-----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, BGp4C20Rna5vx1v8nwsf2Yrt0w6LXJXpIY7CVaoij5Gt2ghsz84tBzