Bureau, Hebei Province. 10.12(1)* Sales Contract dated August 23, 1999 between UTStarcom (China) Ltd. and Xian Telecommunication Bureau. 10.13(1)* Technical License and Assistance Agreement dated November 2, 1999 between UTStarcom, Inc. and Mitsubishi Electric Corporation. 10.13(a)(1)* Amendment No. 1 to Technical License and Assistance Agreement dated February 21, 2000 between UTStarcom, Inc. and Mitsubishi Electric Corporation. 10.14(1)* Technical Assistance Agreement dated October 1, 1999 between Matsushita Communication Industrial Co. Ltd. and UTStarcom, Inc. 10.14(a)(1) Addendum dated February 18, 2000 to the Technical Assistance Agreement dated October 1, 1999 between Matsushita Communication Industrial Co. Ltd. and UTStarcom, Inc. 10.15(1)* Joint Product Development and Marketing Memorandum and Understanding dated September 2, 1999 between UTStarcom, Inc. and Matsushita Communication Industrial Co., Ltd. 10.16(1)* Joint Patent Filing Agreement dated December 1, 1998 between UTStarcom, Inc. and Matsushita Communication Industrial Co., Ltd. 10.17(1)* Loan Agreement dated June 15, 1998 between UTStarcom, Inc. and SOFTBANK Corp.
85
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.18(a)(1)*+ Loan Agreement dated March 9, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(b)(1)* Loan Agreement dated June 7, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(c)(1)* Loan Agreement dated June 29, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(d)(1)* Loan Agreement dated July 7, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(e)(1)* Loan Agreement dated July 14, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(f)(1)* Loan Agreement dated July 21, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(g)(1)* Loan Agreement dated August 5, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(h)(1)* Loan Agreement dated August 17, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(i)(1)* Loan Agreement dated September 2, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.18(j)(1)* Loan Agreement dated September 17, 1999 between Bank of China and UTStarcom Hangzhou Telecommunications Co., Ltd. 10.19(1)* Joint Venture Agreement dated July 31, 1997 between UTStarcom, Inc. and Zhejiang Telecommunication Equipment Factory. 10.20(1)* Joint Venture Agreement dated December 8, 1995 between UTStarcom, Inc. and Chinese Guangdong Nanfeng Telecommunication Group Co. Ltd. 10.20(a)(1)* Amendment Agreement to the Contract and Articles of Association of Guangdong UTStarcom Communications Co. Ltd. dated December 11, 1997. 10.21(1)* Joint Venture Agreement dated September 12, 1997 between UTStarcom, Inc. and Zhejiang Nantian Post and Telecommunication Development Group Co. Ltd. 10.22(1) Lease dated December 23, 1997 between UTStarcom, Inc. and Tech Center Partners. 10.23(1) Lease Agreement dated April 1995, as amended, between UTStarcom, Inc. and Metro Park Associates. 10.24(1) Lease Agreements dated December 31, 1997 and May 14, 1998 between Guangdong UTStarcom Telecom Co., Ltd. and Guangdong Southern Telecom Group Huizhou Company. 10.25(1) Lease Contract dated December 15, 1996 between UTStarcom (Hangzhou) Telecommunications Co., Ltd. and Yile Village, Gudang Township. 10.26(1)* Purchase Agreement for P.R. China Market dated April 1, 1999 between UTStarcom Inc., Matsushita Electric Industrial Co., Ltd. and Matsushita Communication Industrial Co., Ltd. 10.27(1) Information Service Project Contract dated June 1, 1998 between UTStarcom (China) Ltd. and China Jitong Communication Co. Ltd. 10.28(1) Payment Agent Contract dated June 11, 1998 among UTStarcom, UTStarcom (China) Ltd, Softbank Corporation and Jitong Communication Co., Ltd.
86
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.29(1) Agreement on Termination of Contract dated August 30, 1999 among UTStarcom, Inc., UTStarcom (China) Ltd., Softbank Corporation and Jitong Communication Co., Ltd. 10.30(1) Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors. 10.31(1) Exchange Agreement dated October 15, 1997 between UTStarcom, Inc. and certain investors. 10.32(1) Employment and Non-Competition Agreement dated October 6, 1995 between UTStarcom, Inc. and Bill Huang. 10.33(1) Lease contract on Housing and Vacant Land at Yunshan Post and Telecommunication Industrial Village dated January 3, 2000 between Guangdong UTStarcom Telecom Co., Ltd. and Guangdong Nanfang Communication Group, Huizhou Co. 10.34(1) Loan Agreement dated October 8, 1996 between UTStarcom (China) Co., Inc. and Bill X. Huang. 10.35(1) Promissory Note Secured by Deed of Trust dated February 13, 1999 issued to UTStarcom, Inc. by Bill X. Huang and Minnie Huang. 10.36(1)* Supply Agreement dated February 18, 2000 between UTStarcom, Inc. and Matsushita Electric Industrial Co., Ltd. 10.37(2)* Manufacturing License Agreement between Himachal Futuristic Communications Ltd. and UTStarcom, Inc., undated. 10.38(2)* Sales Agreement between Japan Radio Company and UTStarcom, dated March 16, 2000. 10.39(2)* Technical Collaboration Agreement between Sharp Corporation and UTStarcom, Inc., dated March 31, 2000. 10.40(2)* Parts Supply Agreement between Sharp Corporation and UTStarcom, Inc., undated. 10.41(3)* Joint Venture Agreement between SOFTBANK Corporation and UTStarcom, Inc., dated May 29, 2000. 10.42(3)* Land Use Right Assignment Agreement between the Administration Committee of Hangzhou Hi-Tech Industry Development Zone of Zhejiang Province of the People's Republic of China and UTStarcom, Inc., dated May 18, 2000. 10.43(3)* Supply Agreement between Matsushita Electric Industrial Co., Ltd., Matsushita Communications Industrial Co., Ltd., and UTStarcom, Inc., dated April 1, 2000. 10.44(4)* OEM Agreement between UTStarcom, Inc. and Zaffire, Inc., dated August 10, 2000. 10.45(4)* Development Agreement between UTStarcom, Inc. and Matsushita Communication Industrial Co., Ltd., dated September 26, 2000. 10.46(4)* OEM Agreement between UTStarcom, Inc. and Interwave Communications International, Ltd., dated July 14, 2000. 10.47(4)* OEM Agreement between UTStarcom, Inc. and Foundry Networks, Inc., dated August 24, 2000. 10.48(4)* Loan Contract between UTSC Co., Ltd. and Bank of China Beijing Branch, dated August 29, 2000. 10.49* Sales Contract between UTStarcom (China), Ltd. and Zhejiang Telecom Company (Shaoxing Branch), dated November 18, 2000.
87
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.50* Sales Contract between UTStarcom (China), Ltd. and He Nan Telecom Company, dated October 28, 2000. 10.51* Sales Contract between UTStarcom (China), Ltd., Xian Equipment Import/Export Company, Ltd., and Shaanxi China Telecom Group, Ltd., dated September 29, 2000. (received by UTStarcom, Inc. on October 9, 2000). 10.52* Technical Assistance Agreement between UTStarcom, Inc. and Matsushita Communication Industrial Co. Ltd., dated December 1, 2000. 10.53* Definitive Agreement for Collaboration between UTStarcom, Inc. and Mitsubishi Electric Corporation, dated October 22, 2000. 10.54* Software License Agreement between UTStarcom, Inc. and DDI Corporation, Inc. dated October 4, 2000. 10.55* Strategic Alliance, Purchase and License Agreement between UTStarcom, Inc. and Telecommunication D'Haiti S.A.M., dated December 5, 2000. 21.1 Subsidiaries of UTStarcom, Inc. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Willamette Management Associates 24.1 Power of Attorney (included on signature page).
- ------------------------ * Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 333-93069), which became effective March 2, 2000. (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. (4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the year. (c) Exhibits See Item 14(a) (3) above. (d) Financial Statement Schedules See Index to Consolidated Financial Statements and Financial Statement Schedules at page 53 of this Form 10-K. 88 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, on the 28th day of February, 2001. UTSTARCOM, INC. (REGISTRANT) By /s/ HONG LIANG LU ----------------------------------------- Hong Liang Lu PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
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 and in the capacities indicated on the 28th day of February, 2001.
SIGNATURE TITLE --------- ----- /s/ HONG LIANG LU President, Chief Executive Officer and -------------------------------------- Director (Principal Executive Officer) Hong Liang Lu /s/ MICHAEL J. SOPHIE Vice President of Finance, Chief Financial -------------------------------------- Officer and Assistant Secretary (Principal Michael J. Sophie Financial and Accounting Officer) /s/ MASAYOSHI SON Chairman of the Board of Directors -------------------------------------- Masayoshi Son /s/ YING WU Vice Chairman of the Board of Directors -------------------------------------- Ying Wu /s/ THOMAS TOY Director -------------------------------------- Thomas Toy /s/ CHAUNCEY SHEY Director -------------------------------------- Chauncey Shey /s/ LARRY D. HORNER Director -------------------------------------- Larry D. Horner
89 Condensed Financial Information at December 31, 1999 and 2000 and for each of the three years ended December 31, 2000. INDEPENDENT ACCOUNTANTS REPORT ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Stockholders of UTStarcom, Inc.: Our audits of the consolidated financial statements referred to in our report dated January 24, 2001, included an audit of the financial statement schedules of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP San Francisco, California January 24, 2001 90 SCHEDULE I UTSTARCOM, INC. (UNCONSOLIDATED) REGISTRANT BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $104,805 $ 43,729 Short-term investment..................................... 83,858 -- Accounts receivable....................................... 105,571 42,107 Receivable from related parties........................... 406 892 Inventories, net.......................................... 18,223 11,479 Other current assets...................................... 4,889 4,764 -------- -------- Total current assets........................................ 317,752 102,971 Property, plant and equipment, net.......................... 6,604 3,867 Long-term investments....................................... 110,332 54,971 Goodwill and intangible assets, net......................... 18,888 23,696 Other long term assets...................................... 5,768 2,155 -------- -------- Total assets.............................................. $459,344 $187,660 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 18,794 $ 4,501 Third party debt.......................................... 7 15 Income taxes payable...................................... 3,999 2,127 Deferred revenue.......................................... 11,457 500 Other current liabilities................................. 12,768 14,797 -------- -------- Total current liabilities................................... 47,025 21,940 -------- -------- Stockholders' equity: Convertible preferred stock: $.00125 par value; authorized: 99,200,000 shares; issued and outstanding 70,377,322 at December 31, 1999...................................................... -- 88 Common stock: $.00125 par value; authorized: 250,000,000 shares; issued and outstanding: 95,032,657 at December 31, 2000 and 8,929,837 at December 31, 1999................... 120 13 Additional paid-in capital.................................. 426,665 218,692 Deferred stock compensation................................. (6,491) (17,792) Accumulated deficit......................................... (7,808) (34,821) Notes receivable from shareholders.......................... (314) (555) Other comprehensive income.................................. 147 95 -------- -------- Total stockholders' equity.................................. 412,319 165,720 -------- -------- Total liabilities, minority interest, and stockholders' equity.................................................... $459,344 $187,660 ======== ========
The accompanying notes are an integral part of these financial statements. 91 SCHEDULE I UTSTARCOM, INC. (UNCONSOLIDATED) CONDENSED INFORMATION AS TO THE RESULTS OF OPERATIONS OF THE REGISTRANT (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net sales................................................... $267,384 $109,091 $48,458 Cost of sales (includes stock compensation expense of $90, $12, and $0).............................................. 228,624 95,866 36,293 -------- -------- ------- Gross profit................................................ 38,760 13,225 12,165 Operating expenses: Selling, general and administrative expenses (includes stock compensation expense of $4,676, $4,256, $390)..... 14,814 8,249 5,892 Research and development expenses (includes stock compensation expense of $6,795, $1,285, and $22)........ 40,957 12,966 9,319 Amortization of intangible assets......................... 4,808 188 -- In-process research and development costs................. -- 3,992 -- -------- -------- ------- Total operating expenses.................................... 60,579 25,395 15,211 -------- -------- ------- Operating loss.............................................. (21,819) (12,170) (3,046) Interest income............................................. 12,426 3,839 3,754 Interest expenses........................................... (154) (1,693) (1,016) Other income (expenses)..................................... (139) 360 (925) Equity in net income of affiliated companies................ 47,399 21,954 2,220 -------- -------- ------- Income before income taxes and cumulative effect of a change of accounting principle................................... 37,713 12,290 987 Income tax expense (benefit)................................ 9,720 (829) 394 -------- -------- ------- Income from continuing operations........................... 27,993 13,119 593 Loss from discontinued operations........................... -- (1,656) (893) -------- -------- ------- Net income (loss) before cumulative effect of a change of accounting principle...................................... 27,993 11,463 (300) Cumulative effect of change in accounting principle, net of income taxes.............................................. (980) -- -- -------- -------- ------- Net income (loss)........................................... 27,013 11,463 (300) Beneficial conversion feature of Series F convertible preferred stock........................................... -- (29,977) -- -------- -------- ------- Net income (loss) applicable to common stockholders......... $ 27,013 $(18,514) $ (300)
The accompanying notes are an integral part of these financial statements. 92 SCHEDULE I UTSTARCOM, INC. (UNCONSOLIDATED) CONDENSED INFORMATION AS TO THE CASH FLOWS OF THE REGISTRANT (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 27,013 $11,463 $ (300) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss from discontinued operations......................... -- 1,656 893 Depreciation and amortization............................. 7,308 1,258 841 Write-off of in-process research and development costs.... -- 3,992 -- Net loss on sale of assets................................ 698 -- 107 Cumulative effect of change in accounting principle....... 980 -- -- Stock compensation expense................................ 11,560 5,553 412 Equity in net loss of affiliated companies................ (47,399) (21,954) (2,220) Minority interest......................................... -- -- -- Changes in operating assets and liabilities: Accounts receivable and receivable from related parties............................................... (61,089) 3,647 (35,238) Inventories............................................. (6,744) (10,062) (380) Other current and non-current assets.................... 2,497 (1,578) (739) Accounts payable and payable to related parties......... 14,363 (24,359) 16,000 Income taxes payable.................................... 3,264 1,079 884 Other current liabilities............................... (1,987) 11,275 2,585 Deferred revenue........................................ 10,957 500 -- -------- ------- ------- Net cash used in operating activities....................... (38,579) (17,530) (17,155) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.................. (6,119) (1,422) (2,122) Investment in affiliates, net of cash acquired.............. (8,945) 108 (803) Proceeds from disposal of property.......................... 75 652 -- Purchase of short-term investment........................... (83,805) -- -- -------- ------- ------- Net cash used in investing activities....................... (98,794) (662) (2,925) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock, net of expenses.......................... 198,213 55,481 480 Reacquired common stock..................................... -- -- (453) Distribution of cash to shareholders........................ -- -- -- Proceeds (payments) from borrowing, net..................... (8) (7) 13 Proceeds from shareholder notes............................. 245 -- -- -------- ------- ------- Net cash provided by financing activities................... 198,450 55,474 40 -------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 61,077 37,282 (20,040) Cash and cash equivalents at beginning of period............ 43,729 6,447 26,487 -------- ------- ------- Cash and cash equivalents at end of period.................. $104,806 $43,729 $ 6,447 ======== ======= =======
The accompanying notes are an integral part of these financial statements. 93 SCHEDULE I UTSTARCOM, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION UTStarcom, Inc., a Delaware corporation, is the parent company of all UTStarcom, Inc. subsidiaries. The accompanying condensed financial statements reflect the financial position, results of operations and cash flows of UTStarcom, Inc. on a separate basis. All subsidiaries of UTStarcom, Inc. are reflected as investments accounted for using the equity method. Accordingly, intercompany transactions have not been eliminated. No cash dividends were paid to UTStarcom, Inc. by its subsidiaries during the three years ended December 31, 2000. For accounting policies and other information, see the Notes to Consolidated Financial Statements included elsewhere herein. 94 SCHEDULE II UTSTARCOM, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF DESCRIPTION THE PERIOD EXPENSES DEDUCTIONS THE PERIOD - ----------- ------------ ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 2000 Allowance for doubtful accounts.................... $6,789 $6,448 $ 402 $12,835 Provision for obsolete inventory................... $6,415 $2,786 $ -- $ 9,201 Accrued product warranty costs..................... $1,236 $4,279 $2,382 $ 3,133 YEAR ENDED DECEMBER 31, 1999 Allowance for doubtful accounts.................... $3,957 $6,006 $3,174 $ 6,789 Provision for obsolete inventory................... $2,445 $5,695 $1,725 $ 6,415 Accrued product warranty costs..................... $ 997 $ 481 $ 242 $ 1,236 YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts.................... $3,312 $ 875 $ 230 $ 3,957 Provision for obsolete inventory................... $1,779 $1,048 $ 382 $ 2,445 Accrued product warranty costs..................... $ 548 $ 879 $ 430 $ 997
95 EX-10.49 2 a2040014zex-10_49.txt EXHIBIT 10.49 Exhibit 10.49 [*] 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. CONTRACT Contract No.: UTPAS-H22Kii1206 Project No. The Buyer: The Seller: Zhejiang Telecommunications Corporation, UTStarcom (China) Ltd. Shaoxing Branch 11th Floor, CNT Manhattan Building, No. 6 Chao Yang Men Bei Da Jie Street, Beijing, 100027 Tel: 0575-5134567 Tel: (010)-65542030 Fax: 0575-5124855 Fax: (010)-65542058 This contract is made between the Buyer and the Seller, whereby the Buyer agrees to buy and the Seller agrees to sell the under-mentioned commodities according to the terms and conditions as stipulated hereinafter: 1. Total Contract Price: [*] 2. Name of Commodities: PAS Wireless Access System (Please refer to the attached list for quantity, specifications and unit price.) 3. Date of Shipment: [*]. 4. Place of Destination: Shaoxing Telecommunications Corporation (He He Qiao), Zhuji Telecommunications Bureau, Xinchang County Telecommunications Bureau, Bianzhou Telecommunications Bureau and Shangyu Telecommunications Bureau. 5. Packing: The goods shall be packed in new strong cases suitable for long distance transportation and well protected against dampness, moisture, shook and rust. The Seller shall be liable for any damage to the goods on account of improper packing. 6. Shipping Marks: The Seller is required to mark clearly on the surface of each package the package number, measurements and such cautions as "This Side Up", "Handle with Care" and "Keep Away from Moisture" in unfading ink and put on shipping marks. 7. Transportation: 7.1 [*] shall bear all the expenses and risks involved in the handling of the goods until the moment when the goods have officially been handed over to the relevant transportation unit designated by the Buyer. 7.2 The transportation and insurance costs from Hangzhou or Huizhou Railway Stations (or from the Sellers' warehouse, if shipped by highway) to the place of destination designated by the Buyer shall be borne by [*]. 8. Acceptance of Goods: 8.1 Upon arrival of the goods, the Buyer shall check the goods immediately in the presence of the Seller's representative and sign on the shipping list as a certificate of acceptance of the goods. If shipped by air, railway or postal service, the carrier's shipping list shall serve as a certificate of acceptance of the goods. 8.2 In case of missing parts or damages due to the Seller's improper packing, the Buyer shall make a detail record, or commission the China Commodity Inspection Bureau for a reexamination and issuance of a certificate, or require the representatives of the Buyer and the Seller to sign a memorandum to serve as a certificate for the replacement of missed or damaged parts. If the Buyer opens the cases by itself or fails to make a written claim on missing or damaged parts within [*] upon arrival of the goods, the Buyer shall be deemed to have accepted the goods. 9. Terms of Payment: General Provisions: If the payment by the Buyer to the Seller is made in [*], the exchange rate shall be based on the average price of a given foreign currency published by the People's Bank of China on the same day when the Seller receives such payment. The payment shall be made by T/T to Beijing Industry and Commerce Bank of China, Chao Yang Branch, Ri Tan Lu Office, for the account number [*]. 9.1 Terms of Payment for the Equipment as Follows: 9.1.1 Amount Paid on Arrival of the Goods [*] of the total contract price, or [*] shall be paid by the Buyer within [*] upon arrival of the goods. -2- 9.1.2 [*] of the total contract price, or [*] shall be paid by the Buyer within [*] upon connection and a test run of the equipment. 9.1.3 [*] of the total contract price, or [*] shall be paid by the Buyer within [*] upon certification of quality of final test (The final test is set for [*] upon connection of the equipment). 9.2 In the event that a payment required by Section 9.1 is not made by the Buyer within the stipulated time, the Buyer shall pay to the Seller, in addition to the amount owned, a late payment penalty equal to [*] of the amount owned per week. Any fractional part of a week is to be considered as a full week. The total amount of late payment penalty shall not, however, exceed [*] of the total amount owned. 10. Warranty: 10.1 The Seller warrants the equipment supplied hereunder to be free from defects in workmanship and materials. The Seller's warranty for equipment and materials will commence upon delivery of the goods and will continue for a period of [*]. During the warranty period, the Seller will, [*], either repair or replace those equipment and materials not in conformity with the aforementioned warranty. If the Buyer determines that certain parts be returned to the Seller, the [*] shall bear the transportation cost for the return of such parts inside China and for the return of the repaired or replaced parts to the Buyer's site. 10.2 The Seller warrants to eliminating errors from the software it provides. 10.3 The foregoing warranty does not extend to any equipment or part that has been: 10.3.1 Damaged due to improper use or accidents; 10.3.2 Wired, repaired or altered by anyone other than the Seller or its representatives; 10.3.3 Damaged due to improper installation, storage, handling or maintenance by anyone other than the Seller or its representatives; and 10.3.3 Removed from its original site of installation, or due to expendable components such as fuses, light bulbs, motor brushes and the like. 10.2.5 All equipment supplied under this Contract is brand-new. 11. Force Majeure -3- The Seller shall not be liable for any loss, damage, delay of the goods or failure of their performance resulting directly or indirectly from any cause which is beyond its reasonable control, which includes but is not limited to the laws, regulations, acts of any government authorities. 12. Late Delivery and Penalty: In case of delayed shipment, except for force majeure, the Seller shall pay to the Buyer for every week of delay a penalty amounting to [*] of the total value of the goods whose shipment has been delayed. Any fractional part of a week is to be considered as a full week. The total amount of penalty shall not, however, exceed [*] of the total value of the goods involved in late shipment and is to be deducted from the amount due at the time of payment. 13. Arbitration The parties shall strictly execute this Contract in accordance with the relevant laws and regulations of the PRC. All disputes arising out of the execution of the Contract shall be settled through mutual understanding and friendly negotiations. In case no settlement can be reached through negotiations, either party can apply to the appropriate organization for arbitration or medication. The arbitration fees shall be borne by the losing party. 14. Limitation of Liability In the event of any breach of this Contract by the Seller, or of any losses or injuries to the Buyer arising out of this Contract for which the Seller is liable, the Seller's total cumulative liability for such breaches, losses and injuries shall be the lesser of: a. The actual value of the damages or losses caused to the Buyer. b. The Seller shall not be liable for any consequential or incidental losses or damages resulting from this Contract. 15. Validity and Termination of the Contract and Miscellaneous Matters: 15.1 This Contract will come into force upon affixation of the seals by the parties and execution by the representatives of the parties. 15.2 This Contract will be terminated upon fulfillment of the respective duties and obligations by the parties. 15.3 This Contract can only be amended by an instrument in writing signed and sealed by the duly authorized representatives of the parties. -4- 15.4 During the course of performance of this Contract, all notices between the parties shall be delivered by telex, facsimile or certified mail. 15.5 This Contract is made in both Chinese and English, and the versions in two languages shall be equally authentic. In case of discrepancy between the two versions, the Chinese version will prevail. 16. Remarks: The Contract is made in two originals, of which each party holds one. The Buyer: Zhejiang Telecommunication Corporation, Shaoxing Branch Representative: (Signature) Date: November 18, 2000 The Seller: UTStarcom (China) Ltd. Representative: (Signature) Date: November 18, 2000 -5- EX-10.50 3 a2040014zex-10_50.txt EXHIBIT 10.50 Exhibit 10.50 [*] 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. CONTRACT Contract No.: UTA-BJ-0011-004 Project No.: PAS The Buyer: The Seller: Henan Telecommunications Corporation, UTStarcom (China) Ltd. Luoyang Branch No. 216 Zhong Zhou Zhong Street, 11th Floor, CNT Manhattan Building, Luoyang, 471000 No. 6 Chao Yang Men Bei Da Jie Street, Beijing, 100027 Tel: (0379) - 9937662 Tel: (010)-65542030 Fax: (0379) - 3942706 Fax: (010)-65542058 This contract is made between the Buyer and the Seller, whereby the Buyer agrees to buy and the Seller agrees to sell the under-mentioned commodities according to the terms and conditions as stipulated hereinafter: PAS Wireless Citywide Telephone System. 1. Total Contract Price: [*] 2. Name of Commodities or Services: PAS Citywide Telephone System for Henan telecommunications Corporation, Luoyang Branch. (Please refer to the attached list for quantity, specifications and unit price.) 3. Date of Shipment: [*]. 4. Place of Destination: Henan telecommunications Corporation, Luoyang Branch (No. 216 Zhong Zhou Zhong Street Luoyang) and Yanshi Telecommunication Bureau. 5. Packing: The goods shall be packed in new strong cases suitable for long distance transportation and well protected against dampness, moisture, shook and rust. The Seller shall be liable for any damage to the goods on account of improper packing. 6. Shipping Marks: The Seller is required to mark clearly on the surface of each package the package number, measurements and such cautions as "This Side Up", "Handle with Care" and "Keep Away from Moisture" in unfading ink and put on shipping marks. 7. Transportation: 7.1 The Seller shall bear all the expenses and risks involved in the handling of the goods until the moment when the goods have officially been handed over to the relevant transportation unit designated by the Buyer. 7.2 The transportation and insurance costs from Hangzhou or Huizhou Railway Stations (or from the Sellers' warehouse, if shipped by highway) to the place of destination designated by the Buyer shall be borne by the Buyer. 8. Acceptance of Goods: 8.1 Upon arrival of the goods, the Buyer shall check the goods immediately in the presence of the Seller's representative and sign on the shipping list as a certificate of acceptance of the goods. If shipped by air, railway or postal service, the carrier's shipping list shall serve as a certificate of acceptance of the goods. 8.2 In case of missing parts or damages due to the Seller's improper packing, the Buyer shall make a detail record, or commission the China Commodity Inspection Bureau for a reexamination and issuance of a certificate, or require the representatives of the Buyer and the Seller to sign a memorandum to serve as a certificate for the replacement of missed or damaged parts. If the Buyer opens the cases by itself or fails to make a written claim on missing or damaged parts within [*] upon arrival of the goods, the Buyer shall be deemed to have accepted the goods. 9. Terms of Payment: General Provisions: If the payment by the Buyer to the Seller is made in [*], the exchange rate shall be based on the average price of a given foreign currency published by the People's Bank of China on the same day when the Seller receives such payment. The payment shall be made by T/T to Beijing Industry and Commerce Bank of China, Chao Yang Branch, Ri Tan Lu Office, for the account number [*]. 9.1 Terms of Payment for the Equipment as Follows: -2- 9.1.1 Down Payment [*] of the total contract price, or [*] shall be paid as down payment by the Buyer to the Seller within [*] upon execution of the Contract. If the down payment is delayed, the date of shipment for the goods will be delayed accordingly. 9.1.2 Payment upon Arrival of the Goods [*] of the total contract price, or [*] shall be paid by the Buyer within [*] upon arrival of all the equipment. 9.1.3 The remaining [*] of the total contract price, or [*] shall be paid by the Buyer within [*] upon certification of quality of final test or within [*] upon arrival of the goods, whichever is earlier. 9.2 In the event that a payment required by Section 9.1 is not made by the Buyer within the stipulated time, the Buyer shall pay to the Seller, in addition to the amount owned, a late payment penalty equal to [*] of the amount owned per week. Any fractional part of a week is to be considered as a full week. The total amount of late payment penalty shall not, however, exceed [*] of the total amount owned. 10. Equipment Installation: 10.1 The Buyer is responsible for the installation of the equipment. 10.2 The Seller is responsible for the technical support during the installation of the equipment. 11. Warranty: 11.1 The Seller warrants the equipment supplied hereunder to be free from defects in workmanship and materials. The Seller's warranty for equipment and materials will commence upon delivery of the goods and will continue for a period of [*]. During the warranty period, the Seller will, at its option, either repair or replace those equipment and materials not in conformity with the aforementioned warranty. If the Buyer determines that certain parts be returned to the Seller, the [*] shall bear the transportation cost for the return of such parts inside China and for the return of the repaired or replaced parts to the Buyer's site. -3- 11.2 The Seller warrants to eliminating errors from the software it provides. 11.3 The foregoing warranty does not extend to any equipment or part that has been: 11.3.1 Damaged due to improper use or accidents; 11.3.2 Wired, repaired or altered by anyone other than the Seller or its representatives; 11.3.3 Damaged due to improper installation, storage, handling or maintenance by anyone other than the Seller or its representatives; and 11.3.4 Removed from its original site of installation, or due to expendable components such as fuses, light bulbs, motor brushes and the like. 12. Force Majeure The Seller shall not be liable for any loss, damage, delay of the goods or failure of their performance resulting directly or indirectly from any cause which is beyond its reasonable control, which includes but is not limited to the laws, regulations, acts of any government authorities. 13. Late Delivery and Penalty: In case of delayed shipment, except for force majeure, the Seller shall pay to the Buyer for every week of delay a penalty amounting to [*] of the total value of the goods whose shipment has been delayed. Any fractional part of a week is to be considered as a full week. The total amount of penalty shall not, however, exceed [*] of the total value of the goods involved in late shipment and is to be deducted from the amount due at the time of payment. 14. Arbitration The parties shall strictly execute this Contract in accordance with the relevant laws and regulations of the PRC. All disputes arising out of the execution of the Contract shall be settled through mutual understanding and friendly negotiations. In case no settlement can be reached through negotiations, either party can apply to the appropriate organization for arbitration or medication. The arbitration fees shall be borne by the losing party. -4- 15. Limitation of Liability 15.1 In the event of any breach of this Contract by the Seller, or of any losses or injuries to the Buyer arising out of this Contract for which the Seller is liable, the Seller's total cumulative liability for such breaches, losses and injuries shall be the lesser of: a. The actual value of the damages or losses caused to the Buyer. b. The total payment made to the Seller. 15.2 The Seller shall not be liable for any consequential or incidental losses or damages resulting from this Contract. 16. Validity and Termination of the Contract and Miscellaneous Matters: 16.1 This Contract will come into force upon affixation of the seals by the parties and execution by the representatives of the parties. 16.2 This Contract will be terminated upon fulfillment of the respective duties and obligations by the parties. 16.3 The Seller hereby grants the Buyer the license to use the software contained within the equipment purchased. The Buyer or its representatives shall not de-compile, disassemble or reverse the software unless consented in writing by the Seller. 16.4 This Contract can only be amended by an instrument in writing signed and sealed by the duly authorized representatives of the parties. 16.5 During the course of performance of this Contract, all notices between the parties shall be delivered by telex, facsimile or certified mail. 16.6 This Contract is made in both Chinese and English, and the versions in two languages shall be equally authentic. In case of discrepancy between the two versions, the Chinese version will prevail. 17. Remarks: The Contract is made in two originals, of which each party holds one. -5- The Buyer: Henan Telecommunications Corporation, Luoyang Branch (Corporate Seal) Representative: (Signature) Date: October 28, 2000 The Seller: UTStarcom (China) Ltd. Representative: (Signature) Date: October 28, 2000 -6- EX-10.51 4 a2040014zex-10_51.txt EXHIBIT 10.51 Exhibit 10.51 [*] 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. CONTRACT NUMBER: 20MKK-0320022US ON XIAN BROADBAND MULTI-MEDIA BUSINESS SYSTEM AMONG CHINA XIAN MACHINERY IMPORT & EXPORT CORPORATION AND CHINA TELECOM GROUP, SHANXI TELECOMMUNICATIONS CORPORATION AND U.S. UTSTARCOM, INC. TABLE OF CONTENTS OF PURCHASE CONTRACT 1. Definition 2. Subject Matter of Contract 3. Price 4. Payment and Terms of Payment 5. Terms of Transportation 6. Packing and Shipping Marks 7. Shipment 8. Installation, Testing, Test Run and Final Test 9. Warranty 10. Spare Parts 11. Claims 12. Force Majeure 13. Arbitration 14. Notice 15. Amendment of Contract 16. Customs Duties, Taxes and Other Expenses 17. Miscellaneous 18. Validity of Contract Signature Page Appendices Appendix 1 List of Quotation for Equipment Appendix 2 Technology Proposal Appendix 3 Training Plan Appendix 4 Manual of Products Appendix 5 Reply to Questions re Quotation PURCHASE CONTRACT 1. Purchase Contract (a) This purchase contract of Xian broadband multi-media business system equipment and other related service contracts (hereinafter referred to as the "Contract") are made among China Xian Machinery Import & Export Corporation (hereinafter referred to as the "Buyer"), registered under the laws of the People's Republic of China and having its legal address at Building No. 4 (East), Jian Hua Hotel, No. 6 East Section, Huan Cheng Road (South), Xian, China Telecom Group, Shanxi Telecommunications Corporation (hereinafter referred to as the "End User"), registered under the laws of the People's Republic of China and having its legal address at No. 1 Gao Xin Road, Xian and U.S. UTStarcom, Inc. (hereinafter referred to as the "Seller"), having its address at 1275 Harbour Bay Parkway, Suite 100, Alameda CA 94502 by adhering to the principle of mutual benefits and friendly cooperation, through discussions and pursuant to the following terms and conditions: Chapter 1 Definition 1.1 "Authorized representatives" shall mean people who exercise the rights on behalf of the parties to this Contract. 1.2 "Contract Equipment" shall mean system equipment, spare parts and related software listed in Appendix 1 attached to this Contract. 1.3 "Technical Services" shall mean services provided within the boundaries of [*] by the Seller to the Buyer and the End User. 1.4 "Site" shall mean the spot where contract equipment is installed. 1.5 "Readiness for Preparation of the Site" shall mean that prior to the arrival of the contract equipment at the Site, the Site provided by the Buyer and the End User is equipped with the conditions required by the Seller for the installation of the contract equipment; thus, the work for such installation may start. 1.6 "Amended Application Forms" shall mean forms on the amendment of the scope, plan or price of the Contract. Chapter 2 Subject Matter of Contract 2.1 The Buyer agrees to buy from the Seller the equipment and technical services provided in accordance with Appendix Nos. 1 and 2 attached to this Contract, and the Seller agrees to sell such equipment and services. Please refer to Appendix 2 attached to this Contract for detailed explanation of the equipment and the related technical services pursuant to this Contract. Chapter 3 Price 3.1 The Buyer shall pay the Seller a total contract price of [*]. The contract price is [*]. 3.2 The contract price listed in 3.1 is based on the provisions of [*], and the expenses for shipping and insurance are paid up till to [*]. 3.3 The prices listed in 3.1 are fixed. Any amendment of the relevant contracts shall be unanimously made in writing by the parties to the Contract. Chapter 4 Payment and Terms of Payment 4.1 The computation and display of prices listed in the Contract and the preparation and payment of all the invoices shall be carried out in [*]. 4.2 The total contract price set forth in 3.1 shall be paid by the Buyer by the following means and ratio: 4.2.1 Within [*] upon the official validity of this Contract, the Buyer shall pay [*] of the total contract price or [*]. The Buyer shall wire transfer such payment through the Buyer's bank within [*] upon receipt of the following documents: a. Export license issued by the government authorities of the Seller's country or a certificate indicating no need of such export license; b. Five (5) copies of [*] pro forma invoices; c. Five (5) copies of [*] commercial invoices; d. Two (2) copies of [*] sight draft; e. Original copy of air waybill indication "freight paid", and notification to China Xian Machinery Import & Export Corporation; f. Three (3) copies of a detailed packing list; g. An original and a copy of the insurance policy covering all risks for [*] of the contract price; and h. Two (2) copies of inspection certificates of quality and quantity or weight. 4.2.2 2nd Payment: [*] of the Contract Price -2- Upon arrival of the goods and after confirming without error the following documents submitted by the Seller, the Buyer shall wire transfer [*] of the total contract price or [*] to the bank designated by the Seller in accordance with the provisions of the contractual clauses: a. Three (3) originals and three (3) copies of commercial invoices for [*] of the total contract price indicating the contract number and the names of the goods. 4.2.3 Final Payment: [*] of the Total Contract Price The final payment, i.e. [*] of the total contract price or [*], shall be paid via T/T by the Buyer to the Seller's designated bank upon arrival of the goods and against the following documents presented by the Seller: a. Three (3) originals and three (3) copies of commercial invoices for [*] of the total contract price indicating the contract number and the names of the goods. 4.3 Any bank expenses in connection with the aforementioned procedures for such payment occurred inside the People's Republic of China shall be borne by [*]; and any bank expenses occurred outside the People's Republic of China shall be borne by the [*]. Chapter 5 Terms of Transportation 5.1 All the equipment under this Contract shall be shipped to Xian pursuant to the provisions of [*]. 5.2 With [*] upon shipment of the contract equipment, the Seller shall notify the Buyer and the End User by fax of the contract number, date, commodities, quantities, value of invoices, gross weight, flight number and other information. 5.3 The port of destination for the goods is Xianyang International Airport in Xian, and the [*] shall be responsible for the domestic transportation and insurance. Chapter 6 Packing and Shipping Marks 6.1 All the equipment and materials supplied under this Contract shall be carefully packed in strong cases suitable for long-distance transportation by air, sea or land and well protected against changes of weather, dampness, rain, rust, shook on loading and unloading and erosions. If necessary, they should be shipped in well-sealed containers. -3- 6.2 The Seller shall mark packing cases for loose spare parts, indicating in English the contract number, names of the equipment and spare parts. In addition, spare parts and tools shall be marked with letters of "parts" or "tools". 6.3 The Seller shall mark, in conspicuous English, the following contents on both sides of each packing case: 1) Contract number; 2) Shipping Mark: 20MKK-0320022US; 3) Recipient; 4) Port of Destination: Xian; 5) Case number; 6) Gross weight; and 7) Measurement (length x width x height). Based on the characteristics and different requirements of each packing case during the course of transportation, the Seller shall mark in English such cautions as "Handle with Care", "This Side Up", "Keep Dry" and any other conspicuous signs customarily used in the trade. 6.4 The Seller shall enclose a set of packing list inside each packing case. Chapter 7 Shipment 7.1 The Seller shall make one-time delivery of all the goods at the delivery date stipulated in the performance schedule (within [*] upon execution of the Contract). 7.2 The Seller shall be liable for any delay of the delivery of the contract goods caused by its own fault. Chapter 8 Installation, Testing, Test Run and Final Test 8.1 The [*] shall be responsible for the installation of the contract equipment under the supervision of the [*] technicians, and the [*] shall be responsible for the supervisory work of installation and system debugging, whereby the [*] technicians shall render assistance. The Seller's technical support shall comply with the integrated technology standards of engineering system for Xian broadband multi-media business system. -4- 8.2 Installation, testing and acceptance of the contract equipment shall be carried out in accordance with the performance schedule listed in Appendix 4 to this Contract. 8.3 Upon completion of the contract equipment installation by the End User and of debugging by the Seller, the Seller should guarantee the requirements of stability performance for the contract equipment be met and that preparation be made for a test run. The Seller shall provide the End User with any written and related information [*] prior to the test run, and confirm the date for such test run. Thereafter, the test run will begin immediately. 8.4 If, due to the Seller's reasons, the equipment does not comply with the allocation requirements, the Seller will solve the problem of such contract equipment at its own cost until they are up to the standards. The corresponding extension of the period of time for the test run shall be equal to the time spent by the Seller to solve the problem of such contract equipment. Chapter 9 Warranty 9.1 The Seller warrants the equipment supplied hereunder to be free from defects in workmanship. The Seller's warranty for the quality of the equipment will commence upon execution of the certificate of qualification at the final test and continue for a period of [*]. During the warranty period, the Seller will, at its option, either repair or replace any parts not conforming to the above warranty. The Seller shall bear all the expenses for the return of such parts as well as the transportation charges for the return of such repaired or replaced parts to the installation site. 9.2 If any part is determined to be returned by the parties, the End User shall complete a repair & maintenance form provided by the Seller and return the part, and the [*] shall bear the cost of transportation, insurance, loading and unloading of the faulty party to be returned to the Seller, and also be responsible for the return of the repaired or replaced part to the End User. 9.3 The Seller shall make its best efforts to ship a replaced part within [*] upon identification by the End User of the faulty essential part affecting the system performance. The End User shall do its best to return the faulty part within [*] upon delivery of a replaced part by the Seller to the End User. 9.4 If the Seller determines the need to dispatch its technicians to assist the End User in inspecting or repairing a faulty part at the site, any cost occurred during the warranty period shall be [*]. After the end warranty period, the Seller shall provide the Buyer with maintenance services, but the fees shall not exceed [*] of the discount price of the repaired unit. Chapter 10 Spare Parts -5- 10.1 The Seller agrees that it will exert its best efforts to provide spare parts for [*] upon delivery of the goods. The Seller warrants that it will notify the Buyer [*] ahead of time of any decision to suspend the production of certain parts in order to enable the Buyer to purchase enough parts for its inventory. 10.2 The Seller agrees not to price any of the spare parts higher than [*]. Chapter 11 Claims 11.1 Within [*] upon arrival of the goods at the End User's site, the cases shall be opened by the End User in the presence of the Seller's representatives, and checked jointly by the representatives of both the End User and the Seller. 11.2 In case of missing parts or damages due to the inadequate packing on the part of the Seller, the Buyer and the End User shall make a detailed record at the site or they may commission the China Commodity Inspection Bureau for a re-inspection. The representatives of the Buyer and the Seller shall draft and sign a proposal with a detailed list of the goods attached. Such proposal may serve proper evidence for the replacement or repair of missed or damaged parts. The replacement of missed parts and the repair of damaged parts shall be carried out in accordance with the provisions of Chapter 9, the warranty clause. 11.3 In case of delayed shipment due to the Seller's fault, the Buyer may seek compensation from the Seller according to the following ratio: a penalty amounting to [*] of the total value of the goods plus interest shall be imposed per weak. Any fractional part of a week is to be considered as a full weak. The total amount of compensation shall not, however, exceed [*] of the total value of the goods involved in delayed shipment. The payment of compensation will not exclude the Seller from its obligations to execute the Contract. If the delayed shipment exceeds [*], the Buyer and the End User have the right to rescind part or whole of the Contract. 11.4 The total amount of the aforementioned penalty shall not exceed [*] of the total contract price, which will be deducted at the time of payment due by the Buyer. Chapter 12 Force Majeure 12.1 The Seller, the End User or the Buyer shall not be liable for any lass, damage, delay or failure of performance resulting directly or indirectly from any cause which is beyond their reasonable control including, but not limited to, the laws, regulations, acts or failure to act of any governmental authorities. Under such circumstances, the party affected by the force majeure event shall notify the other party within [*] after the occurrence of such event. If the performance of this Contract is prevented for the aforementioned reasons for a consecutive period of [*] or a longer time, any party has the right to terminate this Contract by way of a written notice. -6- Chapter 13 Arbitration 13.1 Any dispute arising out of the performance of this Contract shall be settled by the parties through friendly consultations. In case of no settlement through consultations, the said dispute shall be submitted for an arbitration. 13.2 The place for the arbitration is Xian, China, and the said arbitration should be carried by Xian Arbitration Commission in accordance with its rules. This Contract is governed by the laws of the People's Republic of China. 13.3 The arbitration award issued by the Arbitration Commission shall be final and binding on the parties. No party shall try to seek legal or any other channels to amend the arbitration award. 13.4 The arbitration fees shall be covered by the losing party unless otherwise stipulated by the Arbitration Commission. 13.5 During the arbitration, the parties shall continue to perform this Contract except for the part under arbitration. Chapter 14 Notice 14.1 Any notice hereunder by the parties shall be in writing, and delivered by fax or similar communication means confirmed by the parties or registered mail to the following addresses: The Seller: U.S. UTStarcom, Inc. Telephone: 001-510-8648800 Fax: 001-510-8648802 The Buyer: China Xian Machinery Import & Export Corporation Telephone: 0086-29-2239614 Fax: 0086-29-2230418 The End User: China Telecom Group, Shanxi Telecommunications Corporation Telephone: 86-29-8258899 Fax: 86-29-8258809 14.2 Notices sent by fax or similar communications means shall be deemed as being effectively served on the sending day; notices sent by guaranteed or registered mail shall be deemed as being effectively served on the sending day when the prepaid postage is delivered. Chapter 15 Amendment of Contract -7- 15.1 Any amendment or memorandum made by the parties in relation to this Contract shall be executed by the authorized representatives of the parties. 15.2 During the performance of this Contract, any increase, cancellation or amendment relating to the contract price, schedule and progress of the project may be submitted by the parties, and shall come into force only after the confirmation of the parties' approval and signatures. 15.3 If any party fails to carry out its duties during the performance of this Contract, it shall bear the corresponding cost associated with such failure. Chapter 16 Customs Duties, Taxes and Other Expenses 16.1 The [*] shall be responsible for the payment of any taxes or other financial obligations arising out of this Contract and levied at abroad. 16.2 The [*] shall be responsible for the payment of any taxes or other financial obligations levied in China in relation to this Contract or import of equipment from abroad. 16.3 The Seller shall be responsible for the payment of any taxes or other financial obligations levied in China in relation to this Contract or import of equipment from abroad. Chapter 17 Miscellaneous 17.1 This Contract shall be kept confidential, and can only be disclosed or submitted to the government authorities pursuant to the laws. 17.2 This contract from its main body of Chapter 1 to 18 and appendices 1 to 6 represents the unanimous agreement of the parties and their common understanding on the relevant negotiations and agreements, whether in oral or written form, prior to the execution of this Contract. Unless otherwise specified in this Contract, no other representations, understanding or agreements are contained in this Contract. Any party shall not be liable for anything beyond the terms, conditions, definitions, warranties, understanding or representations provided for in this Contract. 17.3 This Contract shall be terminated upon completion of each party's duties and obligations. 17.4 Technical Services 17.4.1 The Seller is obliged to provide the following services within [*] after the delivery of the goods: -8- a. To provide 24-hour [ILLEGIBLE] online technical consultations, and warrants timely response to eliminate or reduce the occurrence of any breakdown. b. To send a maintenance team to solve the problem at the site within [*] upon receipt of a notice. Chapter 18 Validity of Contract This Contract is made in three (3) copies, and shall be jointly entered into and executed by the representatives of the parties. Buyer: China Xian Machinery Import & Export Corporation Authorized Representative: (Signature) Date of Signature: 9/29/00 Seller: U.S. UTStarcom, Inc. Authorized Representative: (Signature) Date of Signature: 9/29/00 End User: China Telecom Group, Shanxi Telecommunications Corporation Authorized Representative: (Signature) Date of Signature: 9/29/00 -9- EX-10.52 5 a2040014zex-10_52.txt EXHIBIT 10.52 Exhibit 10.52 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. TECHNICAL ASSISTANCE AGREEMENT AGREEMENT made and entered into, by and between Matsushita Communication Industrial Co., Ltd., Communication Systems Division, a Japanese corporation, having its principal offices at 3-1 Tsunashima-Higashi 4-chome, Kohoku-ku, Yokohama 223-8639, Japan (hereinafter called "Licensor"), and UTStarcom Inc., a Delaware corporation, having its principal offices at 1275 Harbor Bay Parkway, Suit 100, Alameda, California 94502, U.S.A. (hereinafter called "Licensee"). WITNESSETH: RECITALS: Licensor and Licensee have been the parties to the technical assistance agreement effective on October 1, 1999 which is subsequently modified, under which Licensee is receiving from Licensor, technical assistance and information for, and know-how in connection with, the manufacture and assembly in [*] of a certain radio port and radio port controller. Licensee is desirous of receiving such a technical assistance in further details and to a higher level. Licensor is willing and ready to render such technical assistance, information and know-how to Licensee, all upon and subject to the terms and conditions hereinafter set forth, NOW, THEREFORE, in consideration of the recitals and the mutual promises herein contained, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS 1.01 The term "Item(s)" means, 1)[*], and 2)[*], Any other items may be added to the aforesaid items or any of the aforesaid items may be excluded from the scope of Items by mutual written agreement or the parties hereto and subject to the approval of the Japanese Government, if then required. 1.02 The term "Products" means the product models and the subassemblies therefor within the scope of Items, that are designed and/or manufactured by Licensor during the term of this Agreement and are selected by a written agreement of the parties hereto. The initial Products are set forth in Exhibit A attached hereto and made a part hereof. Exhibit A may be amended by a written agreement of the parties from time to time during the term of this Agreement and subject to the approval of the Japanese Government, if then required. 1.03 The term "Effective Date" means the date on which both parties signed this Agreement (if different, the later date of signature), subject to the approval of the Japanese Government, if necessary. 1.04 The term "Components" means parts, components, materials, subassemblies, printed circuit boards, control cards, interface cards, accessories, packing materials, and printed materials used in the Products. 1.05 The term "Production Equipment" means machine, tools, jigs, molds, dies, and instruments, required by Licensee for manufacture (including assembly, adjustment, programming, and tests) and inspection of the Products. 1.06 The term "Production" means procurement of Production Equipment, Components, assembly, adjustment, in-process test, quality control inspection and repair. 1.07 The term "Calculation Period" means the periods from [*] to [*], from [*] to [*], from [*] to [*], and from [*] to [*] of each year, and the period from the later coming [*] to the date of termination or expiration of this Agreement. 1.08 The term "Affiliates" means companies or other entities controlling, controlled by, or under the common control with, either party, and the term "Subsidiaries" means, among the Affiliates, companies or other entities controlled by either party. As used in this Article, the term "control" means the direct or indirect ownership or control of the majority of the outstanding shares or the ownership representing the power to direct the business of the companies or entities, as long as such ownership or control exists. ARTICLE 2. TECHNICAL ASSISTANCE 2.01 Technical Information and Advice: 2.01A During the term of this Agreement, Licensor shall furnish Licensee with a set of tangible technical information for use by Licensee in the manufacture and/or assembly of the Products to the extent freely disposable by Licensor without any obligation to any third party, necessary for the Production of the Products by Licensee. Such information (hereinafter called "Technical Information") shall be as set forth in Exhibit B attached hereto and made a part of this Agreement. 2.01B From time to time during the term of this Agreement, whenever a new Product is selected pursuant to Article 1.02. hereof, Licensor will furnish Licensee with the technical information therefor, to the extent provided for in Article 2.01A hereof and required in addition to what has been previously supplied. Such technical information shall also be the Technical Information. 2.01C From time to time during the term of this Agreement, at the reasonable request of Licensee in writing, Licensor may furnish Licensee with advice and information which is incidental or supplemental to the Technical Information furnished pursuant to Articles 2.01A and 2.01B hereof and which may be properly disclosed by Licensor. 2.01D All Technical Information furnished hereunder shall be in the English language except for software and hardware design document in the Japanese language, and the measurements and specifications used therein shall be in the metric system. 2.02 Technical Service: 2.02A From time to time during the term of this Agreement, at the reasonable request of Licensee in writing, Licensor may permit officers and/or employees of Licensee to visit Licensor's facilities at which it manufactures or assembles the Products, for such periods of time as mutually agreed, to train such personnel of Licensee in the process of manufacturing and assembling the Products. 2.02B From time to time during the term of this Agreement, at the reasonable request of Licensee in writing, Licensor may send one or more of its engineers and/or technicians to Licensee's or Sub-Licensee's facilities at which it manufactures and/or assembles the Products, for such periods of time as mutually agreed, to provide advisory and instructive technical service to Licensee regarding the manufacture and/or assembly of the Products hereunder. 2.02C Details of the terms and conditions applicable to the technical services to be provided to Licensee as set forth in Articles 2.02A and 2.02B that are to be rendered by Licensor's engineers or technicians visiting Licensee's factory as herein provided shall be confirmed in writing between both parties hereto to the extent practicable prior to any such visit. 2.02D From time to time during the term of this Agreement, at the reasonable request of Licensee, Licensor may inspect or test samples of the Products produced by Licensee or the Components obtained by Licensee pursuant to the provisions of Article 4.02 hereof, and Licensor may inform Licensee of the results of such inspection or the test with any pertinent comments, if any, that Licensor may have to make. Such samples shall be given to Licensor [*] and at the [*]. -2- Licensee shall also reimburse Licensor, [*], for the expenses of [*] involved after receipt by Licensee of Licensor's invoice therefor. 2.03A All costs and expenses for the technical information, advice and services to be provided to Licensee as set forth in Articles 2.01 and 2.02 hereof (hereinafter called "Technical Services"), including those for technical information, advice, technical service, accommodation, transportation to and from Japan by air coach, meals and allowances, in respect of Licensor's engineers and/or technicians and Licensee's officers and/or employees as the case may be, shall be paid, or if paid by [*], shall be reimbursed, by [*] to [*] in [*] by means of telegraphic transfer within [*] after [*] presentation to [*] of bills or invoices for any such costs or expenses. 2.03B The schedule of the Technical Services at the initial stage and the payment therefor shall be set forth in Exhibit C. 2.03C Anything to the contrary herein notwithstanding, all such personnel of Licensor shall be deemed at all times to be employees of Licensor, subject to Licensor's ultimate direction and control, and shall not be deemed to be employees of Licensee. 2.03D Governmental Approval: Any of the Technical Assistance (as defined in Article 3.01A hereof) herein contemplated shall be made available to Licensee subject to a required approval by the competent authority of the Japanese Government under the Foreign Exchange and Foreign Trade Law of Japan, and/or the Japanese governmental administration guidance if and to the extent from time to time so required. It is further agreed by the parties hereto that any addition or selection of Item or Product pursuant hereto and any renewal of this Agreement shall also be subject to a required approval of the Japanese Government under the aforesaid law and/or governmental guidance, if and to the extent then required. ARTICLE 3. LICENSES 3.01A During the term of this Agreement, Licensor hereby grants to Licensee [*] license, [*], to use the Technical Information and advice and information related thereto and the Technical Services and such other technical assistance as may be furnished by Licensor hereunder (all of which are hereinafter collectively called "Technical Assistance") in order to manufacture and/or assemble the Products in [*] for sale, use, lease or other disposition of the same in [*]. 3.01B To the extent any patent owned by Licensor is embodied within the Technical Assistance and is applicable to manufacturing or selling the Products, Licensor agrees and hereby grants to Licensee during the term hereof, a [*] license under such patent, [*], to the extent necessary to exercise the license granted under Article 3.01A. 3.01C [*], Licensee [*] grant a sub-license of the license granted to it under Articles 3.01A and 3.01B to UTStarcom (Hangzhou) Telecom Co., Ltd. at Yile Industrial Park, Building 3, 129 WenYi Road, Hangzhou 310012, P.R. China (hereinafter called "Sub-Licensee"), as long as the Sub-Licensee remains a Subsidiary of the Licensee and provided that Licensee obtains at its risk and responsibility any permits and licenses necessary for such sub-license including, but not limited to, those by the governments of U.S.A. and P.R. China, that the Licensee shall have Sub-Licensee observe and comply with the terms and conditions hereof, and that Licensee shall be responsible for the performance of the Sub-Licensee. In the event there is a major change in the management or ownership of the Sub-Licensee, the Licensee shall inform the Licensor thereof without delay. 3.01D In the event the Licensee or the Sub-Licensee invents, creates or perceives any improvement, enhancement, addition or other modification on the Products and/or Technical Assistance during the term of this Agreement, the Licensee and the Sub-Licensee hereby grants to Licensor and its Subsidiaries a [*] license, [*], to use such improvement, enhancement and modification in order to manufacture/assemble the Item or sale, use, lease or other disposition of the same. 3.01E In the event any improvement, enhancement, addition or other modification on the Products and/or Technical Assistance is invented, created or perceived jointly by (i) the Licensor and (ii) the Licensee and/or Sub-Licensee during the term of this Agreement, such improvement, enhancement, addition or other modification shall be [*] owned by [*]. -3- The application for protection and its costs for such [*] owned improvement, enhancement, addition or other modification ("[*] Property") shall be discussed separately by the parties. Each party and its Affiliates may use such [*] Property for any purpose without the consent of the other party and without any compensation or accounting to the other party, provided that granting a license, sale, transfer or other disposition of the [*] Property to any third party (excluding respective Affiliates) requires a prior written consent of the other party and the income resulting from such license, sale, transfer or other disposition shall be shared [*] between the parties hereto. ARTICLE 4. PRODUCTION EQUIPMENT & COMPONENTS 4.01 Production Equipment: In the event that Licensee purchases any of the Production Equipment excluding the molds and dies from any third party, Licensee agrees that in order for Licensor to properly provide Technical Assistance to Licensee pursuant to this Agreement, Licensee shall purchase such Production Equipment only in accordance with the specifications therefor that are given to Licensee by Licensor. As for the molds and dies, the Licensor provides the specification of the Components to be manufactured with such molds and dies, and the Licensee shall purchase the molds and dies at its sole discretion and responsibility. 4.02 Components: In the event Licensee purchases any Components from any third party, Licensee agrees that in order for Licensor to properly provide Technical Assistance to Licensee pursuant to this Agreement, any such Components that Licensee purchases from any third party shall meet and maintain the specifications and quality standards set therefor by Licensor. ARTICLE 5. REMUNERATION 5.01 The parties hereto agree to establish the annual contracted minimum quantities as to the each of the Products which Licensee shall manufactures in [*] and sells in [*] during each annual term of this Agreement. Such contracted minimum quantities shall be separately confirmed in writing. 5.02 In consideration of the Technical Assistance to be provided by Licensor to Licensee and the licenses granted to Licensee pursuant to this Agreement, Licensee agrees to pay to Licensor a technical assistance fee set forth in Exhibit D. 5.03 Licensee agrees to provide Licensor with written reports, in such a form as may be reasonably indicated and requested by Licensor, within [*] after the end of each Calculation Period beginning with the Calculation Period commencing on the Effective Date, setting forth the number of Products shipped from Licensee and Sub-Licensee during the immediately preceding Calculation Period, and also showing computation of the technical assistance fee payable pursuant to the provisions of this Article and compensation of the tax described in Article 5.05 hereof. The report following expiration or termination of this Agreement shall include all of the Products shipped from Licensee and Sub-Licensee prior to the expiration or termination hereof and not previously reported to Licensor. Within [*] after the end of each Calculation Period, Licensee shall pay to Licensor the technical assistance fee for the Products included in such report in [*], by telegraphic transfer to Licensor's account at such bank as shall be designated by Licensor. The conversion to [*] from [*] shall be made based on the TTB rate quoted by the Citibank in California, U.S.A. on the date of relative payment. 5.04 Licensee agrees to keep records showing the total number of the Products shipped from Licensee and Sub-Licensee, and showing other related information in sufficient detail to enable the technical assistance fee payable hereunder by Licensee to be determined. Licensee further agrees, if Licensor so requests, to permit its books and records to be examined by Licensor from time to time during the term hereof and for [*] after termination or expiration hereof and to take extracts therefrom, to verify the technical assistance fee due and payable hereunder. Such examination shall be made at the expense of [*] its duly authorized representative(s) or agent(s) appointed by Licensor. 5.05 The technical assistance fee payable to Licensor by Licensee hereunder is net of the withholding tax or the tax at the source, and, if there is any such tax, the amount of the technical assistance fee is adjusted to compensate for such tax. Licensee shall promptly after payment of such tax furnish Licensor with a copy or the pertinent receipt of such tax issued by the tax agency or proof of payment thereof. -4- 5.06 If, as of the expiration or termination of this Agreement, there are any: (1) Products then completed by Licensee but not yet sold or otherwise disposed of; or (2) Products then in the process or manufacture or assembly; the technical assistance fee shall be paid thereon, as set forth above, by Licensee to Licensor by telegraphic transfer for all of such products within [*] after such expiration or termination hereof. Licensee agrees to provide Licensor with written reports in respect of any Products provided for in this Article 5.06 in like form and manner set forth in Article 5.03 hereof, within [*], after the expiration or termination hereof, setting forth the number of each such Product then completed or then in process as of the date of expiration or termination hereof. ARTICLE 6. MAINTENANCE OF QUALITY 6.01A Licensee agrees that in order for Licensor to properly provide the Technical Assistance to Licensee pursuant to this Agreement, Licensee shall strictly comply, in the Production of the Products hereunder, with all specifications and quality standards that are reasonably established by Licensor for Production of the Products. Licensee agrees to submit to Licensor, as Licensor reasonably requests, Licensee's quality control and inspection data in such form as may be reasonably established by Licensor for its inspection. Licensee shall keep, during and for [*] after the terms of this Agreement, copies of such quality control and inspection data so furnished to Licensor. Licensee agrees, upon reasonable request of Licensor, to send to Licensor samples of Products or the Components obtained by Licensee or its Sub-Licensee in reasonable quantities. Licensor may give Licensee, as promptly as possible, such Technical Assistance and such pertinent advice and/or instructions in written form in English with respect to the Products and/or Components, as shall be necessary in the reasonable opinion of Licensor after inspecting and/or testing such samples and/or after reviewing the reports of quality control, inspection and/or manufacturing data. 6.01B If, at any time during the term of this Agreement, Licensee and Licensor deem it necessary, Licensor may send to Licensee, Licensor's engineer(s) and/or technician(s) for the purpose of checking and/or inspecting the quality and/or performance of the Products and/or Components manufactured or assembled by, and/or the performance of the Production Equipment and/or the quality of the Components purchased by, Licensee or the Sub-Licensee, and in any such event, the provisions of Article 2.03 hereof shall be applicable to such sending of Licensor's engineer(s) and/or technician(s). 6.01C Licensee hereby agrees to inform Licensor forthwith in writing of any current or future standards, legal or otherwise, applicable to the Products, if any, in [*]. Licensor agrees to provide Licensee with such information and assistance as may be reasonably required by Licensee in obtaining any approvals, ratings or listings for the Products. 6.02 Manufacture and assembly of the Products and the sale or other disposition thereof by Licensee or the Sub-Licensee, as well as any guarantee thereon to Licensee's customers of the Products including, without limitation, responsibility for product liability, obtaining approval for the Products pursuant to any standard, legal or otherwise, applicable to the Products, shall be at Licensee's sole cost and expense and at Licensee's sole risk and responsibility, and Licensor shall not be responsible therefor to Licensee, the Sub-Licensee or any third party. Licensee shall indemnify Licensor for and hold Licensor harmless from any losses, liabilities, damages, claims, actions, suits, proceedings, costs and expenses (including fees and expenses of counsel) arising out of or in connection with the use by Licensee of any Technical Assistance, Production Equipment, Components, Technical Information, advice or service furnished by Licensor hereunder and the manufacture or assembly and sale or other disposition of the Products or Components hereunder, including, without limitation, claims for product liability (excepting those claims relating to defects in design of the Products as delivered Licensor) and obtaining approval for the Products pursuant to any standards, legal or otherwise, applicable to the Products or for infringement of any patents, trademarks or other proprietary rights or any third party. 6.03 The sole obligation of Licensor with respect to the Technical Assistance, advice or service to be provided to Licensee under this Agreement shall be to furnish the same to Licensee as provided for in this Agreement. Licensor shall have no responsibility for the ability of Licensee or the Sub-Licensee to use such Technical Assistance, Technical Information, advice or service or for the Products manufactured or assembled by Licensee or the Sub-Licensee thereunder. -5- ARTICLE 7. TRADEMARK 7.01 Licensee shall affix Licensee's brand name and/or its trade name designated by Licensee on the Products. Licensee shall not use any trademark, model numbers or tradename used by the Licensor or any mark which shall be, in the Licensor's opinion, similar to or shall resemble such Licensor's trademarks, model numbers or tradename, on the Products or with respect to the sale, use, lease or other disposition thereof (including relevant printings and advertising materials). ARTICLE 8. GENERAL PROVISIONS 8.01 Secrecy and Unauthorized Use of Technical Information: 8.01A Except as specifically set forth in Article 8.01 hereof or otherwise approved by Licensor in a separate writing, Licensee agrees to treat and keep secret and confidential and not to disclose, except as herein provided pursuant to Article 8.01B below, to any person, Licensor's technical know-how which may be disclosed by Licensor's engineers or technicians and/or acquired by Licensee's officers or employees and agents, as well as all Technical Information, advice and service furnished or disclosed by Licensor to Licensee hereunder, except to the extent Licensee may be required to disclose the same to obtain any approvals for the Products as provided for in Article 6 above or as may otherwise be required by law. Licensee further shall not use any Technical Information, advice or service furnished hereunder for any purpose other than that of this Agreement and shall not file or cause to be filed application for any patent or similar right in any countries based on or with respect to the Technical Information, advice or service furnished hereunder. 8.01B In the event Licensee shall disclose any of the Technical Information to the Sub-Licensee, except as provided in Article 8.01A hereof, Licensee shall obtain from the Sub-Licensee a confidential information agreement or arrangement as shall be mutually satisfactory to Licensor and Licensee. 8.01C Licensee shall take all necessary actions to comply and to compel compliance with the provisions of Article 8.01A hereof and with the provisions of any confidential information agreement or arrangement entered into pursuant to the provisions of Article 8.01B hereof. 8.01D The provisions of Article 8.01 hereof shall survive the expiration or termination of this Agreement, unless and until any Technical Information and advice or service furnished in connection therewith, as referred to in Article 8.01A above, shall have become part of the public domain or until [*] after the expiration or termination of this Agreement. 8.02 No Warranty: 8.02A Nothing herein contained shall be construed as the making or giving by Licensor of any warranty or representation that any Products manufactured or assembled by Licensee or the Sub-Licensee hereunder or that any process or method for manufacturing or assembling the Products by Licensee or the Sub-Licensee or that any Components or Production Equipment purchased by Licensee or the Sub-Licensee according to the specifications supplied from Licensor shall not infringe upon any proprietary property rights, including but not limited to, patent rights and trademark rights owned or otherwise controlled by a third party. Any license or permission, if any, that is required by Licensee or the Sub-Licensee from any third party, to manufacture or assemble or sell or otherwise dispose of the Products hereunder, shall be acquired by Licensee [*]. 8.02B During and after the term hereof, nothing herein contained shall be construed as the making or giving by Licensor of any warranty or representation that any Products meet the current or future standards, legal or otherwise, applicable to the Products, if any, in the [*]. 8.03 Force Majeure: Neither party shall be liable for delay or failure in performance arising from any of the following: (a) acts of God, or public enemy, or war (declared or undeclared); (b) acts of governmental or quasi-governmental authorities or any political subdivision thereof, or of any department or agency thereof, or regulations or restrictions imposed by law or by court action; (c) acts of persons engaged in subversive activities or sabotage; (d) fires, floods, explosions, or other catastrophes; (e) epidemics or quarantine restrictions; (f) strikes, slowdowns, lockouts, or labor stoppages, or disputes of -6- any kind; (g) freight embargoes or interruption of transportation; (h) any other causes, similar or dissimilar, beyond the control of the affected party, and the time for performance by such party shall be extended by a period of any such delay. 8.04 Breach or Default and Waiver: Either party hereto has the right to terminate this Agreement by giving a written notice to the other party to that effect in the event such other party shall have been in a material breach and/or default of this Agreement and such material breach and/or default shall not have been corrected within [*] after receipt of notice specifying the nature of such breach and/or default. The termination of this Agreement shall be without any prejudice to the rights which such terminating party may have under this Agreement. No failure or delay on the part of any party to exercise its right of termination of this Agreement for any one or more breaches and/or defaults shall be construed to prejudice its rights of termination for any other or subsequent breaches and/or defaults. 8.05 Disputes: Any disagreement in connection herewith shall be finally settled by arbitration. If Licensor initiates the arbitration, the arbitration shall be held in San Francisco, California, the U.S.A. in accordance with the International Arbitration Rules of American Arbitration Association. If Licensee initiates the arbitration, the arbitration shall be held in Tokyo, Japan in accordance with the Commercial Arbitration Rules of Japan Commercial Arbitration Association. 8.06 Applicable Law: This Agreement shall be interpreted and governed in accordance with the laws of Japan, without reference to its conflicts of laws principles. 8.07 Assignment: Neither this Agreement or any rights and obligations hereunder shall be assignable or otherwise transferable by either party, voluntarily or by operation or law or otherwise, without the prior written consent of the other party hereto, and any assignment or transfer without such consent of the other party shall be null and void; provided, however, that all of the terms of this Agreement shall inure to the benefit of and shall be binding upon each of the parties hereto and their respective successors and assigns as may be expressly consented to in writing by the other party. 8.08 Entire Agreement and Amendment: This Agreement and the exhibits thereto, contains the entire and only agreement between the parties hereto with respect to the subject matter herein contained and, this Agreement supersedes and cancels all previous agreements, negotiations, commitments and writings with respect to the subject matter hereof. This Agreement may not be amended, modified, superseded or canceled, nor may any of the terms, provisions or conditions hereof be waived, except by a written instrument duly executed by an authorized officer of each of the parties hereto. No waiver by either party of any condition of this Agreement, in any one instance, shall be deemed to be or construed as a further or continuing waiver of any such condition. 8.09 Obligations After Expiration or Termination: Except as to Products completed and/or in process as referred to in Article 5.06 hereof, upon and after the expiration or termination of this Agreement, Licensee shall not engage, nor contract with third parties to engage, in the manufacture or assembly or sale or other disposition of the Products, and Licensee shall, upon and after the expiration or termination of this Agreement, neither use nor contract with third parties to use any Technical Information or technical know-how embodied in the Technical Information, advice, service or other technical assistance furnished by Licensor hereunder, and Licensee shall return to Licensor [*], within [*] after notice to that effect sent by Licensor to Licensee, all or such Technical Information, advice, service or other technical assistance theretofore delivered or furnished by Licensor hereunder in tangible form relating to the Products and the manufacture and assembly thereof, including all copies or reproductions thereof. 8.10 Article Headings: The article headings contained in this Agreement are for the convenience of reference only and do not form a part of this Agreement, and shall not in any way affect the interpretation of this Agreement. -7- 8.11 Notice: For the purpose of this Agreement, any notice hereunder shall be sufficiently given if: 8.11A Delivered personally, in which case it shall be deemed to have been received at the time of delivery; or 8.11B Sent by prepaid registered or certified air mail, addressed as follows: To Licensee at: UTStarcom Inc. 1275 Harbor Bay Parkway, Suite 100, Alameda, California 94502, the U.S.A. Attention: Russell L. Boltwood To Licensor at: Matsushita Communication Industrial Co., Ltd. Communication Systems Division 4-3-1, Tsunashima-higashi, Kohoku-ku, Yokohama 223-8639, Japan Attention: General Manager, International Business Department or to such other addresses as may hereafter be furnished in writing by either party hereto to the other, and such mail shall be deemed conclusively to have been received on the tenth (10th) business day of the recipient following the date on which it is so mailed; or 8.11C Sent by a overseas commercial courier to the address set forth in Article 8.11B, in which case it shall be deemed to have been received on the second (2nd) business day of the recipient following the date on which it is deposited to such courier. 8.12 Scope of Technical Assistance and Licenses: The Technical Assistance to be provided and licenses granted pursuant to this Agreement are solely for manufacturing, assembling and selling the Products and not for manufacturing, assembling and selling any individual Components or Production Equipment. 8.13 Change of Specifications: 8.13A Licensee or the Sub-Licensee may make any change(s) in the specifications or to the physical appearance of the Products, provided that such change(s) shall be at the risk and responsibility of Licensee and that Licensee shall defend, indemnify and hold Licensor harmless from any losses, liabilities, damages, claims, actions, suits, proceedings, costs and expenses (including fees and expenses of counsel) arising out of or in connection with such change(s). Such changed Products shall be also deemed to be Products for the purpose of this Agreement. 8.13B Upon written notice to Licensee, Licensor may from time to time alter the specifications of or substitute any Components Licensor may supply in any manner which, in the judgment of Licensor, does not degrade the performance or quality of such Components, without incurring any liability to Licensee. ARTICLE 9. TERM & TERMINATION 9.01 This Agreement shall be effective for the period of [*] commencing on the Effective Date unless earlier terminated pursuant to the provisions of this Agreement, and after expiration of the original term, this Agreement may be renewed by the mutual written consent of the parties hereto under the terms and conditions to be then mutually agreed upon and subject to the approval of the Japanese Government, if then required. Notwithstanding the foregoing in this Article 9.01, in the event Licensee continues the manufacture of the Products after expiration of the original term, this Agreement shall be deemed automatically renewed year to year under the otherwise same terms and conditions, unless Licensor gives a notice of termination at least [*] prior to the expiration of any renewal term. 9.02 If at any time during the term of this Agreement, Licensee makes any unauthorized use of any Technical Information, advice or service furnished by Licensor to Licensee, Licensor shall have the right to terminate this Agreement upon notice without prejudice to any rights which Licensor may have under or in connection with this Agreement. -8- 9.03 Should Licensee at any time default in making payment of any technical assistance fee or in providing any report as herein provided for and fail to remedy such default within [*] written notice to that effect given by Licensor, Licensor may, at its option, terminate this Agreement by written notice in writing to Licensee. No failure or delay on the part of Licensor to exercise its right of termination of this Agreement for any one or more defaults of Licensee in the payment of any technical assistance fee or in providing any report pursuant hereto shall be construed to prejudice Licensor's rights of termination hereof for any other or subsequent default. 9.04 Licensor may terminate this Agreement immediately by giving a written notice to Licensee upon any of the following events: (a) any arrangement with direction or any application for bankruptcy, receivership, winding-up or other similar proceeding against Licensee and/or Sub-Licensee shall be made by Licensee, Sub-Licensee or any person; (b) all of or, in the opinion of Licensor, substantial part of the assets of Licensee and/or Sub-Licensee shall be seized or attached in conjunction with any action against Licensee and/or Sub-Licensee by any third party; (c) a sale of all of or in the opinion of Licensor, substantially all of the assets of Licensee and/or Sub-Licensee is made, or this Agreement is assigned by Licensee without the prior written consent of Licensor; (d) there occurs any such change in the capital ownership and/or management control of Licensee and/or Sub-Licensee as, in the opinion of Licensor, may adversely affect the performance of this Agreement and/or the benefits or rights of Licensor in this Agreement; (e) there occurs any difficulties, in Licensor's opinion, to perform the obligation under this Agreement due to any of significant changes of the political, economic or taxation policy by the governmental or quasi-governmental organization or agencies in the [*]; (f) Licensor judges that the quality of the Products assembled by Licensee or Sub-Licensee hereunder is found to be insufficient and such insufficiency seems not to be corrected within a reasonable period of time; (g) an import license of the Components and/or Production Equipment into the [*] and/or an import license of the Components and/or Production Equipment from Licensee to Sub-Licensee is not obtained from the competent authority of the government of the [*], (to the extent that such license is required by law), within [*] from the Effective Date hereof; or (h) the sub-licensing arrangement between Licensee and Sub-Licensee is not completed or is terminated. 9.05 Expiration or termination of this Agreement for any reason whatsoever shall not affect the rights of Licensor or Licensee which shall have been accrued hereunder. 9.06 The following articles shall survive any termination or expiration of this Agreement; Articles 1, 3.01D, 3.01E, 5.02-5.06, 6.01A, 6.02, 6.03, 8, 9.05, 9.06, 10, and 11. ARTICLE 10. 10.01 No Joint Venture: This Agreement is not a joint venture or a partnership, and nothing herein shall be deemed, construed or in any way interpreted to constitute the parties as joint venturers or as partners. 10.02 Export Control: A. In connection with the performance of this Agreement and the transactions contemplated hereunder, Licensor, Licensee and Sub-Licensee each hereby agree to fully comply with all applicable provisions of the export control laws and regulations of [*]. B. Licensee agrees to treat all data communicated to it by Licensor as required by the appropriate export control laws of [*]. If such data are subject to the export control laws of Japan, Licensor shall so notify Licensee together with the applicable Classification Numbers. Should Licensee transmit any non-public technical data to Licensor in the course of the performance of this Agreement, Licensor shall comply with applicable [*] regulations governing the use and communication of such technical data. If such data are subject to the export control regulations of the [*] Licensee shall also notify Licensor together with the applicable Classification Numbers. -9- C. Licensee agrees that it shall not export the Products manufactured hereunder to any country to which export is restricted by the Export Administration Regulations without the required approval of the [*] Government to the extent required. D. Licensee and Sub-Licensee shall not knowingly sell, lease or otherwise dispose of either any data transmitted hereunder, or the Products, directly or indirectly, to any customer who makes use of, or is likely to or intends to make use of, the same for "Military Purposes". For the purpose of this section, "Military Purposes" means the design, development, manufacture or use of any weapon, including without limitation nuclear weapon, biological weapon, chemical weapon and missiles. E. In order to assure the observance and/or implementation by Licensee and Sub-Licensee of the foregoing provisions, Licensee and Sub-Licensee shall submit necessary documents (including without limitation, sales contract, sales notes and invoices) in accordance with request of Licensor. F. In the event that Licensee and Sub-Licensee violates the provisions of this Article 10.02, Licensee and Sub-Licensee shall jointly and severally bear responsibility for any and all damages incurred by Licensor because of such violation, and further, notwithstanding the provisions of Article 8.04 hereof, Licensor shall have the right to terminate this Agreement forthwith by giving a written notice to Licensee, without any prejudice to the rights and remedies which Licensor may have under this Agreement. G. In the course of operation under this Agreement, Licensor may wish to obtain from Licensee, technical data, whether by direct communication between Licensee and Licensor, or by communication between Licensee and employees of Licensor who are not U.S. citizens, but who are assigned to Licensee by Licensor. To the extent that any such technical data is subject to U.S. export controls and may not be exported except with prior receipt of a Letter of Assurances, this Agreement is intended to serve as such Assurances. Licensor assures that it will not re-export, re-transfer or otherwise release any such data or the direct product thereof except in conformity with the then applicable U.S. export control laws and regulations. As used in this Article 10.02, the terms "technical data" and "direct product" shall have the meaning specified in the U.S. Export Control Regulations. ARTICLE 11. SEVERABILITY 11.01 If any provision(s) of this Agreement shall contravene any laws or regulations, it is agreed that the invalidity or illegality of such provision(s) shall not invalidate the whole of this Agreement but this Agreement shall be construed as if it did not contain the provision(s) claimed or held to be invalid or illegal in the particular jurisdiction concerned insofar as such construction does not effect the substance of this Agreement, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. In the event, however, that such claim of invalidity or illegality shall substantially and adversely effect the interest of either party hereto, the parties hereto shall negotiate a mutually acceptable provision(s) not conflicting with such laws, and, if the parties hereto cannot agree upon a substitute provision(s) within a reasonable period, Licensor or Licensee may terminate this Agreement forthwith. IN WITNESS WHEREOF, the parties hereto have caused this Agreement in two (2) original counterpart instruments, to be executed and delivered in English, as of the date written below, by their duly authorized officers.
Matsushita Communication Industrial UTStarcom Inc. Co., Ltd., Communication Systems Division By: By: ------------------------------------------------- --------------------------------------------------- Name: Yasuo Katsura Name: Hong Liang Lu ---------------------------------------------- ------------------------------------------------- Title: Senior Managing Director Title: President & CEO --------------------------------------------- ------------------------------------------------ Date: December 1, 2000 Date: December 1, 2000 ---------------------------------------------- -------------------------------------------------
-10- Exhibit A - --------- List of Products ---------------- [*] -11- Exhibit B (1/2) - --------------- List of Technical Information ----------------------------- Design Related Materials ------------------------ [*] 1.2 Hardware and Mechanical materials [*] 1.3 Software Related materials [*] -12- Exhibit B (2/2) - --------------- 2 Production Related materials [*] 3 Quality control & Assurance materials [*] -13- Exhibit D - --------- Technical Assistance Fee ------------------------ 1. The technical assistance fee for each unit of the Products shall be calculated in accordance with the following formula ("Formula"); [*] 2. The following products shall be categories for technical assistance fee; [*] -14- Schedule of Technical Services at the initial stage and the payment ------------------------------------------------------------------- [*] -15- Technical Service Costs and Expense ----------------------------------- [*] -16- EX-10.53 6 a2040014zex-10_53.txt EXHIBIT 10.53 Exhibit 10.53 [*] 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. DEFINITIVE AGREEMENT FOR COLLABORATION (3G W-CDMA) THIS DEFINITIVE AGREEMENT (hereinafter referred to as "DA") is made and entered into this 22nd of October, 2000 by and between UTStarcom Inc., having its principal place of business at 1275 Harbor Bay Parkway, Suite 100, Alameda, California 94502, U.S.A. (hereinafter referred to as "UTStarcom") and Mitsubishi Electric Corporation, acting through its Communication Systems Business Division, having its principal place of business at 8-1-1, Tsukaguchi-Honmachi, Amagasaki, Hyogo 661-8661, Japan (hereinafter referred to as "MELCO") WITNESSETH THAT; WHEREAS, UTStarcom and MELCO (hereinafter referred to individually as a "Party" and collectively as "Parties") have a strong intention to establish a mutually beneficial business relationship, bringing the expertise and experiences of each Party in China and other Asian market (hereinafter referred to as "Territory"); and WHEREAS, UTStarcom and MELCO have concluded MEMORANDUM OF UNDERSTANDING (MoU) (3G W-CDMA) on March 31, 2000; and WHEREAS, UTStarcom and MELCO have concluded Joint Development Plan on June 21, 2000: WHEREAS, The Parties have studied the business and technical feasibility of development of 3G W-CDMA in [*] based on UTStarcom WACOS platform (hereinafter referred to "WACOS 3G Network") in accordance with MOU: NOW, THEREFORE, in the light of the above recitals, the Parties hereto set forth the DA, as follows: 1. SCOPE OF WORK FOR THE DEVELOPMENT, TIME FRAME OF MAJOR MILESTONE AND ROLE & RESPONSIBILITY OF PRODUCT DEVELOPMENT AND SYSTEM INTEGRATION & TESTING The Parties confirm to jointly develop and market a complete suite of infrastructure product for the 3rd generation cellular network (hereinafter referred to as "3G W-CDMA") with a spirit of creating and developing a new business based on Parties' own initiated architecture and specification in [*]. MELCO will develop 3G BTS and UTStarcom will develop the rest of the network infrastructures (RNC, MSC/GSN, NMS, etc.) of a 3G W-CDMA based on WACOS platform (hereinafter referred to as "the Products"). Scope of work for development, Time frame of major milestone and Role & Responsibility of product development and system integration & Testing are described in Annex-1 (UTStarcom & Mitsubishi 3G Joint Development Plan). The Parties shall jointly perform system integration effort in accordance with Addendum-1. 2. TASK FORCE TEAM AND STEERING COMMITTEE During the term of this DA, the Parties internally promote their cooperation with all reasonable means with the aim to secure a satisfactory result of this DA. The Parties shall carry out and complete the development of the respective products with the Parties' due diligence for a joint business development. The Parties organize the following: (1) Task Force a. A task force composed of two teams, one business and one technical, from each Party is hereby created. Each Party shall assign a task force leader to be in charge of ensuring the proper implementation of the DA and, in particular, the coordination of each Party's task. The names of these individuals are listed in Annex 2. The technical task force will be responsible for the execution of the engineering development. The business task force will be responsible for the execution of business development. b. Task force shall meet on a regular basis, in principle once a month. c. Important agreed decisions shall be recorded in writing and signed by the task force. Such signed writing shall serve as the records of the DA implementation. d. In the event of disagreement, the task force will escalate the issue to the Steering Committee. (2) Steering Committee a. The Parties create a Steering Committee including the management of each Party and other staff member directly involved in the Project as per Annex-3. b. The Steering Committee shall meet regularly on quarterly basis unless either Party call for an extraordinary meeting for a purpose of management review and important decision making, including schedule and role & responsibility, as well as an effectual business development. c. Decision of the Steering Committee shall be made by the Parties' mutual agreement. At the conclusion of each meeting, the representatives shall prepare minutes and sign the same. d. The Steering Committee shall examine and make decisions on all important matters relating to this DA, including, but not limited to: i. Winning strategy for proactively obtaining 3G W-CDMA business. -2- ii. Review of implementation and execution of D/A. iii. Review of analysis of competition and carriers' network planning for 3G, financial back up for 3G implementation and carriers' preference of technology for 3G and set an action plan to be taken. iv. All important questions raised by the task force and the decisions to be made in respect thereof. 3. COST [*] [*] shall bear [*] cost incurred during the system integration, in particular, for integration testing during the [*] phases as shown in Annex-4, unless otherwise agreed in this DA or separately. If the quantity shown in Annex-4 will be increased in future, the Parties shall discuss [*] with regard to extra-cost to be caused by the increase of the quantity. In the event that either Party requires support from the other party for successful development and execution of respective responsible portion, the other Party may support the requesting Party on the basis of [*]. 4. 3G MOBILE SIMULATOR MELCO shall provide 3G mobile simulator during the [*] phases if UTStarcom requests for it. The quantity will be further discussed. 5. [*] TERMS/CONDITIONS UTStarcom shall have the right to sell the MELCO BTS on [*] basis to UTStarcom's customers [*] under the condition that the BTS is still manufactured by MELCO. MELCO shall have the right to sell the UTStarcom RNC and WACOS 3G products on [*] basis to customers [*] under the condition that the RNC and WACOS 3G products are still manufactured by UTStarcom. In the event that MELCO or its nominees arrange Official Development Aids (ODA) or equivalent financing, and the financing requires MELCO's brand name on the MELCO BTS, UTStarcom shall use MELCO's brand name on the BTS for commercial proposals and any associated contracts. In the event that a joint venture is established between UTStarcom and MELCO after completion of a joint-venture feasibility study, MELCO's supply of the MELCO BTS to UTStarcom on [*] basis will be re-studied and negotiated to mutual agreement between the Parties. -3- 6. COLLABORATION OF SYSTEM INTEGRATION UTStarcom and MELCO shall collaborate in the system integration using MELCO's BTS together with UTStarcom's RNC and WACOS 3G Core Network products as per conditions stipulated in Addendum-1. 7. RELEASE OF INFORMATION (1) UTStarcom will provide MELCO with necessary and sufficient information and data to the extent available, subject to Article 13(4), for MELCO's timely study upon MELCO's request. (2) MELCO will provide UTStarcom with necessary and sufficient information and data to the extent available, subject to Article 13(4), for UTStarcom's timely study upon UTStarcom's request. 8. SUBCONTRACTING Subject to the stipulation set forth in the DA, each Party shall be entitled to subcontract, at its own risk, to a corporation or corporations of its choice, any part of the supplies and services allocated to it under this DA. 9. PARTICIPATION OF THIRD PARTY INTO JOINT DEVELOPMENT UTStarcom and MELCO agree to consider a participation of an appropriate third company in the joint development, in case both Parties mutually judge that the participation of the third Party will enhance the Parties strength of competitiveness and a probability to win any bid in the Territory in the future. In such a case, the items stated in this DA shall still hold valid between UTStarcom and MELCO; and a separate agreement will be made among all Parties, reflecting this DA. 10. PURCHASE WARRANTY The Parties shall honor Clause 7 of MOU signed on March 31, 2000, as it is clearly stipulated as a legal binding Clause in Clause 16(3) of the MOU. [*] shall retain the sole discretion of whether MELCO's BTS is equal or better than that of another vendor in terms of price, quality, functionality and performance, in a reasonable and fair manner with good faith. If MELCO BTS satisfies the requirements of potential customers in terms of technical performance (by the sole discretion of [*] in a reasonable and fair manner with good faith), and MELCO's price is equal or better than other competing BTS units (by the sole discretion of [*] in a reasonable and fair manner with good faith), UTStarcom shall in the best effort purchase [*] of UTStarcom BTS product needs from MELCO. 11. [*] -4- 12. DISPUTES All disputes, controversies or differences which may arise between the Parties hereto, of or in relation to or in connection with this DA, whether during or after its term, which fails to be solved amicably, shall be finally resolved by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce as in force on the date of this DA. The arbitration shall be held in (a) Tokyo, Japan in case of an arbitration claim filed by UTStarcom; and in (b) New York, USA in case of an arbitration claim filed by MELCO. The arbitration panel shall consist of three (3) arbitrators appointed in accordance with the said Rules. All arbitration proceeding shall be conducted in English language. 13. CONFIDENTIALITY AND INDUSTRIAL AND/OR INTELLECTUAL PROPERTY (1) Ownership of Intellectual Property The Parties agree that each Party retains full and exclusive rights and ownership in any and all letters patent, inventions, software, algorithms, know-how, trademarks, copyrights and trade secrets, and any other proprietary rights which the Party currently possess, or develop independently pursuant to this DA. (2) Joint Invention It is not anticipated that the Parties shall carry out joint development work, but in the event that the personnel of MELCO and UTStarcom jointly make an invention or generate intellectual property rights in the course of the development, the Parties shall jointly file an application and have the right to use such intellectual property right without accounting to the other. Expenses incurred in connection with the filing and maintenance of the protective rights shall be shared equally, unless a Party elects not to file an application, in which case the other Party may file at its own expense and enjoy the exclusive ownership. (3) Against Infringement In the event a claim is brought by a third party alleging that the Products infringe any patent, copyright or any other intellectual property right of that third party, the Party having supplied the infringing module shall defend and settle the claim and indemnify and hold the other Party harmless from any fees, expenses or damages that may be incurred or awarded as consequence of such claim. (4) Confidentiality "Confidential Information" is all information (i) identified in written or oral format by the Disclosing Party as confidential, trade secret or proprietary information, and, if disclosed orally, summarized in written format within thirty (30) days of disclosure. "Disclosing Party" is the Party disclosing Confidential Information. "Receiving Party" is the Party receiving Confidential Information. -5- The Receiving Party may use the Confidential Information solely for the purpose of joint development of 3G W-CDMA. The Receiving Party shall not disclose the Confidential Information to any third party other than persons in the direct employ of the Receiving Party and its subsidiaries who have a need to have access to and knowledge of the Confidential Information solely for the purpose authorized above. Each Party shall take appropriate measures by instruction and agreement prior to disclosure to such employees to assure against unauthorized use or disclosure. The Receiving Party shall have no obligation with respect to information which (i) was rightfully in possession of or known to the Receiving Party without any obligation of confidentiality prior to receiving it from the Disclosing Party; (ii) is, or subsequently becomes, legally and publicly available without breach of this Agreement; (iii) is rightfully obtained by the Receiving Party from a source other than the Disclosing Party without any obligation of confidentiality; (iv) is developed by or for the Receiving Party without use of the Confidential Information and such independent development can be shown by documentary evidence; (v) becomes available to the Receiving Party by wholly lawful inspection or analysis of products offered for sale; (vi) is transmitted by a Party after receiving written notification from the other Party that it does not desire to receive any further Confidential Information; (vii) is disclosed by the Receiving Party pursuant to a valid order issued by a court or government agency, provided that the Receiving Party provides (a) prior written notice to the Disclosing Party of such obligation and (b) the opportunity to oppose such disclosure. Upon written demand by the Disclosing Party, the Receiving Party shall: (i) cease using the Confidential Information, (ii) return the Confidential Information and all copies, notes or extracts thereof to the Disclosing Party within [*] of receipt of demand, and (iii) upon request of the Disclosing Party, certify in writing that the Receiving Party has complied with the obligations set forth in this paragraph. The terms of confidentiality under this Agreement shall not be construed to limit either Party's right to independently develop or acquire products without use of the other Party's Confidential Information. The Disclosing Party acknowledges that the Receiving Party may currently or in the future be developing information internally, or receiving information from other parties, that is similar to the Confidential Information. Accordingly, nothing in this Agreement will be construed as a representation or agreement that the Receiving Party will not develop or have developed for it products, concepts, systems or techniques that are similar to or compete with the products, concepts, systems or techniques contemplated by or embodied in the Confidential Information provided that the Receiving Party does not violate any of its obligations under this Agreement in connection with such development. Notwithstanding anything herein contained to the contrary, each Party shall have the right to refuse to receive any Confidential Information, and the right to use Residuals for any purpose, including, but not limited to use in development, manufacture, promotion, sale and maintenance of its products and services, without paying any charge to the Disclosing Party, provided that each Party shall maintain the confidentiality as provided herein and that the right to Residuals does not represent a license under any patent right, utility model right, -6- design right or trade mark right of the Disclosing Party. The term "Residuals" means information in non-tangible form retained in the unaided memories of the Receiving Party's and its subsidiaries' employees who have had rightful access to the Disclosing Party's Confidential Information pursuant to the term of this Agreement. An employee's memory is unaided if the employee has not intentionally memorized the Confidential Information for the purpose of retaining and subsequently using or disclosing it. Both Parties agree that any Confidential Information disclosed hereunder by the other Party in the course of performance of the subject matter provided hereunder shall be considered as Residuals. Each Party shall retain all right, title and interest to such Party's Confidential Information. No license under any trademark, patent or copyright, or application for same which are now or thereafter may be obtained by such Party is either granted or implied by the conveying of Confidential Information. The Receiving Party shall not reverse-engineer, decompile, or disassemble any software disclosed to it and shall not remove, overprint or deface any notice of copyright, trademark, logo, legend, or other notices of ownership from any originals or copies of Confidential Information it obtains from the Disclosing Party. CONFIDENTIAL INFORMATION IS PROVIDED "AS IS" WITH ALL FAULTS. IN NO EVENT SHALL THE DISCLOSING PARTY BE LIABLE FOR THE ACCURACY OR COMPLETENESS OF THE CONFIDENTIAL INFORMATION. None of the Confidential Information disclosed by the Parties constitutes any representation, warranty, assurance, guarantee or inducement by either Party to the other with respect to the infringement of trademarks, patents, copyrights; any right of privacy; or any rights of third persons. Neither Party shall transmit, directly or indirectly, the Confidential Information or any technical data received from the other Party, nor the direct product thereof, without the Disclosing Party's prior written consent and in accordance with all export laws and regulations of the United States and Japan. The Parties agree that they do not intend nor will they, directly or indirectly, export or re-export any Confidential Information to any end-user who either Party knows or has reason to know will utilize it in the design, development or production of nuclear, chemical or biological weapons or to any end user who has been prohibited from participating in U.S. and Japanese export transactions by any federal agency of the U.S. and Japanese Government. Each Party acknowledges that monetary remedies may be inadequate to protect Confidential Information and that injunctive relief may be appropriate to protect such Confidential Information. Not withstanding the foregoing sentence, each Party may disclose joint developed Interface specification between MELCO's 3G BTS and UTStarcom's WACOS PNC and Interface specification between MELCO's 3G BTS and UTStarcom's WACOS Network Management Center to third party who agree in writing to be bound by the provisions hereof, provided that -7- the third party shall not disclose the specifications to any other party. The Parties shall take every reasonable precaution to protect the confidentiality of Confidential Information or materials to be confidential. In the event of termination of this DA, there shall be no use or disclosure by either Party of any Confidential Information of the other Party, and neither Party shall manufacture or have manufactured any product, devices, components or assemblies utilizing any of the other Party's Confidential Information absent a prior written agreement between the Parties. Additionally, neither Party shall use the name of the other party in any news release, public announcement, advertisement or other form of publicity without the prior written consent of the other Party. 14. EFFECTIVE DATE -- TERM This DA comes into force as soon as it is signed by the Parties and shall remain valid until December 31st, 2002 or the date to be mutually agreed. Within [*] before December 31st, 2002 or the date extended by mutual agreement, the Steering Committee shall decide on the future course of the cooperation or extension of this DA. 15. ASSIGNMENT Both parties [*] the right to assign or transfer any or all of its rights and obligations under this DA to any third party without the prior written agreement of the other Parties. 16. TERMINATION OF THE AGREEMENT AND INDEMNIFICATION Either Party shall have the right to terminate this DA for default by the other in performance of any substantial obligation or material breach of this DA where such default or breach continues for a period of [*] after written notice thereof to the defaulting Party. In case this DA is terminated, as per this clause, the defaulting party shall be responsible for the compensation of the direct loss, which the other party may suffer because of the termination of this DA. In any case, the Parties shall not be responsible for each other for indirect and/or consequential loss. 17. GOVERNING LAW This DA shall be construed in accordance with the laws of New York State, USA. 18. COMMUNICATIONS-ADVERTISING (1) Both parties shall not make any announcement or communicate any information to a third party concerning the purpose of this DA without the prior approval of the other Party, except as may be required by applicable law. (2) Any advertising by one Party shall make reference to the other Party. (3) Public announcement and/or press release related to this DA will be done at appropriate time subject to the agreement by the Parties. -8- 19. OTHERS (1) Headings Headings to articles of this DA are to facilitate reference only, do not form a part of this DA, and shall in no way affect its interpretation. (2) Entire Agreement This DA represents the entire agreement between the Parties regarding its subject matter superseding previous communications or understandings. This DA may not be modified except by written approval by the Parties. (3) Partnership disclaimer In principle, the relationship of UTStarcom and MELCO established by this DA shall be that of prime contractor and key subcontractor as a team member, and nothing contained in this DA shall be construed: i. to give either Party the power to direct or control the day-to- day activities of the other or: ii. to constitute the Parties as partners, joint venture, co-owner or otherwise as participants in a joint or common undertaking. 20. EFFECTIVENESS OF AGREEMENT This agreement is legally binding, but subject to final legal rewording. -9- IN WITNESS WHEREOF, The Parties hereto have caused their representatives, duly executed in two (2) original copies by their duly authorized representative. UTStarcom Inc Mitsubishi Electric Corporation By: By: ------------------------------ ------------------------------------- Name: Hong Liang Lu Name: Teruhiko Moriyama Title: President and CEO Title: Division President Communication Systems Business Division Date: October 22, 2000 Date: October 22, 2000 ---------------------------- -------------------------------- -10- ANNEX-1 Refer to the Joint Development Plan signed by MELCO and UTStarcom on Jun-21, 2000. ANNEX-2 MELCO TASK FORCE TEAM - - Lead: M. Todo, Group Manager, International Marketing & Business Development Department - - Technical: K. Mihashi, Project Manager, H. Kojima, Manager, Mobile Communication Network Systems Department - - Business: T. Aoki, Senior Manager, International Marketing & Business Development Department UTSTARCOM TASK FORCE TEAM - - Lead: Pat Chan, Director, Mobile Network - - Technical: Phil Lee, System Project Manager, - - Business: Jack Wu, Director, Product Management ANNEX-3 MELCO STEERING COMMITTEE MEMBERS: T. Moriyama: Division President Communication Systems Business Division K. Teshima: Deputy Division President Communication Systems Business Division Carrier Network Systems Business Center S. Aoyama: General Manager Communication System R&D Center K. Kimura: General Manager Mobile Communication Network Systems Department T. Kanamori: General Manager International Marketing & Business Development Department M. Todo: Group Manager, International Marketing & Business Development Department UTSTARCOM STEERING COMMITTEE MEMBERS: Hong Lu: President and CEO Bill Huang: Vice President Chief Technology Officer Pat Chan: Director, Mobile Network Jack Wu: Director, Product Management ANNEX-4 SYSTEM INTEGRATION CORE NETWORK/RNC & UE/BTS REQUIREMENT (1) For System Integration [*] [*] (2) For Debug [*] [*] ADDENDUM-1 1. SYSTEM INTEGRATION DEVELOPMENT EFFORTS FOR RNC AND BTS UNITS: a. The Parties shall jointly develop a complete suite of infrastructure products for 3G cellular network based on each Parties' own initiated architecture and specifications. MELCO will develop a 3G BTS, and UTStarcom will develop a RNC based upon the UTStarcom WACOS product platform. b. The Parties shall collaborate as to the development of the Interface specifications between the BTS and RNC units ("Iub"). c. MELCO shall develop the BTS in accordance with Iub. UTStarcom shall develop the RNC unit which will function with MELCO BTS in accordance with Iub. d. UTStarcom shall be responsible for developing, producing and supplying the RNC by itself without MELCO's engineering support; except for Iub interface for BTS and RNC which is under joint development with MELCO's initiative. e. Upon the request of MELCO, and after payment to UTStarcom as stipulated in Item 2 below, UTStarcom shall provide MELCO with necessary assistance as to UTStarcom RNC for MELCO proposals to potential customers for implementation of the UTStarcom RNC with MELCO's BTS and UTStarcom 3G Core Network. f. MELCO will provide BTS for UTStarcom primarily for [*] market where UTStarcom can lead marketing of W-CDMA infrastructure, while UTStarcom shall provide RNC for MELCO where MELCO can lead marketing of W-CDMA infrastructure. Conditions of Agreement shall be mutually agreed upon. 2. PAYMENT TERMS: In consideration that (1) UTStarcom having a joint integration with MELCO's BTS and providing MELCO the binary software of the RNC, together with the associated documents to MELCO. The documents shall include: Specification of WACOS and Basic Specification of RNC by [*]; Specification and Drawing of RNC by [*]; and binary RNC software and Operation Manual of RNC by [*] (worth of [*]); (2) UTStarcom providing one set of RNC and WACOS 3G products to MELCO as test bench after the [*] (worth of [*]); (3) Upgrading (2) to General Availability (GA) version (worth of [*]) MELCO will pay the following amounts under the following terms and conditions as mentioned in Item 3 of the Addendum-1. a. Total Payment Amount: [*] b. Terms of payment: 1st payment: [*] within [*] after the signing of this DA, MELCO's receipt of UTStarcom development plan and its official notification of authorized fund amount. 2nd payment: [*] within [*] after the mutual confirmation of successful [*] demonstration of RNC functionality with BTS on the Iub interface. 3rd payment: [*] within [*] after MELCO's receipt of a delivery acceptance confirmation of a UTStarcom RNC by a customer in accordance with a UTStarcom contract to be signed with a customer for 3G W-CDMA including MELCO's BTS. 3. MARKETING TERMS/CONDITIONS: UTStarcom shall pay to MELCO [*] of RNC selling price [*] under the condition that the sold 3G system will use a third party BTS. -2- EX-10.54 7 a2040014zex-10_54.txt EXHIBIT 10.54 Exhibit 10.54 [*] 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. SOFTWARE LICENCE AGREEMENT THIS AGREEMENT is made as of October 4, 2000 BETWEEN DDI Corporation, a corporation duly organized and existing under the laws of Japan, whose registered office is at 8, Ichibancho, Chiyoda-ku, Tokyo 102-8401, Japan (the LICENSOR); and UTStarcom Inc., a corporation duly organized and existing under the law of Delaware, whose registered office is at 1275 Harbor Bay Parkway, Alameda, CA 94502, USA (UTS). WHEREAS (A) DDI-Pocket Incorporated, a corporation duly organized and existing under the laws of Japan, whose registered office at 3-5-1 Toranomon, Minato-ku, Tokyo 105-8477, Japan (DDI-P) developed P-mail Deluxe Software (PDX), a service which can be used in conjunction with the Personal Handyphone System (PHS); (B) First International Telecom Corp., a corporation duly organized and existing under the laws of Taiwan, whose registered office is at 3F, No. 80, Sec. 1. Chien-kuo N. Rd., Taipei, Taiwan, R.O.C. (FITEL) desires to establish its own PHS business in Taiwan (FITEL TAIWAN PHS BUSINESS) and desires to use DDI-P's PDX service in conjunction with such FITEL Taiwan PHS Business; (C) FITEL desires to have UTS develop the necessary systems and products and for UTS to licence to FITEL certain software and other intellectual property relating to the FITEL Taiwan PHS Business; (D) The Licensor and DDI-P entered into a distribution agreement documented in the Minutes of the Meeting dated as of July 4, 2000 whereby, among other things (DISTRIBUTION AGREEMENT), DDI-P authorized the Licensor to enter into this Agreement with UTS. (E) The Licensor desires to grant UTS and UTS desires to obtain from the Licensor a [*] licence to use the Software and Software Documentation (as both terms are defined in Clause 1) to develop Products (as defined in Clause 1) to be provided to FITEL for the FITEL Taiwan PHS Business and to sublicence such Software and Software Documentation to FITEL to enable FITEL to use such Products for the FITEL Taiwan PHS Business upon the terms and conditions contained in this Agreement. IT IS HEREBY AGREED as follows: DEFINITIONS .1 In this Agreement, unless otherwise expressly provided for, the following expressions shall have the following meanings: DELIVERY DATE means the scheduled date for delivery of the Software Materials; LOCATION means UTS building/location where the Software is to be delivered; MEDIA means the media on which the Software and the Software Documentation, as provided to UTS by the Licensor, is recorded or printed; PARTIES shall mean the Licensor and UTS (each, a PARTY); PRODUCTS means the systems and products developed by UTS which are necessary for FITEL to operate the FITEL Taiwan PHS Business; PROPRIETARY INFORMATION means any information contained or embodied in the Software Materials and the Specifications or otherwise disclosed or made available to UTS by or on behalf of the Licensor pursuant to or in connection with this Agreement and the Technical Disclosure Agreements one being between DDI-P and FITEL and the other being between DDI-P and UTS both dated July 4, 2000 (whether orally or in writing), and whether or not such information is expressly stated to be confidential or marked as such; SOFTWARE means the computer programs in machine-readable object code only as specified in Part A of Schedule 1; SOFTWARE DOCUMENTATION means the operating manuals, user instructions, technical literature and all other related materials in eye-readable form written in Japanese as supplied to UTS by the Licensor for aiding the use and application of the Software only as specified in Part B of Schedule 1; SOFTWARE MATERIALS means the Software, the Software Documentation and the Media; SPECIFICATIONS mean the functional specifications of the Software including details of the environment in which the Software is designed to operate as set out in Schedule 1 describing the facilities and functions of the Software, the environment in which the Software is designed to operate and the language in which the Software is written, a copy of which is attached hereto and initialled by the parties for the purposes of identification only as Appendix 1; [*]; USE THE SOFTWARE means to read all or any part of the Software, from magnetic or other storage media at the Location; USE THE SOFTWARE MATERIALS means to use the Software, and to read and possess the Software Documentation in conjunction with the use of the Software and to possess the Media; and BASIS OF THIS AGREEMENT 2.1 The Licensor hereby agrees to: (a) deliver the Software to UTS on an "AS IS" basis at the Location; -2- (b) provide UTS with a copy of the Software Documentation on an "AS IS" basis without any translation, modification or update; (c) grant UTS a [*] licence in accordance with Clause 5 to (i) use the Software Materials to develop Products to be provided to FITEL which are to be used in connection with the FITEL Taiwan PHS Business and (ii) sublicence the use of such Software Materials to FITEL to enable FITEL to use the Products in connection with the FITEL Taiwan PHS Business; (d) disclose to UTS the source code of the Software to enable UTS to use the Software Materials to develop Products to be used in connection with the FITEL Taiwan PHS Business; and (e) grant UTS a [*] licence to modify the source code of the Software only for the purpose of developing Products in connection with the FITEL Taiwan PHS Business; upon and subject to the terms and conditions of this Agreement. 2.2 An additional agreement shall be required detailing the terms and conditions for distribution of the Products or disclosure of the Proprietary Information by UTS to a third party. 2.3 UTS agrees not to use (or to allow FITEL to use) the Software Material or the Proprietary Information in a manner not permitted by this Agreement unless the Licensor expressly agrees otherwise in writing. Such prohibited additional uses include, but are not limited to, the following: (a) Where UTS intends to provide the Products to third parties other than to FITEL for use in connection with the FITEL Taiwan PHS Business; (b) Where UTS or FITEL intends to distribute the Products for use outside of Taiwan in which case the Licensor may grant a further licence to UTS on identical terms to this Agreement, with any necessary modification to reflect the changed territory, for an additional total sum of [*]; (c) Where the Licensor and UTS separately agree to conduct trials or market promotions without paying the full amount of [*]. Such fees that may be agreed to for such trials or market promotions shall, upon the granting of any further license, be deducted from the total amount of [*] stipulated in section (b) above for a further licence. PRICE AND PAYMENT 3.1 The fee for the licence to be granted to UTS by the Licensor under this Agreement (the LICENCE FEE) shall be paid by UTS as follows: (a) A [*] payment of [*] upon execution of the minutes of the meeting between DDI Group-DDI (include the Licensor and DDI-P) and UTS dated July 4, 2000; and -3- (b) [*] on the [*] after the date on which UTS delivers the finished Products to FITEL (the HANDLING DATE) or the date on which FITEL commences operational use of the Software in Taiwan, whichever shall occur earlier. 3.2 The Licence Fee and any other charges payable under this Agreement are, unless otherwise specified: (a) [*] of any packing, delivery or transportation charges incurred in Japan; and (b) [*] of consumption tax or any other duties or taxes which may be chargeable on any goods or services provided to UTS hereunder and which shall be paid by [*] at the rate and in the manner for the time being prescribed law. For the avoidance of doubt, [*] shall pay all taxes, tariffs, and duties, including any sales or use tax (and any related interest or penalty), however designated, imposed as a result of the execution or implementation of this Agreement, except any tax imposed upon the [*] corporate income. If the [*] is required to collect tax to be paid by [*], [*] shall promptly pay such tax to the [*] on demand. 3.3 The Licence Fee payable pursuant to Clause 3.1(b) shall be discharged if UTS notifies the Licensor by giving written notice, at any time before the Handling Date, that UTS desires to terminate the development of the Products, and if the Licensor accepts such notice. 3.4 If any sum payable under this Agreement is not paid within [*] after the due date, then (without prejudice to the Licensor's other rights and remedies) the Licensor reserves the right to charge interest on such sum on a day-to-day basis (after, as well as before, any judgment), from the due date to the date of payment inclusive, at the rate of [*] per annum. 3.5 UTS shall not be entitled to withhold payment of any sum by reason of any right of set-off or any claim or dispute with the Licensor, whether relating to the quality or performance of the Software Materials or otherwise. 3.6 The Licensor shall have the right to suspend delivery where it reasonably believes that UTS will not make payment in accordance with this Clause 3. DELIVERY AND INSTALLATION 4.1 The Licensor shall use all reasonable endeavours to deliver to UTS: (a) one copy of the Software in source code; and (b) one copy of the Software Documentation; on the Media at the Location on the Delivery Date. 4.2 Delivery shall be effected and risk of accidental loss of, or damage to, the Software Materials shall pass to UTS when delivery is tendered at the Location during normal working hours. UTS -4- acknowledge that they are responsible for effecting insurance cover for the Software Materials from the time at which risk in the Software Materials passes to it. 4.3 The Licensor shall not be liable for any delay caused by events beyond its reasonable control and in such case shall be entitled to a reasonable extension of time to perform its obligations pursuant to this Clause 4. 4.4 The Licensor shall not be responsible for complying with statutory regulations, local by-laws, or the fulfilment of any special regulations affecting UTS. LICENCE 5.1 The Licensor hereby grants UTS a [*] licence to: (a) use the Software only for the purpose of developing Products to be provided to FITEL to be used in connection with the FITEL Taiwan PHS Business; (b) sublicence the use of the Software Materials to FITEL only to enable FITEL to use the Products in connection with the FITEL Taiwan PHS Business. (c) use the Software Documentation in support of its use of the Software for the development of Products and sublicence of the Software pursuant to Clause 5.1(a) and (b) above; and (d) modify the source code of the Software disclosed by the Licensor to UTS under Clause 2.1 (a) only for the purpose of, and only the extent necessary for, developing Products to be used in connection with the FITEL Taiwan PHS Business. for the duration of this Agreement. 5.2 UTS shall not permit any third party other than FITEL to use the Software Materials, nor shall UTS use the Software Materials on behalf of or for the benefit of any third party other than FITEL in any way whatsoever. 5.3 UTS shall not disclose the source code of the Software to any third party including FITEL. 5.4 UTS shall ensure that (i) FITEL will only use the Software Materials and Products to enable it to use the Products in connection with the FITEL Taiwan PHS Business; (ii) FITEL shall only use the Products in connection with the FITEL Taiwan PHS Business; (iii) FITEL will observe the same obligations of confidentiality in respect of the Proprietary Information as set forth in Clause 11; (iv) its agreement with FITEL will not result in any breach of any of UTS's obligations under this Agreement; and (v) it uses its best efforts nominate the Licensor as a third party beneficiary of the agreement between UTS and FITEL. 5.5 The licence granted under this Agreement to UTS shall not be deemed to extend to any programs or materials of the Licensor other than the Software Materials unless expressly agreed to in writing by the Licensor. -5- 5.6 UTS may make only so many copies of the Software as is reasonably necessary for its use of the Software pursuant to Clause 5.1 (a) above, and shall ensure that all such copies bear the Licensor's proprietary notice. All such copies shall be subject to the terms and conditions of this Agreement. 5.7 During the continuance of this Agreement, UTS shall: (a) effect and maintain adequate security measures to safeguard the Software Materials and any copies thereof from access or use by any unauthorised body or person; (b) retain the Software Materials and any copies thereof under its exclusive control; and (c) maintain a full and accurate record of its copying and disclosure of the Software Materials and produce such record to the Licensor on request from time to time. WARRANTY 6.1 While the Licensor has endeavoured to use reasonable care in compiling the systems and information incorporated in the Software Materials, the Licensor can accept no liability of any kind whatsoever for the accuracy and completeness of such systems or the Software Materials. 6.2 UTS acknowledges that the Software Materials have not been produced to meet the individual requirements of UTS and cannot be tested in every possible combination. The Licensor does not warrant that (i) the facilities and functions comprised in the Software will meet all of UTS's needs in connection with the FITEL Taiwan PHS Business, (ii) that the Software will operate in the combinations which may be selected by UTS, (iii) that the operation of the Software will be uninterrupted or error free, or (iv) that all Software defects can or will be corrected. 6.3 The Licensor shall have no obligation to repair or replace the Software Materials under any circumstances except as expressly provided in this Agreement. 6.4 The Licensor warrants that it has full authority to licence to UTS on the terms and conditions of this Agreement, based on its Distribution Agreement with DDI-P. SUPPORT SERVICE 7.1 The Licensor shall have no obligation to provide any technical support in connection with the use of the Software under this Agreement or the FITEL Taiwan PHS Business. 7.2 At the request of UTS, the Licensor may, [*], provide technical support as to the use of the Software or the FITEL Taiwan PHS Business on the terms and conditions provided in Appendix 2. SOFTWARE MAINTENANCE 8. Unless UTS enters into a separate software maintenance agreement with the Licensor on or before the Delivery Date (on terms to be agreed between the parties), the Licensor will not provide any maintenance in respect of the Software Materials. If at a later date UTS wishes the Licensor to -6- provide maintenance services in respect of the Software Materials, then the Licensor may [*] provide the same to UTS subject to UTS paying the Licensor's an agreed maintenance charge. MODIFICATIONS 9.1 UTS may themselves modify the Software Materials at their own expense and responsibility to the extent necessary for the development of the Products and their use in respect of the FITEL Taiwan PHS Business. UTS shall indemnify the Licensor against any claims that such modifications infringe the copyrights, database rights, patents, trade secrets or other proprietary or intellectual property rights of any third party of whatever nature howsoever or wheresoever arising. 9.2 The copyrights, database rights, patents, trade secrets and other proprietary or intellectual property rights of whatever nature howsoever or wheresoever arising in such modifications shall be jointly owned by DDI-P and UTS. UTS shall be entitled without further charge to use such modifications in order to develop the Products and allow FITEL to use the Products for the FITEL Taiwan PHS Business upon the same terms and conditions as the Software Materials but shall not otherwise be entitled to use such modifications. DDI-P shall be entitled to use such modifications in Japan. An additional agreement is required for the use of such modifications outside of Taiwan or Japan. 9.3 UTS shall promptly notify the Licensor of all such modifications and shall, without charge, supply to the Licensor copies of all documentation relating to such modifications, including full functional and performance specifications thereof and all source code materials. 9.4 In addition to providing UTS with the most current version of the Software in accordance with Clause 2.1, the Licensor shall also provide UTS with any future modifications of the Software, including but not limited to any changes, modifications, improvements or bug fixes to existing features, functionalities, designs or protocols that may be contained within the Software (FUTURE SOFTWARE MODIFICATIONs). The Licensor shall provide such Future Software Modifications to UTS [*] only for a period of only [*] from the execution of this Agreement. The terms and conditions of the license granted by the Licensor to UTS under this Agreement shall also apply MUTATIS MUTANDIS to any and all Future Software Modifications provided by the Licensor to UTS, provided, however, that the provision of Future Software Modifications by the Licensor after expiration of the [*] period following the execution of this Agreement shall be subject to separate pricing terms to be negotiated by the parties hereto. PROPRIETARY RIGHTS 10.1 The Software Materials and all copyrights, database rights, patents, trade secrets, trademarks and other proprietary or intellectual property rights whatsoever, howsoever and wheresoever arising in the Software Materials and in all other written or oral information provided by the Licensor for the purposes of this Agreement, are and shall remain the exclusive property of DDI-P. DDI-P reserves the right to grant licences to use or otherwise exploit the Software Materials to any other person or body. UTS shall not acquire any intellectual property rights of whatever nature in the Software Materials and may not copy them or attempt in any way to decompile, disassemble, imitate or reverse engineer the Software except as expressly permitted in this Agreement. -7- 10.2 UTS shall notify the Licensor immediately if UTS become aware of any unauthorised use or exploitation of the whole or any part of the Software Materials by any person or body. 10.3 UTS will permit the Licensor to check the use of the Software Materials by UTS at all times during normal business hours, and for that purpose UTS shall grant the Licensor (and its agents, employees and representatives) an [*] licence to enter UTS's premises at any time during normal business hours, upon giving 48 hours advance written notice by the Licensor to UTS. CONFIDENTIALITY OF THE PROPRIETARY INFORMATION 11.1 UTS undertakes to treat as confidential and keep secret the Proprietary Information, and shall not without the prior written consent of the Licensor: (a) exploit the Proprietary Information in whole or part other than as may be necessary to enable UTS to use the Software Materials in accordance with the terms and conditions of this Agreement; (b) disclose the Proprietary Information in whole or part or make any aspect of the Proprietary Information available to any person or body, subject always to Clause 11.2 below, other than to: (i) such of UTS' own employees as need to know or use the same for the purpose of performing their duties to UTS, for processing UTS' own data for its internal business purposes; (ii) UTS' auditor or any other person or body having the right, duty or obligation to know the business of UTS, and then only in pursuance of such right, duty or obligation; (iii) any person or body who is appointed by UTS to maintain any equipment on which the Software is used (in accordance with the terms of this Agreement) and then only to the extent necessary to enable such person or body to properly maintain such equipment. 11.2 UTS undertakes to ensure that any person or body to whom any part of the Proprietary Information is disclosed pursuant to Clause 11.1(b) is made aware prior to the disclosure of any part of the Proprietary Information that (i) the same is confidential and (ii) they owe an express duty of confidence to the Licensor. UTS shall indemnify and hold the Licensor harmless against any loss or damage which the Licensor may suffer or incur as a result of UTS failing to comply with such undertaking. 11.3 UTS shall promptly notify the Licensor if they become aware of any breach of confidence by any person or body to whom UTS divulges all or any aspect of the Proprietary Information and shall give the Licensor all reasonable assistance in connection with any proceedings which the Licensor may institute against such person or body in respect of such breach of confidence. 11.4 The foregoing obligations as to confidentiality shall remain in full force and effect notwithstanding any termination of this Agreement. INTELLECTUAL PROPERTY INFRINGEMENT -8- 12.1 If claims arise out of the infringement of any Japanese patent or copyright of any third party which is valid and effective at the date of this Agreement, with respect to the use by UTS and/or FITEL of the Software pursuant to the terms of this Agreement: (a) UTS shall promptly notify the Licensor in writing of any allegations of infringement of which it has notice or becomes aware; (b) the Licensor shall have sole control over the defence of any such suit or claim and over all negotiations in relation thereto, responsibility for any and all attorneys' fees and legal costs related to defence of any such suit or claim, and, in particular, UTS shall not make or attempt to make any settlement or admit any liability in relation to such suit or claim without the prior written consent of the Licensor; (c) At the Licensor's expense, UTS shall take such actions and provide such information and enter into all such documents as the Licensor may reasonably require in relation to the defence of any such suit or claim. 12.2 If UTS is prohibited by a court order from using the Software, then the Licensor shall have the right at its sole option to: (a) procure for UTS the right to continue using the Software; (b) modify or amend the Software so that it becomes non-infringing; (c) replace all or part of the Software with programs of similar capability; or (d) terminate this Agreement in respect of the Software so affected, if the Licensor considers that, in its reasonable opinion, the foregoing alternatives are not available on reasonable terms, in which event UTS shall cease using such prohibited Software forthwith and, at the Licensor's direction, shall return, or certify that it has destroyed, the original copies of such Software so affected and any copies made by UTS thereof. In such event, the Licensor shall be under no further liability to UTS with respect to the Software so affected. 12.3 Where any computer program materials, in relation to which rights are owned by a third party, are to be copied or otherwise used by UTS in association with any Software Materials, UTS warrants that they have any and all necessary permissions, express or otherwise, to enable them to copy or otherwise use such computer program materials without infringing such third parties rights. 12.4 If UTS discloses such computer program materials to the Licensor or requests or permits the Licensor to copy or otherwise use such computer program materials, UTS warrants that they are entitled to make such disclosures or requests or give such permission, and that it has any necessary consent, express or otherwise, to enable the Licensor to copy or otherwise use such computer program materials as so requested or permitted without infringing said third party rights. 12.5 UTS shall indemnify the Licensor against any expense or loss the Licensor may incur resulting from the infringement of third party patents, copyrights, database rights, trade secrets, trade -9- marks or other proprietary or intellectual property rights whatsoever, howsoever or wheresoever arising in consequence of any matter referred to in Clauses 12.3 or 12.4. UTS'S CONFIDENTIAL INFORMATION 13.1 The Licensor shall treat as confidential all information supplied by UTS under this Agreement which is designated as confidential by UTS or which is by its nature clearly confidential (the UTS CONFIDENTIAL INFORMATION). This Clause shall not extend to any information which: (a) was lawfully in the possession of the Licensor prior to the commencement of the negotiations leading to this Agreement; (b) is already public knowledge or becomes so at a future date (other than as a result of a breach by the Licensor of this Clause 13); (c) comes into the Licensor's knowledge from a third party who lawfully possesses such information, and such disclosure is not in breach of a duty of confidence owed by the disclosing party to UTS. 13.2 The Licensor shall not divulge any UTS Confidential Information to any person or body except to: (a) such of its own employees, consultants, agents or representatives including the suppliers of any third party software as need to know the same for the purpose of performing their duties pursuant to this Agreement. The Licensor shall ensure that its employees, consultants, agents or representatives are aware of and comply with the provisions of this Clause 13; (b) the Licensor's auditors and any other bodies having the right, duty or obligation to know the business of the Licensor and then only in pursuance of such right, duty or obligation. 13.3 The foregoing obligations of this Clause 13 shall survive any termination of this Agreement. LIMITATION OF LIABILITY 14.1 The Licensor shall not be liable to UTS for any loss, expense or damage of any kind (direct, indirect, economic or consequential and whether arising from negligence or otherwise) resulting from the supply, purported supply, failure to supply, use or possession of the Software Materials, or Products, or any other service provided under this Agreement. 14.2 No officer or employee of the Licensor shall be liable to UTS in any circumstances for any loss, expense or damage of any kind (direct, indirect, economic or consequential and whether arising from negligence or otherwise) arising from any act or omission during the performance of his or her employment or other duties. All officers and employees of the Licensor from time to time shall be entitled to the benefit of the exemptions, limitations, terms and conditions in this Agreement. 14.3 UTS acknowledges that they are exclusively responsible for: -10- (a) supervision, management and control of the use of the Software (including use by FITEL) pursuant to the terms of this Agreement and ensuring that their personnel are, at all times, educated and trained in the proper use and operation of the Software Materials; (b) processing their data and ensuring the security and accuracy of all inputs and outputs; and (c) making regular back-up copies of their data to ensure recovery of their data in the event of malfunction of the Software; (d) the selection, use of and results obtained from any other programs, equipment, materials or services used in conjunction with the Software Materials; and (e) any loss, expense, or damage of any kind (direct, indirect, economic or consequential) suffered by FITEL resulting from the supply, purported supply, failure to supply, use or possession of the Software Materials or Products or any other service provided to FITEL by UTS under UTS's agreement with FITEL. 14.4 UTS shall indemnify the Licensor and shall keep the Licensor fully and effectively indemnified against any loss, expense, or damage of any kind (direct, indirect, economic or consequential) arising from the breach of this Agreement by UTS and against any loss of, or damage to, any properly or injury or death of any person caused by any negligent act, omission or unlawful misconduct of UTS and/or FITEL, their employees, agents or sub-contractors. 14.5 UTS further acknowledges that they will obtain insurance cover in respect of all risks relating to their use of the Software Materials and all other goods and services provided under this Agreement and that they will ensure that the Licensor is noted on such insurance cover. TERMINATION 15.1 Any Party hereto may terminate this Agreement forthwith on giving notice in writing, to the a breaching Party if: (a) the breaching Party commits any material or continuing breach of any term of this Agreement and fails to remedy such breach within [*] after the receipt of a request in writing from the aggrieved Party to do so (such request will contain a warning of the aggrieved Party's intention to terminate), provided, however, the Licensor may terminate this Agreement immediately with written notice in the event that UTS fails to pay any part of the Licence Fee within [*] of the due date for payment; (b) a Party learns or believes upon reasonable grounds that the other Party (being a body corporate) has or is likely to: (i) present a petition or have a petition presented against them by a creditor for the appointment of an administrator or for their winding up; (ii) convene a meeting to pass a resolution for a voluntary winding up or the making of an administration order; -11- (iii) enter into liquidation (other than for the purposes of a bona fide reconstruction or amalgamation); (iv) call a meeting of their creditors, or have a receiver, administrator, administrative receiver, liquidator or any other similar officer or insolvency practitioner appointed in respect of all or any of its undertakings or assets; (v) refuse or be unable to meet any sums payable to another Party when such sums fall due; (vi) cease to carry on business as a going concern or cease to be in a position to fulfil this Agreement; (c) a Party learns or believes upon reasonable grounds that the other Party shall be dissolved or shall commit any act of bankruptcy or have a bankruptcy order made against them or shall make or negotiate for any composition or arrangement with, or assignment for, the benefit of their creditors; (d) any event occurs in a foreign jurisdiction analogous to, or comparable with Clause 15.1(b)(i) to (v) or 15.1(c) above. (e) UTS notifies the Licensor of UTS's desire to terminate the development of Products and the Licensor accepts such notice in accordance with Clause 3.3. 15.2 Forthwith upon the termination of this Agreement for whatever reason: (a) the Parties shall be discharged from any further liability to perform under this Agreement, except as otherwise specified in this Agreement; (b) UTS shall pay the Licensor on demand for all goods and services provided to UTS by the Licensor prior to such termination; (c) UTS shall either return to the Licensor all Software Materials (including any modifications thereto made by UTS) and all copies of the whole or any part thereof or, if requested by the Licensor, shall destroy the same (in the case of the Software, by erasing it from the magnetic media on which it is stored) and certify in writing by statutory declaration to the Licensor that such Software Materials have been so destroyed. 15.3 Any termination of this Agreement (howsoever occasioned) shall not affect any accrued rights or liabilities of any party nor shall it affect the enforceability of any provision hereof which is expressly or by implication intended to come into or continue in force on or after such termination. ASSIGNMENT 16.1 UTS shall not be entitled to assign or otherwise transfer any part of this Agreement or assign, sub-licence or otherwise transfer, charge or encumber the Software Materials (other than the permitted sublicense to FITEL under this Agreement) or any copies thereof without the prior written consent of the Licensor. Such consent, if given, may be made subject to the payment of any -12- additional fee and/or any other term or condition. Any purported assignment, licence or transfer by UTS without such consent shall be void. 16.2 The Licensor may assign the benefit of this Agreement including the right to receive monies, or sub-contract the performance of any of its obligations to Licensor's subsidiary without the consent of UTS. WAIVER OF REMEDIES 17. No waiver of any rights arising under this Agreement shall be effective unless in writing and signed by a duly authorised signatory of the Party against whom the waiver is to be enforced. No failure or delay by either party in exercising any right, power or remedy under this Agreement (except as expressly provided herein) shall operate as a waiver of any such right, power or remedy. ENTIRE AGREEMENT 18.1 This Agreement supersedes all prior agreements, arrangements, proposals and undertakings between the parties in relation to the subject matter hereof (whether written or oral) and constitutes the entire Agreement between the parties relating to the subject matter hereof. UTS further warrants that they have not relied on any oral representation made by the Licensor or any agent, employee or other representative or upon any description, illustration or specification contained in any advertisements, catalogues or publicity materials produced by or on behalf of the Licensor or in any correspondence between the Licensor and UTS before the date of this Agreement. 18.2 No addition to or modification of any provision of this Agreement shall be binding upon the Parties unless made by a written instrument signed by a duly authorised signatory of each of the Parties. Any other terms, conditions or provisions whether proposed by UTS orally or in writing shall be of no effect and the supply of the Software Materials or any other goods or services by the Licensor to UTS shall not constitute acceptance by the Licensor of such other terms, conditions or provisions. NOTICES 19. Any notices or other communications required or permitted hereunder or otherwise in connection herewith shall be in writing and shall be delivered personally (including by courier), sent by facsimile transmission or sent by certified or registered mail, postage prepaid. Any notice shall be deemed given when so delivered personally, or if sent by facsimile transmission, when so transmitted provided that the sender's facsimile machine produces printed confirmation of error free transmission to the correct number, or if mailed, upon receipt, as follows: TO THE LICENSOR At: 3-2, Nishishinjuku 2-chome, Shinjuku-ku, Tokyo 163-8003 Japan Attention: Dr. Tsuneyoshi Narahara -13- Facsimile No.: +813 3347 5300 TO UTS At: 1275 Harbor Bay Parkway Alameda, CA 94502 USA Attention: Mr. Chang H. Kao Facsimile No. +1 732 548 1099 SEVERABILITY 20. Should any provision of this Agreement be void or illegal for any reason, the validity of the remainder of the Agreement shall not be affected and the parties shall promptly enter into negotiation in good faith to find a replacement for the provision which is of similar economic effect to both parties. FORCE MAJEURE 21. The Licensor shall not be liable in any way for any failure to perform its obligations or for any losses, damages or delays incurred by UTS resulting from circumstances beyond the reasonable control of the Licensor; provided, however, that the Licensor shall resume performing such obligations as soon as such circumstances have ended. FURTHER ASSURANCE 22. Each Party agrees to execute such documents and waivers and generally do everything further that may be necessary to fulfil its obligations under this Agreement. JAPAN REGULATIONS 23.1 The Software Materials may be subject to regulations imposed by governmental authorities (the REGULATIONS) restricting the ultimate destination of such Software Materials. UTS agrees to indemnify the Licensor against any liability the Licensor may incur in consequence of UTS' infringement of the Regulations, where the Licensor has attempted to substantially comply in good faith with said Regulations. 23.2 This Agreement shall be conditional on the Licensor obtaining any necessary export license from Japan or any other anticipation required pursuant to the Regulations. The Licensor shall be excused performance under this Agreement and shall have no further responsibility or liability to UTS if it is not able to obtain any export licence or authorisation required from Japan or any other authorities. LAW AND DISPUTES -14- 24. This Agreement shall in all respects be governed by and construed in accordance with the law of Japan, such that; (a) Any dispute, controversy or claim arising out of or relating to this contract, or the breach termination of invalidity thereof, shall be settled by arbitration in accordance with the International Chamber of Commerce (ICC) Arbitration Rules as at present in force. (b) The Licensor and UTS shall each appoint one arbitrator and the two arbitrators so nominated shall designate a third arbitrator acceptable to both appointing parties, failing which the third arbitrator shall be appointed in accordance with the arbitration rules of the ICC. The appointing authority shall be the ICC. (c) The place of arbitration shall be Tokyo, Japan if the dispute, controversy or claim is initiated by either of UTS. If the dispute, controversy or claim is initiated by the Licensor, the place of arbitration shall be Taipei, Taiwan. (d) The language to be used in the arbitral proceedings shall be English. (e) By agreeing to arbitration pursuant to this clause, the Parties irrevocably waive their right to any form of appeal, review or recourse, to any state court or other judicial authority, insofar as such waiver validly made. -15- IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be signed by its duly authorized representatives on the date first above written. Signed for and on behalf of the LICENSOR DDI Corporation - ------------------------------------ Name: Dr. Tsuneyoshi Narahara Title: Senior Managing Director Signed for and on behalf of UTS - ------------------------------------ Name: Mr. Paul Berkowitz Title: VP of International Marketing SCHEDULE 1 The following schedule is not binding. Amendments and changes to the following schedule shall be made if and when [*] deems such changes necessary. PART A SOFTWARE [*] -2- PART B SOFTWARE DOCUMENTATION [*] -3- APPENDIX 1 SPECIFICATION [*] SOFTWARE OPERATING ENVIRONMENT: Operates under [*] Operating System. USED PROGRAM LANGUAGE: Software programmed by [*]. -4- APPENDIX 2 TRAINING AT DDI'S OFFICES Upon the prior mutual agreement of the Licensor and UTS, the Lincesor shall provide technical and engineering support training to UTS personnel at the Licensor's office location, [*], in regard to the Software. [*] shall be responsible for any and all costs and expenses related to the sending of UTS personnel to the Licensor's office location for training , including but not limited to airfare, lodging and meals. TRAINING FOR UTS PERSONNEL AS UTS'S OFFICES AND BUSINESS LOCATIONS Upon the prior mutual agreement of the Licensor and UTS, the Licensor shall send engineering personnel to UTS at its offices and business locations within Taiwan [and the People's Republic of China]. UTS shall reimburse the Licensor for sending such engineering personnel according to the folowing fee schedule: [*]. LIMITATIONS With respect to the training described above, neither the Licensor nor its development nor its employees or agents shall make any warranty or representation as to the successful development by UTS of the PDX Center for the PHS network now being developed by UTS for FITEL for development in Taiwan. -5- EX-10.55 8 a2040014zex-10_55.txt EXHIBIT 10.55 Exhibit 10.55 [*] 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. STRATEGIC ALLIANCE, PURCHASE AND LICENSE AGREEMENT between UTStarcom Incorporated (COMPANY) and TELECOMMUNICATIONS D'HAITI S.A.M. (TELECO) STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION TABLE OF CONTENTS 1. DEFINITIONS..................................................................................................1 1.1 "Functional Verification"...........................................................................1 1.2 "Commercial Service"................................................................................1 1.3 "Effective Date"....................................................................................1 1.4 "Product"...........................................................................................2 1.5 "Services"..........................................................................................2 1.6 Documentation.......................................................................................2 1.7 "Software"..........................................................................................2 1.8 "Software License Agreement"........................................................................2 1.9 "Non-Disclosure Agreement"..........................................................................2 1.10 "Warranty Period"...................................................................................2 1.11 "Business Plan".....................................................................................2 1.12 "Training"..........................................................................................2 1.13 "Final Acceptance Certificate"......................................................................3 2 TERM.........................................................................................................3 3 PROJECT SCOPE................................................................................................3 4 PROJECT BUSINESS PLAN AND SCHEDULE...........................................................................4 5 PURCHASE ORDERS..............................................................................................4 5.1 Order Submission....................................................................................4 6 PRICE, FINANCING AND PAYMENT TERMS...........................................................................5 6.1 Pricing and Shipment................................................................................5 6.2 Taxes, Duties and Levies............................................................................5 6.3 Financing and Form of Payment.......................................................................5 7 ADVANCE PAYMENT GUARANTEE....................................................................................6 8 LIQUIDATED DAMAGES...........................................................................................7 9 INSTALLATION AND ACCEPTANCE..................................................................................7 9.1 Site Availability...................................................................................7 9.2 Installation........................................................................................7 9.3 EQUIPMENT ACCEPTANCE................................................................................9 10 OBLIGATIONS AND RIGHTS OF PARTIES............................................................................9 11 PROJECT COORDINATION COMMITTEE AND EXECUTIVE BOARD..........................................................12
-i- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 12 FUNCTIONAL VERIFICATION.....................................................................................12 13 LICENSES....................................................................................................13 14 TITLE AND RISK..............................................................................................13 15 WARRANTY....................................................................................................13 15.1 Limited Warranty...................................................................................13 15.2 Disclaimer of Warranties...........................................................................14 15.3 Inherently Dangerous Applications..................................................................14 15.4 Product Returns....................................................................................15 16 INDEMNIFICATION.............................................................................................15 16.1 Indemnity..........................................................................................15 16.2 Limitations........................................................................................15 17 LIMITATION OF LIABILITY.....................................................................................16 18 TERMINATION.................................................................................................16 19 TRAINING....................................................................................................17 20 GOVERNING LAW AND REGULATIONS...............................................................................17 21 GENERAL PROVISIONS..........................................................................................17 21.1 No Liability for Other Party's Acts................................................................17 21.2 Independent Contractors............................................................................17 21.3 Notices............................................................................................17 21.4 Security Interest..................................................................................18 21.5 No Assignment......................................................................................18 21.6 Jurisdiction.......................................................................................18 21.7 Publicity..........................................................................................18 21.8 No Violation of Applicable Law.....................................................................19 21.9 Conflicting Exhibits...............................................................................19 21.10 No Waiver..........................................................................................19 21.11 Arbitration........................................................................................19 21.12 Non-Monetary Remedies..............................................................................19 21.13 Force Majeure......................................................................................19 21.14 Entire Agreement...................................................................................20 21.15 May be Executed in Counterparts....................................................................20 21.16 Contract Validity..................................................................................20
-ii- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 22 EXHIBIT A: SECTION 7 ECONOMIC PROPOSAL AND EQUIPMENT LISTS.................................................20 22.1 Price Validity.....................................................................................20 EXHIBIT B: END-USER SOFTWARE LICENSE........................................................................22 23 EXHIBIT: C MUTUAL NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENT..............................................23 24 EXHIBIT D: BUSINESS PLAN AND PROJECT COMMERCIAL MILESTONES..................................................26 25 EXHIBIT E: PROJECT IMPLEMENTATION SCHEDULE..................................................................26 26 EXHIBIT F: TRAINING AND TECHNOLOGY TRANSFER.................................................................26
-iii- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION STRATEGIC ALLIANCE, PURCHASE AND LICENSE AGREEMENT THIS STRATEGIC ALLIANCE, PURCHASE AND LICENSE AGREEMENT (the "Agreement") is made by and between UTSTARCOM, INC., a Delaware corporation, having offices at 1275 Harbor Bay Parkway, Suite 100, Alameda, California 94502, United States of America (hereinafter referred to as "Company"), duly represented by Mr. Omar A Graibe, Managing Director, Caribbean and Latin America of Company and TELECOMMUNICATIONS D'HAITI S.A.M., hereinafter referred to as TELECO or BUYER, a company, with its principal place of business at Port Au Prince, Republic of Haiti, duly represented by Monsieur Jean-Francois Chamblain, Directeur General of TELECO, appointed by the President du Conseil d'Administrationon Gouverneur de la Banque de la Republique d'Haiti on September 1998, and duly authorized by the Government of Haiti to enter into and sign this contract. WHEREAS, BUYER desires to purchase and license, from time to time, certain of Company's products and services; and WHEREAS, Company wishes to enter a strategic alliance, sell and license such products and services to BUYER upon the terms and conditions set forth herein. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS For the purpose of this Agreement, the terms below shall have the following definitions: 1.1 "Functional Verification" "Functional Verification" means completion of tests performed by Company in accordance with the Functional Verification test procedure to be provided by Company and approved by the BUYER prior to the commencement of the tests. 1.2 "Commercial Service" "Commercial Service means the earliest date when any of BUYER's subscribers or customers begins to use the Product. 1.3 "Effective Date" "Effective Date" means the earliest date by which duly authorized officers of both parties have signed this Agreement. STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 1.4 "Product" "Product" means collectively all hardware and software components and subsystems provided by Company as more fully described in EXHIBIT A attached hereto. 1.5 "Services" "Services" means collectively labor delivered by Company and/or its subcontractors for the purpose of training, installation, repair or other purposes. 1.6 Documentation "Documentation" means all user manuals, training manuals, Software release notes, and other similar, written materials to be provided in English during the initial Project's phase and in French after the completion of the Project's first phase, provided with the System, as may be updated by Company from time to time. 1.7 "Software" "Software"--the executable (object code) version of software as developed by and/or licensed to Company for use in the Product. 1.8 "Software License Agreement" "Software License Agreement" means the Software License Agreement between the parties and attached hereto as EXHIBIT B. 1.9 "Non-Disclosure Agreement" "Non-Disclosure Agreement" means the Mutual Non-Disclosure and Confidentiality Agreement between the parties and attached hereto as EXHIBIT C. 1.10 "Warranty Period" "Warranty Period" -- a period starting on the date of Functional Verification as applicable per Limited Equipment Warranty coverage described herein this Contract. 1.11 "Business Plan" "Business Plan" - The Business Plan of the Project details Project Implementation Schedule, financial parameters of the Strategic Alliance, Purchase and License Agreement and the Financial Returns for each party of this Strategic Alliance and attached hereto as EXHIBIT D. 1.12 "Training". Exhibit "F" -2- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 1.13 "Final Acceptance Certificate". Exhibit "G". 2 TERM The term of this Agreement shall commence on the Effective Date and unless otherwise terminated as provided herein, shall continue in full force and effect. 3 PROJECT SCOPE The purpose of this Contract is to rule and establish the conditions, rights, obligations, responsibilities and other related stipulations under which both parties will jointly develop a Project for a minimum of [*] wireless access lines that will allow TELECO to provide Access Services to its residential and business customers throughout the Republic of Haiti. (i), as a key pre-requisite to accomplish the investment and financial commitments being made by the Company to execute the planned project as per the parameters set forth in the Business Plan and TELECO's objectives for the deployment of new telephone lines to provide telephone services in the designated serving areas where pent-up demand exists, (ii) and derive the necessary revenues from these that will make the expansion feasible. The Project shall be developed in accordance to the Business Plan included in EXHIBIT D of this Agreement. To develop the Project both parties agreed that Company will engineer, manufacture or supply, install, test and put into service telecommunication equipment, and related services including but not limited to the sale of the services to end users and the Software (as defined below) as described in EXHIBIT A ("Equipment and Services") at Company, Inc.' prices listed in EXHIBIT A. The equipment could be installed wherever it is required and agreed by Company, as per Company standards practices and recommendations, in the Buyer premises or third party locations. All charges and/or fees related to renting of space, facilities, rights of ways, civil works, expansions to existing telecommunications infrastructure needed to accommodate the equipment/solution for this project, from third parties, as needed to install the contracted equipment, will be charge to [*] and their cost properly adjusted in the contract value as relevant data becomes available from the planned field engineering surveys completion. [*] will purchase and pay for such equipment, services, land, facilities, rights of ways, licenses, and other necessary project elements as agreed in this Contract, its annexes or any amendements to them. Prices for installation and related charges are subject to change due to [*]. Buyer agrees to pay all such additional charges as invoiced by Company. During the execution of Contract both parties could agree on additional extensions to the Contract Scope at the then prevailing prices. Such extensions could include additional equipment, services, new functionalities of the equipment not included in this project and currently inherent to the offered equipment or new features to be developed in the future by the Company. -3- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION Buyer, as National Telecommunications Operator of Haiti, shall provide all of its infrastructure and resources to facilitate the Project Development. Company will provide turnkey network deployment as described and agreed to in this Agreement, its Annexes and the Proposal, including Product and Services as detailed in EXHIBIT A. The scope of contract may be extended by mutual agreement of the parties. The terms and conditions of such extension(s) shall be made through amendments to the original contract. 4 PROJECT BUSINESS PLAN AND SCHEDULE Equipment will be deployed in phases, [*]. Deployment is as per scheduled as detailed in EXHIBIT E. This contract is based on the Business Plan presented in EXHIBIT D, "Business Plan". The Business Plan is a fundamental part of the Contract. It details the Project Commercial Milestones, the financial parameters that will rule the Contract and it establishes the expected financial returns agreed and projected by both parties. One of the key purposes of this Contract and Business Plan is to ensure the success of the project and its financial returns on the investment in order to ensure the successful execution of the Project both from an economic and financial standpoint. This signifies that the revenue streams generated from the initial phases of the project, shall provide the funding needed to carry out the project subsequent phases to achieve the Project Plan stated Goals. In accordance with the aforementioned and to ensure the actual compliance of the Business Plan in practice, every [*], TELECO and Company will review the actual results yielded by Project against the Business Plan goals and will agree on the necessary adjustments warranted to ensure that Company obtains the payments for the goods and services contracted by TELECO under the terms of this Agreement and the financial returns or charges established in the Business Plan as well as the benefits due to TELECO. If for any reason these financial returns are not as projected in the Business Plan TELECO will provide the additional funding that guarantees the payment of product and services as well as the financial product and charges due to Company. Prior to delivery, Company, Inc. reserves the right to make substitutions, modifications and improvements to the Equipment, provided that such substitution, modification or improvement shall not materially affect performance in the application originally agreed to with Customer. 5 PURCHASE ORDERS 5.1 Order Submission BUYER will purchase and/or license Products according to the Scope of this Strategic Alliance Agreement by submitting, from time to time as per Project Schedules and Phases indicated in Business Plan and Project Schedule (EXHIBITS D AND E), purchase orders by hard copy or facsimile. Company will accept orders in compliance with the terms of this contract and will inform BUYER in writing of expected shipment dates. -4- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION All purchase orders submitted by BUYER shall be subject to the terms and conditions of this Agreement. No additional or different provisions appearing anywhere on BUYER's purchase orders or other correspondence shall be binding on Company. Any such terms and will be deemed to be stricken. 6 PRICE, FINANCING AND PAYMENT TERMS 6.1 Pricing and Shipment Prices for the Product and Services purchased and/or licensed hereunder shall be as described in EXHIBIT A to this Agreement (the "Prices"). Prices for the Product are in [*]. Unless otherwise specified by Company in writing, the Prices for the Products [*] any freight, transportation, handling or Services, which are listed, separately as applicable. 6.2 Taxes, Duties and Levies The Prices and/or any payments or disbursements to Company from this Agreement [*] any customs duties, value added tax, income tax or any other direct or indirect tax, charge, duty, levy or assessment which may be levied or charged by any national, state, local or other governmental authority, agency or instrumentality of the Republic of Haiti, currently applicable or created in the future by any authority of the Republic of Haiti. Any such amounts charged, levied or assessed, whether withheld at source or otherwise, will be [*] to the prices otherwise chargeable to and payable by BUYER pursuant to this Agreement. 6.3 Financing and Form of Payment Payment of goods, services and other charges due to Company shall be made by TELECO as follows: 1) Down payment of [*] per cent of the Project Total Contract Value of each individual phase of the [*] Access Lines project payable [*] within [*] from Contract Signature. 2) Payment of Contract remaining balance due to Company shall be paid by TELECO in [*] installments [*] as follows: These installments shall come from the total revenues collected from users who subscribe to access lines provided by the Buyer with this project. Both parties agreed that total revenues would consist of the following: a) [*]: b) [*]. c) [*]. -5- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION d) [*]. e) [*]. Total revenues have been estimated in the Business Plan based on conservative figures below the actual applicable values. The actual values could be higher and will depend on the official tariffs approved and applicable in Haiti by TELECO. All revenues collected by TELECO shall be automatically deposited when subscriber pays for their services in an escrow account at a mutually agreeable international financial institution whose joint beneficiaries shall be the Company and Buyer. At the end of each [*], the Company and TELECO will review the balance of the escrow account. The Company shall be entitled to collect the [*] installments owed to Company as per the mutually agreed project implementation schedule. The escrow account shall be kept with a minimum balance equivalent to the amount of a [*] installment and the remaining funds in the account shall be disbursed to TELECO. If for any reason, the funds deposited in the escrow account are not sufficient to cover the [*] contract installment, TELECO shall pay from its own funding the difference owed to the Company within a period of [*] from payment due date. As a guarantee to Company efforts and investment, Buyer shall provide Company an acceptable Guarantee acceptable to Company, such as any of the following: I) an [*] L/C for an amount [*] in a first rate international financial institution acceptable to Company, ii) IOU's with the collateral of [*], iii) any other form of guarantee acceptable to Company. The amount of the herewith indicated guarantee shall be equivalent to [*] installments of the project value in favor of Company. This guarantee shall allow partial disbursements that could be exercised by Company if Buyer delays the payment of any outstanding balance for more than [*]. If disbursements are applied to Guarantee. Buyer shall reinstate the original value of L/C and/or guarantee within [*] of notification from Company. Failure to reinstate the value of this guarantee will become a breach of contract; in such case Company could exercise the L/C and/or Guarantee and collect by any means the balance due from the entire contract. This guarantee shall cover the total contract value and shall be valid during the contract term. In addition, Government of Haiti Guarantee should be issued by Banc Nationale D'Haiti, majority owner of TELECO, in favor of Company to serve as guarantee to the contracted project. All payments are non-refundable. 7 ADVANCE PAYMENT GUARANTEE Company shall provide for the benefit of BUYER an advance payment guarantee issued by a first-rate international bank, in the amount of the Initial Payment as set forth in Article 6.3, (the "Guarantee"). The Guarantee shall become effective upon Company's receipt of the Initial Payment due from BUYER under the terms of Section 6, and shall expire upon shipment of the Product, unless extended by mutual written agreement of the parties. -6- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 8 LIQUIDATED DAMAGES In the event Company fails to complete deployment to a sufficient degree to allow Commercial Service to begin by the date specified in the mutually agreed project plan, BUYER may assess against Company liquidated damages, for each week of such delay, in the amount of [*] of the total price under the applicable purchase order for the delayed item or items, provided that the total amount of liquidated damages that may be assessed under this Agreement shall not exceed [*] of the total Product price set forth in the applicable purchase order, and further provided that the assessment of such liquidated damages by BUYER shall be its [*] remedy for Company's delay in preparing the BUYER network for commercial service by the date specified in the mutually agreed project plan. Notwithstanding the foregoing provisions of this Section, Company shall not be responsible for any delay or failure to deliver the Product, and BUYER shall not be entitled to any liquidated damages or termination rights, to the extent such delay or failure results from: (a) any delay or failure by BUYER or any third party not under Company's control to perform its obligations under or related to this Agreement or any of its Exhibits or attachments; or (b) any force majeure event. 9 INSTALLATION AND ACCEPTANCE 9.1 Site Availability BUYER shall prepare within the timeframe agreed to by the parties site(s) for the installation of the Product that meets the environmental and other requirements of the Product for its installation as specified by Company. BUYER shall provide access to the sites and the Product for Company's personnel and other authorized representatives. 9.2 Installation Company or its subcontractors shall install the Product at the site(s). BUYER undertakes and agrees to use its best efforts to avoid delay in the commencement or performance of the installation by any act or omission of the BUYER or any of BUYER's employees, agents or representatives. The Buyer shall, [*], on the signing of this agreement, and at all times thereafter during the period of project execution hereunder be responsible for the following, including site preparation, clean-up, site security, power, equipment warehousing, provide unrestricted access to network facilities and equipment sites. (a) Allow employees or agents of Company, Inc. free access to premises and facilities where the Equipment is warehoused, existing network facilities and sites where contracted equipment will be installed at all hours consistent with the requirements of the installation. (b) ENVIRONMENTAL - Assure that the premises will meet all temperature, humidity controlled, air-conditioned, and other environmental requirements set forth in the applicable -7- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION Equipment specifications and will be dry and free from dust and in such condition as not to be injurious to the employees or agents of Company, Inc. or the Equipment to be installed. (c) MECHANICAL - Provide all patching, painting, concrete openings, conduits, ducts, floors, wall s and ceilings reinforcements and/or modifications, as deemed necessary to house the contracted equipment, or other mechanical modifications pertinent to this installation as required. (d) ELECTRICAL - Provide ample electric current of proper voltage for any necessary purpose suitably terminated in rooms or any places where equipment is to be installed, including but not limited to poles and towers, where it is required. Provide properly ground copper conductor of ample capacity (minimum #6 AWG) at the Equipment locations. Provide the required - 48vDc power feeds and 120/240 VAC power feeds, all separately fused outlets, as may be required per individual equipment site. (e) Provide for the termination of any existing service agreement and for the removal of any existing equipment and cable, as required. (f) Provide suitable and easily accessible floor space, as well as secured storage, to permit storing adjacent to where Equipment will be used, and for secure storage of tools, test sets, and employee's personal effects for the duration of project. (g) APPROVALS - Buyer shall be responsible for the timely and proper securing of all permits, licenses, rights of ways, consents, including landlords, issuance of frequency spectrum operating licenses and approvals from the corresponding regulatory authorities, i.e. CONATEL, legal requirements and fees thereof associated in connection with these for the acquisition, installation and operation in its network of the contracted Equipment. (h) Buyer specifically agrees to indemnify and hold Company, Inc. harmless from all liability and costs arising from the Buyer and its contractors, subcontractors and employees for site preparation efforts or for the latent conditions of the site. Company, Inc. will install the contracted network access Equipment at the designated network points of presence (POPs) indicated in the contract technical schedules and revisions thereof that may result from the network planning, field and site surveys to be conducted. Company, Inc., however, will not be responsible for performing civil works, i.e., construction, modifications, power distribution, painting, plastering, ducts, existing equipment relocations, repairs to Buyer's premises resulting from the installation of the contracted Equipment except as expressly agreed by Company in the contract technical schedules. Buyer hereby holds Company, Inc. harmless from any such damage to Buyer's property. -8- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION It is the sole responsibility of the Buyer to perform the installation of subscriber premises equipment, its proper alignment, and service activation as line and/or Buyer contracts services with its subscribers. Both Buyer and Company, Inc. shall complete the installation services in accordance with Company, Inc.' standard installation practices and recommendations. Company, Inc. shall perform acceptance testing according to Company standards and specifications on the installed Equipment and Buyer agrees to monitor said testing. Upon completion thereof, as described above, Company, Inc. shall notify Buyer that the Equipment has been installed and operates in accordance with the criteria set forth in Company, Inc. Specifications. If the Equipment does not perform according to the acceptance test criteria and Company, Inc. after having been notified in writing of the defects fails to cure such defect within [*] days of receipt of such notice ("Cure Period"), Buyer has the right to return the Equipment [*] if such Equipment is shipped to Company, Inc. no later than [*] days after expiration of the Cure Period. 9.3 EQUIPMENT ACCEPTANCE The commercial in-service handling of first call at the end of each deployment phase described in the Price Summary contained in Exhibit 'A" shall constitute the acceptance by Buyer of the equipment delivered. Company and BUYER shall accordingly execute the Acceptance Certificate forthwith at the cunclusion of each deployment phase, substantially in the form shown in Exhibit G. 10 OBLIGATIONS AND RIGHTS OF PARTIES OBLIGATIONS OF COMPANY: a) Engineer, deliver, install and to put in operation the network expansion and necessary and suitable equipment with all its accessories contracted by the Buyer, and its interconnection, according to parameters and conditions setforth in this Contract. b) Furnish new equipment of most recent version, good quality and compatible with the existing PSTN network of Buyer as per international accepted standards. c) Train and transfer the necessary knowledge to the qualified TELECO personnel to operate, exploit and maintain the equipment that will be provision under the terms of the contract. d) Provide the technical services required to perform the design and commissioning of the proposed network expansion solution, excluding the installation and placement in service of the subscriber premises equipment and necessary wire cable plant. Drop wire installation and modifications or installation at customer premises are to be carried out and at the cost of [*] Company will provide and install the necessary cable between the RPs and RPCs. -9- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION OBLIGATIONS OF BUYER: a) Make available to the Company all existing equipment and network infrastructure required to perform the contracted equipment and expansions, including but not limited to: PSTN facilities, equipment sites, switching systems, PDH and SDH transmission network, inclusive the Banc Nationale D'Haiti SDH points of presence and associated transmission backbone equipment, ducts, poles, buildings, cable plant, radio towers, rights of way, as well as, all the necessary technical engineering information, facilities, licenses and approvals needed to deploy and interconnect the contracted solution. b) Under the terms of the agreement the Buyer or its designated commercial agent is solely responsible for all promotions, sales-marketing, commercial infrastructure, including points of sales and personnel necessary to promote and commercialize the lines and services contracted within the Republic of Haiti. c) Put in operation the structure and equipment supplied by the Company to operate, exploit and to maintain the equipment network expansion contracted, including installation of equipment at end-user premises, installation and provisioning of primary and secondary drop wire cable plant as well as internal installation and repairs at customer premises, training of end-user, Buyer service, billing and collections activities necessary to conduct the marketing, sale, installation, service processing, billing and collection activities of the lines/services contracted. d) Insure, by its own account and risk, the contracted equipment, personnel and goods deployed in its facilities, stored in its warehouses and under the control of its personnel against all the possible risks. e) The Buyer is solely responsible to ensure through its best efforts, capacity and experience the optimun profitability, continuity and regularity of the service, including lines and services sold by the Company and/or its designated commercial agent and disburse all collected revenues due to Company/Agent for the sales of the lines and services. f) Permit the use of its installations when required by the Company to perform equipment installations, interconnections, testing, and any other activity related to the implementation/operation of the project. g) Provision of the services to the users in the coverage zones established; and to the billing and collections for the corresponding connection fees, monthly charges, user fees and other charges from the provision of services to the users. h) Keep separate accounting and financial records of the project according with international accounting practices. -10- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION i) Perform, timely, according to project schedule and engineering the adequate extensions to existing equipment to interconnect the project with the existing infrastructure. j) Buyer agrees to grant the Company and/or its designated agent full rights and privileges to conduct marketing and promotional activities and use of information and the facilities related to this contract to showcase and demonstrate its equipment capacities and attributes to other potential clients. k) Buyer agrees to grant Company the necessary Government of the Republic of Haiti importation exemptions free of any import duties, levies and restrictions to import test equipment, tools, vehicles, computing equipment, office equipment, miscellaneous hardware, and other elements needed for the turnkey implementation of the contracted project. l) Buyer agrees to facilitate Company personnel and its sub-contractors and respective family members the necessary entry visas and work permits to live and work in the Republic of Haiti during the course of the project. m) Buyer agrees to reinvest in the subsequent project phases, the revenues from project's revenue generation. RIGHTS OF BUYER: a. Exploit the equipment and keep the financial product from the revenue of the equipment once the financing of project and all other related charges has been covered. b. Participate in the project field installation activities to obtain knowledge of the equipment and of the processes of installation and placement in operation, for which TELECO will appoint personnel properly qualified under the supervision of the Company. c. Hands-on training to receive technology and knowledge transfer for the operation, exploitation and corrective and preventive maintenance of the contracted equipment/solution. RIGHTS OF COMPANY a) Access to Buyer premises to install the equipment, perform equipment test, interconnections or any other activities related to the project execution and integration to the existing network. b) Company or a firm representing company must have full access to accounting files and Accounting Books of Project and to all information related with the Project. Company could conduct audits to the project' operations. To do such audits, Company reserves the right to do it directly or through a specialized firm that will be hired for such purpose. In such cases, Buyer shall be notified [*] before such audits are going to be conducted. All project information shall be confidential and could not be released without the written consent of both parties. -11- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION c) To receive the payments, to cover the investment made in equipment and services as well as the financing charges and any other charges related to the project, from the total revenues deposited in the escrow account and collected from the subscribers connected to the installed equipment with the project. d) To receive interest at an interest rate [*] for any delayed payment whose delay exceeds [*] days after payment due date. 11 PROJECT COORDINATION COMMITTEE AND EXECUTIVE BOARD Company and Buyer agree to install [*] after Contract Signature a Project Coordination Committee "The Committee" whose main purpose will be to coordinate all activities related to project execution and performance and solve any differences that may arise during contract execution. The Committee will consist of one representative from TELECO and one representative from Company. The Committee shall be responsible for the development and coordination of operational aspects, commercial aspects and the development of procedures to effectively provide service to the end users as well as any action required to secure the success and profitability of the project. Any action or recommendation from the Committee shall be based on the Contract Terms and Conditions. The Committee shall meet at least once every week and produce a weekly report or on a per call basis as required by any of the two members appointed to it. For each of the members, each party shall appoint a substitute that shall represent the principal in the event that this one cannot assist to any specific meetings. Extraordinary meetings could be call by either party, meeting place and date shall be agreed, if no agreement is mutually reach, meeting shall be enforce to be held 8 calendar days after written notification of request of meeting. If any matter is not resolved by the Committee, the General Director of TELECO or its designated representative and the Sales Vice president of Company or its designated representative shall constitute the Executive Board "The Board" of the Project and will solve any matter regarding this. In any event any recommendation or resolution of the Committee, which involves or commits money beyond [*] from either side or a significant deviation from deliverables (schedule or functions) or any expansion beyond [*] shall be approved by the Board. 12 FUNCTIONAL VERIFICATION Company shall perform functional Verification tests in accordance with the Functional Verification Test procedure to be provided by Company prior to the commencement of the tests. The BUYER undertakes and agrees to ensure that there will be no delay in the commencement or performance of the Functional Verification by any act or omission of the BUYER or any of BUYER's employees, agents or representatives. -12- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 13 LICENSES Company hereby grants BUYER a [*] License to use the Software and the Documentation solely in connection with the Products purchased by BUYER pursuant to this Agreement, at the Site(s) and for the purpose and in the manner for which the Product was designed and intended by Company, all in accordance with the software license provisions set forth in EXHIBIT B attached hereto. In no event shall BUYER have the right to market, sell, lease, license, sublicense, assign, distribute or otherwise transfer the Products or any part thereof without the express prior written consent of Company. BUYER shall not remove nor alter, nor permit the removal or alteration of, any Company or third-party trademarks, copyright notices, tags, labels or other identifying markings placed on any Products, products, packages or containers provided hereunder without the prior written consent of Company. In no event shall BUYER have the right to market, sell, lease, license or otherwise distribute the Products. 14 TITLE AND RISK Title to the Product shall pass to BUYER upon Company's shipment of the Product(s) to BUYER [*]. Risk of loss to the Product shall pass to BUYER in accordance with [*]. Title to all Software and Documentation shall remain vested in Company. All intellectual property rights to the Product, Documentation, Applications and Software or any part thereof, including without limitation all patents, trademarks, trade names, copyrights, designs, know how and trade secrets shall remain vested in Company and its licensors at all times. 15 WARRANTY 15.1 Limited Warranty. Company warrants that the non-Software Products, as delivered, will be free from defects in materials and workmanship during the Warranty Period. This warranty will apply to hardware items directly manufactured by Company except the telephone subscriber terminal equipment, shall expire after [*] from the date of shipment or [*] from the date of functional verification is completed as defined herein this contract's Clause 1 Definitions, numerals 1.1 "Functional Verification" and 1.2 "Commercial Service" and Clause 12 "Functional Verification". However, with respect to the telephone terminal equipment, the Company agrees to provide the Customer a [*] additional supply of terminals over the purchased quantity to support the warranty of units found defectived directly attributed to manufacturing defects. The warranty service shall be administered in accordance with Company, Inc. recommendations and practices in effect at the time of shipment. Buyer shall notify Company, Inc. in writing immediately upon discovery of any defects within the warranty period for return authorization and instructions. -13- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION Upon receipt of the returned Equipment prepaid by Buyer, Company, Inc.' sole obligation shall be to repair and/or replace the part found to be defective, at its option. Replacement Equipment may be new, or repaired. Returned replaced Equipment shall become Company, Inc.' property. Replacement Equipment shall be warranted for the unexpired portion of the returned Equipment's warranty. The foregoing warranty is contingent upon proper use of the Products in the applications for which they were intended. This warranty shall not apply to defects or failures to a Product which was subjected to: (i) accident, neglect or misuse; (ii) failure of or defect in electrical power, external electrical circuitry, air-conditioning or humidity control; (iii) the use of software or Product not provided by Company or approved in writing by Company for use with the Product; (iv) unusual stress; (v) improper use or maintenance; (vi) electro-static discharges; (vii) unusual operational or environmental stress or (vii) modification, adjustment, repair, service or installation by any party other than Company, or persons authorized and certified by Company. Company's sole liability and BUYER's exclusive remedy shall be limited to repair, replacement, credit or refund, [*]. [*]shall pay all freight charges for shipment of any replacement Product to BUYER during the Warranty Period. Replacement or repair of a Product shall not extend the original warranty for that Product or repair part. 15.2 Disclaimer of Warranties COMPANY MAKES NO WARRANTIES OR CONDITIONS, EXPRESS, STATUTORY, IMPLIED, OR OTHERWISE, AND COMPANY SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES AND CONDITIONS OF NONINFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, COMPANY DOES NOT EXCLUDE LIABILITY TO THE EXTENT THAT SUCH LIABILITY MAY NOT BE EXCLUDED OR LIMITED BY LAW. 15.3 Inherently Dangerous Applications. THE PRODUCTS ARE NOT AUTHORIZED FOR USE AS CRITICAL COMPONENTS IN LIFE SUPPORT DEVICES OR SYSTEMS OR FOR USE IN AVIATION, NUCLEAR OR ANY OTHER INHERENTLY DANGEROUS APPLICATION WITHOUT THE EXPRESS WRITTEN APPROVAL OF THE MANAGING DIRECTOR OF COMPANY. LIFE SUPPORT DEVICES OR SYSTEMS ARE THOSE WHICH ARE INTENDED TO SUPPORT OR SUSTAIN LIFE AND WHOSE FAILURE TO PERFORM CAN REASONABLY BE EXPECTED TO RESULT IN A SIGNIFICANT INJURY TO THE USER. CRITICAL COMPONENTS ARE THOSE COMPONENTS WHOSE FAILURE TO PERFORM CAN REASONABLY BE EXPECTED TO CAUSE FAILURE OF A LIFE SUPPORT DEVICE OR SYSTEM OR AFFECT ITS SAFETY OR EFFECTIVENESS. -14- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 15.4 Product Returns In order to return Product that BUYER believes is defective, BUYER shall (i) notify Company in writing that such Product is believed to be defective and furnish a detailed explanation of any alleged problem; (ii) obtain a RMA number from Company for the alleged defective Product; and (iii) within [*] of receipt of the RMA number, return such Product to Company, [*], with the RMA number prominently attached to Company's facility in Miami, U.S.A. or such other location as Company may designate in writing in each case during the Warranty Period. BUYER shall pay shipping charges for returned Product shipped to Company and Company shall pay shipping charges for returned product shipped to BUYER. 16 INDEMNIFICATION 16.1 Indemnity. BUYER agrees that Company has the right to defend, or at its option to settle, and Company agree, at its own expense, to defend or at its option to settle, any third party claim, suit or proceeding (collectively, "Action") brought against BUYER alleging the Products infringe any United States patent, copyright or Trademark in existence as of the Effective Date and enforceable in the BUYER's country, subject to the limitations hereinafter set forth. Company will have sole control of any such Action or settlement negotiations, and Company agrees to pay, subject to the limitations hereinafter set forth, any final judgment entered against BUYER on such issue in any such Action defended by Company. BUYER agrees that Company will be relieved of the foregoing obligations unless BUYER notifies Company promptly in writing of such Action, gives Company authority to proceed as contemplated herein, and gives Company proper and full information and assistance to settle and/or defend any such Action. If it is adjudicatively determined, or if Company believes, that the Products, or any part thereof, infringe any patent, copyright or trademark, or if the sale or use of the Products, or any part thereof, is, as a result, enjoined, then Company may, at its election, option, and expense: (i) procure for BUYER the right under such patent, copyright or trademark to sell or use, as appropriate, the Products or such part thereof; or (ii) replace the Products, or part thereof, with other noninfringing suitable Products or parts; or (iii) suitably modify the Products or part thereof; or (iv) remove the Products, or part thereof, terminate distribution or sale thereof and refund the payments paid by BUYER for such Products less a reasonable amount for use and damage. Company will not be liable for any costs or expenses incurred without its prior written authorization, or for any installation costs of any replaced Products. 16.2 Limitations Notwithstanding the provisions of Section 14.1 above, Company has no liability to BUYER for (i) any infringement of patent or copyright claims alleging infringement by completed equipment or -15- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION any assembly, circuit, combination, method or process in which any of the Products may be used but not covering the Products standing alone; (ii) any trademark infringements involving any marking or branding not applied by or requested by Company, or involving any marking or branding applied by Company at the request of BUYER; or (iii) the modification of the Products, or any part thereof, unless such modification was made by Company, where such infringement would not have occurred but for such modifications. DISCLAIMER. COMPANY'S LIABILITY ARISING OUT OF OR RELATING TO THIS SECTION 14 SHALL NOT EXCEED THE AGGREGATE AMOUNTS PAID BY BUYER TO COMPANY FOR THE ALLEGEDLY INFRINGING PRODUCTS THAT ARE THE SUBJECT OF THE INFRINGEMENT CLAIM. THE FOREGOING PROVISIONS OF THIS SECTION 14 STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF COMPANY AND THE EXCLUSIVE REMEDY OF BUYER AND ITS CUSTOMERS, WITH RESPECT TO ANY ALLEGED PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT BY THE PRODUCTS OR ANY PART THEREOF. 17 LIMITATION OF LIABILITY Notwithstanding any other clause in this Agreement, in no event will Company be liable for any special, indirect, incidental, punitive or consequential damages (including without limitation any damages for loss of data, use or profits) arising from or in connection with this Agreement or the use or performance of any Product whether in an action based on contract, tort or any other legal theory, whether or not Company has been notified of the possibility thereof. Notwithstanding any other clause in this Agreement, in no event will Company's total aggregate liability for any damages arising from or in connection with this Agreement or the use or performance of any Product whether in actions based on contract, tort or any other legal theory, and whether or not Company has been notified of the possibility thereof, exceed the price paid by the BUYER for the relevant item or component of Product giving rise to the claim amortized on a straight line basis over [*] from the date of the applicable purchase order. 18 TERMINATION This Agreement may be terminated by either party: a) if the other party is in material breach of this Agreement and fails to cure such breach within [*] of receiving written notice of the breach. Provided that the breaching party continues to make diligent and good faith efforts to cure the breach, the breaching party shall be granted a [*] extension of time to cure the breach. b) Upon [*] prior written notice if any of the following circumstances remain uncured: (i) if the other party becomes insolvent or unable to pay its debts in the ordinary course of its business; (ii) if a voluntary or involuntary petition under applicable bankruptcy laws is filed by or against the other -16- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION party; (iii) if a receiver is appointed for the business affairs of the other party or the other party makes an assignment for the benefit of creditors; or (iv) if the other party liquidates or ceases doing business as a going concern. Any provision of this Agreement, which by its nature survives termination, shall survive termination of this Agreement. 19 TRAINING Company shall offer technical training for BUYER's personnel in accordance with EXHIBIT F 20 GOVERNING LAW AND REGULATIONS BUYER agrees to comply with all relevant laws, export or otherwise of the United States to assure that the Product and Documentation are not exported or otherwise transferred in violation of such laws. Prior to exporting or transferring the Product or Documentation, BUYER shall obtain Company's written consent and a license from the U.S. Department of Commerce and/or any other appropriate agency of the U.S. Government, as required. 21 GENERAL PROVISIONS 21.1 No Liability for Other Party's Acts Neither party shall be liable for any losses, injuries, or damages caused by or attributable to the acts and/or omissions of the other party, its employees, or its agents. 21.2 Independent Contractors The parties hereto agree that they are independent contractors. This Agreement shall not be construed to create or result in a partnership or joint venture between the parties hereto, nor to make either party the agent of the other party. This Agreement shall not create any third party beneficiary rights. 21.3 Notices Any notices, requests, demands or other communications required or permitted under this Agreement shall be in writing and shall be sufficiently communicated if delivered (i) in person or by means of a recognized courier service, (ii) sent by facsimile with written confirmation sent by regular airmail, or (iii) if sent by registered airmail, return receipt requested, to the recipient party at its address appearing in the preamble hereof or to such other address as such party may have designated for such purpose by notice previously given to the other party in accordance with the terms hereof. -17- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION - ------------------------------------- ------------------------------------------ COMPANY: UTStarcom, Inc. Attn: Russell Boltwood Title: Director Legal Affairs 1275 Harbor Bay Parkway Alameda, Ca. 94502 USA Fax: +1 510 864 8802 - ------------------------------------- ------------------------------------------ BUYER: Telecommunications D'Haiti S.A.M. Title: Alphonse Inevil Title: Director FAX: +509 45 2775 - ------------------------------------- ------------------------------------------ Notices shall be deemed to have been received if delivered in person, on the same day; if sent by facsimile, 24 hours after transmission; if sent by registered mail, seven (7) days after deposit into the respective national mail Product. 21.4 Security Interest Company reserves, and BUYER hereby grants to Company, a security interest in [*] until Company has received payment in full. BUYER agrees at Company's request to execute any and all financing statements and to take such other action as Company may reasonably request to carry out the intent of this Section. 21.5 No Assignment Neither party may assign its rights and/or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. Notwithstanding the aforementioned, Company reserves the right and Buyer agrees, that Company could assign to a third party institution its financial rights related to this Agreement. 21.6 Jurisdiction This Agreement shall be governed by, and construed in accordance with, the laws of California, U.S.A., without reference to the conflict of laws provisions thereof. 21.7 Publicity The substance and timing of any written or other public disclosure relating to this Agreement, in the form of a press release or similar disclosure shall be subject to the prior written approval of both parties. -18- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 21.8 No Violation of Applicable Law If any provision of this Agreement is held to be invalid under any applicable law, such provision shall be ineffective to the extent of such violation without invalidating other provisions of this Agreement. 21.9 Conflicting Exhibits In the event that any provision of the Exhibits or any other attachments to this Agreement are deemed to be in conflict with the provisions of this Agreement, the provisions of this Agreement shall control. 21.10 No Waiver Any failure by either party to enforce strict performance by the other party of any provision herein shall not constitute a waiver of the right to subsequently enforce such provision or any other provision of this Agreement. 21.11 Arbitration Any controversy or claim arising out of or related to this Agreement shall be submitted to binding arbitration in San Francisco, State of California, U.S.A. in accordance with the then prevailing International Chamber of Commerce ("ICC") procedural Arbitration Rules. Any such arbitration shall be held in English before a single arbitrator who shall be knowledgeable in telecommunications and data processing Products. The parties consent and submit to the jurisdiction of the Courts of the State of California, United States of America in connection with any award made by the arbitrator(s). Each party shall bear its own costs and expenses (including attorneys' fees) incurred in connection with this section. 21.12 Non-Monetary Remedies The parties hereby acknowledge that monetary damages may not be a sufficient remedy for breaches of the licensing provisions set forth in EXHIBIT B or of the Non-Disclosure Agreement annexed hereto as EXHIBIT C and that either party may be entitled to such injunctive or equitable relief for actions or claims alleging such breach(es) as may be deemed proper by a court of competent jurisdiction. 21.13 Force Majeure Neither party shall be liable for damages resulting from its failure to perform its obligations hereunder (other than the obligation to make payments owing to the other party) if such failure arises out of or in connection with any act of war, civil disturbance, strikes, earthquake, flood, embargo, failure or unavailability of means of communication, failure or unavailability of means of -19- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION transportation or any other cause or event of force majeure beyond the reasonable control of the party failing to perform or of its agents and contractors. 21.14 Entire Agreement This Agreement and the Exhibits hereto constitute the entire agreement between Company and BUYER relating to the subject matter hereof and supersede all statements, representations, and understandings, which have been made by either party or their agents or representatives prior to the execution of this Agreement. No modification of this Agreement shall be binding upon either party unless made in writing and executed on behalf of that party by its duly authorized representative. 21.15 May be Executed in Counterparts This Agreement may be executed in counterparts and by facsimile such that when taken together the counterparts shall be deemed a true original of the Agreement between the parties. 21.16 Contract Validity The validity of this Contract is contingent upon TELECO obtaining the License approval to operate in the proposed solution frequency band. 22 EXHIBIT A: SECTION 7 ECONOMIC PROPOSAL AND EQUIPMENT LISTS. 22.1 Price Validity PRICES ARE BASED ON BUYER'S ACQUISITION OF A MINIMUM OF [*] WIRELESS ACCESS LINES AS DEFINED IN THE ANNEXES TO EXHIBIT D. Pricing as specified here will be honored as herein listed for the term and conditions set forth in this agreement. -20- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION IN WITNESS WHEREOF, a duly authorized representative of each party has executed this Agreement as of the date set forth below. COMPANY BUYER By: /s/ OMAR A. GRAIBE By: /s/ JEAN-FRANCOIS CHAMBLAIN -------------------------------- ---------------------------- Name: Omar A. Graibe Name: Jean-Francois Chamblain Title: Managing Director, Caribbean Title: Directeur General, and Latin America Telecommunications d'Haiti S.A.M. Date: 12/05/00 Date: 12/05/00 -21- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT B: END-USER SOFTWARE LICENSE The following terms and conditions shall constitute the license ("License") by which software that accompanies, whether by being embedded into a hardware element or component or by means of a separate media such as diskette or compact disc, or otherwise ("Software"), is transferred in connection with products ("Products") supplied by Company ("Licensor"). GRANT. The person who acquires any Product ("Licensee") may install and use the Software [*]. Licensee may copy the Software only for backup purposes, provided that Licensee reproduces all copyright and other proprietary notices that are on the original copy of the Software. RESTRICTIONS. Licensee may not use, copy, modify, or transfer the Software, or any copy thereof, in whole or in part, except as expressly permitted by this License. Licensee may not reverse engineer, disassemble, decompile, or translate the Software, or otherwise attempt to derive the source code of the Software, or permit any other person to do any of the foregoing. Any attempt to transfer any right, duty or obligation in this License is void. Licensee may not rent, lease, loan, resell for profit, or distribute the Software, or any part thereof. License may not modify or create derivative works based on the Software in whole or in part. OWNERSHIP. The Software is not sold but is only licensed to Licensee for use only in accordance with this License, and Licensor reserves all rights not expressly granted to Licensee. COPYRIGHT. United States copyright laws and international treaty protect the Software. Licensor or its suppliers or licensors owns the Software. TERM. This License will terminate immediately upon notice to Licensee if Licensee materially breach any term or condition of this License. Licensee agrees upon termination promptly to destroy the Software and all copies thereof. WARRANTY DISCLAIMER. THE SOFTWARE IS PROVIDED TO LICENSEE "AS IS" AND LICENSOR AND ITS SUPPLIERS EXPRESSLY DISCLAIM ALL WARRANTIES INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. LIMITATION OF REMEDIES. IN NO EVENT SHALL LICENSOR OR ITS SUPPLIERS BE LIABLE TO LICENSEE OR TO ANY OTHER PERSON FOR ANY LOST PROFIT, CORRUPTION OR LOSS OF DATA, INTERRUPTION OF BUSINESS, OR OTHER EXEMPLARY, SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGE OF ANY KIND ARISING OUT OF THE USE OR INABILITY TO USE THE SOFTWARE, EVEN IF LICENSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE AND WHETHER OR NOT SUCH LOSS OR DAMAGE IS FORESEEABLE. -22- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXPORT LAW. The Software and related technology are subject to U.S. export control laws and may be subject to export or import regulations in other countries. Licensee agrees strictly to comply with all such laws and regulations and acknowledge that Licensee has the responsibility to obtain such licenses to export, re-export or import as may be required. GENERAL. The laws of the State of California, USA, will govern this License. The Federal and State Courts located in San Francisco County, California, USA shall have sole jurisdiction over all disputes arising in connection with this License. If any provision of this License is held to be unenforceable, that provision will be removed and the remaining provisions will remain in full force. This License is the complete and exclusive statement of the agreement between Licensee and Licensor and supersedes all prior agreements, oral or written, and all other communications between Licensee and Licensor in relation to the subject matter of licensing the Software. Licensee agrees to the terms and conditions set forth above in this License as of the effective date of this agreement date stated below: 23 EXHIBIT C: MUTUAL NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENT THIS AGREEMENT IS ENTERED INTO BY AND BETWEEN COMPANY, INC., 1275 HARBOR BAY PARKWAY, SUITE 100, ALAMEDA, CA 94502 ("Company") AND TELECOMMUNICATIONS D'HAITI S.A.M. ("BUYER"). 1. This Agreement shall apply to all confidential and proprietary information disclosed by the parties to the other, including but not limited to confidential product planning information, product specifications and other proprietary and business and technical information (hereinafter referred to as "Confidential Information"). As used herein, "Confidential Information" shall be in written, graphic, machine recognizable or other tangible or electronic form and marked "Confidential" or "Proprietary" or shown by implication that it is imparted or disclosed in confidence, or if disclosed orally or visually, shall be reduced to writing in summary form, identified as "Confidential Information" and sent to the Receiving Party within 15 days following such oral or visual disclosure. 2. Company and BUYER mutually agree to hold the other party's Confidential Information in strict confidence and not to disclose such Confidential Information to any third parties except after receiving prior consent by the disclosing party in writing. Company and BUYER shall use the same degree of care to avoid disclosure of such Confidential Information as each employs with respect to its own proprietary information of like importance or a greater degree if reasonable. 3. Company and BUYER agree that they will not use the other party's Confidential Information for any purpose other than for the intended purposes, without the prior written permission of the other party. -23- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 4. Company and BUYER mutually agree they may disclose such Confidential Information to their respective responsible employees with a bona fide need to know, and Company and BUYER agree to instruct all such employees not to disclose such Confidential Information to third parties and will ensure that such employees have agreed to similar non-disclosure provisions with Company or the BUYER, its own employees respectively. 5. Information shall not be deemed Confidential Information and the receiving party shall have no obligation regarding any information for which it can be proven in written documentation (a) is already known to the receiving party at the time that it is disclosed without use of the Confidential Information; (b) is or becomes publicly known through no wrongful act contrary to this Agreement of the receiving party; (c) is rightfully received from a third party without obligation of confidence or restriction on disclosure from receiving party and without breach of this Agreement; (d) is independently developed by the receiving party without use of Confidential Information; (f) is disclosed pursuant to a requirement of a valid court order provided that the Receiving Party provides (i) prior written notice for the disclosing party of such obligation and (ii) the opportunity to oppose such disclosure and (iii) it is disclosed for the extent and purposes or the order only. 6. All Confidential Information shall remain the property of the disclosing party, and upon the written request of either party, the other party shall promptly return to the disclosing party all Confidential Information disclosed to it and all copies thereof or at the disclosing party's option shall destroy all such Confidential Information and shall provide the receiving party with a certificate that all Confidential Information has been destroyed. 7. Company and BUYER recognize and agree that nothing contained in this Agreement shall be construed as granting any rights, by license or otherwise to any Confidential Information disclosed pursuant to this Agreement. 8. This agreement shall be binding upon and inure to the benefit of the party's successors and assigns. This Agreement shall not be assignable by either party for the written consent of the other party, and any purported assignment not permitted hereunder shall be void. This document constitutes the entire agreement between the parties with respect to the subject matter hereof, and shall supersede all previous, understandings and agreements, either oral or written, between the parties or any official or representative thereof. 9. The obligations undertaken by each party pursuant to this Agreement shall remain in effect for three years from the last date of disclosure of Confidential Information, and shall survive any termination or expiration hereof. 10. None of the Confidential Information disclosed by the parties constitutes any representation, warranty, assurance, guarantee or inducement by either party to the either with respect to the infringement of trademarks, patents, copyrights; any right of privacy; or any rights of third persons. -24- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 11. The parties hereto are independent contractors. 12. This Agreement may be modified only by written amendment signed by both parties. This Agreement shall be construed in accordance with the laws of the State of California without regard to the conflict of laws provisions and shall be subject to the jurisdiction of the courts of the State of California. 13. The receiving party may make copies of Confidential Information only to the extent necessary for the purpose of this Agreement provided that the copies are marked "Confidential" and treated as Confidential Information in accordance with the terms of this Agreement. 14. Accordingly, nothing in this Agreement will be construed as a representation or inference prohibiting either party from developing products, having products developed for it, from entering into joint ventures, alliances, or licensing arrangements that all without violation of this Agreement, compete with the products or systems embodying the Confidential Information. -25- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION 24 EXHIBIT D: BUSINESS PLAN AND PROJECT COMMERCIAL MILESTONES 25 EXHIBIT E: PROJECT IMPLEMENTATION SCHEDULE 26 EXHIBIT F: TRAINING AND TECHNOLOGY TRANSFER -26- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT A PRICES AND EQUIPMENT LISTS [*] -27- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT D BUSINESS PLAN AND PROJECT COMMERCIAL MILESTONES [*] -28- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT E PROJECT IMPLEMENTATION SCHEDULE [*] -29- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT F TRAINING -30- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION TRAINING COURSE Participants: [*] Time: [*] Duration: [*] OBJECTIVES: - - Describe the porposed solution features and characteristics, including an introduction to the PHS air interface characteristics and to facilitate network planning and system configuration. - - Describe the features and functions of each component of the proposed solution equipment set, to support the operation and maintenance of the equipment by Teleco's personnel during and after the installation. - - Train personnel in the use of the NETMAN Network Management System as art of its operations with the various elements of the proposed solution. Training Course Summary: [*] -31- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION EXHIBIT G FINAL ACCEPTANCE CERTIFICATE -32- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION FINAL ACCEPTANCE CERTIFICATE DATE: --------------------- CONTRACT #: -------------------------------- PHASE #: -------------------------------------------- PHASE AMOUNT: ---------------------------------------- CUSTOMER: --------------------------------------------- BY ITS SIGNATURE BELOW, THE ABOVE-NAMED CUSTOMER CERTIFIES THAT: 1) WITH RESPECT TO THE CONTRACT IDENTIFIED ABOVE, THE CUSTOMER HAS FULLY ACCEPTED DELIVERY OF THE EQUIPMENT DESCRIBED IN THE ABOVE-REFERENCED CONTRACT PHASE, WITH TITLE FULLY PASSING TO THE CUSTOMER. 2) INSTALLATION OF THE EQUIPMENT HAS BEEN FULLY COMPLETED FOR THE CUSTOMER BY UTSTARCOM AND/OR ITS AGENTS OR SUBCONTRACTORS. 3) ALL TRIAL PERIODS, PRELIMINARY TESTING, COMMISSIONING AND FINAL ACCEPTANCE TESTING AS REQUIRED FOR THE ABOVE-DESCRIBED PHASE HAS BEEN COMPLETED TO THE FULL SATISFACTION OF THE CUSTOMER. 4) ALL SERVICES TO BE PROVIDED TO THE CUSTOMER PRIOR TO AND AS A PART OF FINAL ACCEPTANCE TESTING, AS REQUIRED BY THE ABOVE-DESCRIBED CONTRACT, HAVE BEEN SUBSTANTIALLY COMPLETED TO THE FULL SATISFACTION OF THE CUSTOMER. 5) UTSTARCOM IS ENTITLED TO FULL PAYMENT OF THE CONTRACT AMOUNT FOR THE PHASE IDENTIFIED ABOVE. 6) THE CUSTOMER'S SIGNATURE OF THIS FINAL ACCEPTANCE CERTIFICATE IN NO WAY RELIEVES UTSTARCOM OF ANY WARRANTY, POST-ACCEPTANCE MAINTENANCE, OR EQUIPMENT UPGRADE OBLIGATIONS CONTAINED WITHIN THE ABOVE-REFERENCED CONTRACT. 7) THIS CERTIFICATE SUPERSEDES ANY CONTRARY ORAL OR WRITTEN AGREEMENTS OR NEGOTIATIONS THAT MAY HAVE OCCURRED PRIOR TO THE SIGNING OF THIS CERTIFICATE. - ---------------------------------------- NAME - ---------------------------------------- TITLE - ---------------------------------------- CUSTOMER NAME - ---------------------------------------- -33- STRATEGIC ALLIANCE [*] CONTRACT NO. HT 112300 TELECO NETWORK EXPANSION MEMORANDUM OF UNDERSTANDING REFERENCE: STRATEGIC ALLIANCE [*] LINES TELECO NETWORK EXPANSION Pursuant to Contract reference No. HT112300, Strategic Alliance between UTStarcom Inc, and TELECO for the provision of [*] wireless access lines of PAS equipment manufacture by UTStarcom, Inc. UTStarcom hereby agrees to provide TELECO [*] the new software releases that become commercially available for this market, during a maximum period of [*] after the completion of last phase of project. [*] per [*] is usually issued. This MoU will be superceded by a formal service contract for software rigth to use upgrades and does not involve the provision of any additional hardware required for the software release implementations required for new features or functions. By Telecommunications d' Haiti S. A. M. By UTStarcom, Inc Jean Francois Chamblain Omar A. Graibe Directeur General CALA Managing Director -34- EX-21.1 9 a2040014zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES UTStarcom China Ltd., a company organized under the laws of the People's Republic of China. Hangzhou UTStarcom Telecommunications Co., Ltd., a company organized under the laws of the People's Republic of China. Guangdong UTStarcom Telecom Co., Ltd., a company organized under the laws of the People's Republic of China. AbacusChina, Inc., a company organized under the laws of the Cayman Islands. EX-23.1 10 a2040014zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-44548) of UTStarcom, Inc. of our report dated January 24, 2001 relating to the financial statements, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated January 24, 2001 relating to the financial statement schedules, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP San Francisco, CA February 28, 2001 EX-23.2 11 a2040014zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT APPRAISER We hereby consent to the use in the Annual Report on Form 10-K (Reg. No. 000-29661) of UTStarcom, Inc. ("UTStarcom"), and any amendments thereto, and any other filings pursuant to the Securities Exchange Act of 1934, as amended (the "Public Filings"), of all summary information contained therein relating to our independent appraisal of Wacos, Inc. ("Wacos") in connection with the acquisition of Wacos by UTStarcom in December 1999. We also consent to the references to our firm in the Notes to Consolidated Financial Statements contained in the Public Filings. WILLAMETTE MANAGEMENT ASSOCIATES Signature: /s/ STEVEN D. GARBER ---------------------------------------------- Date: February 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----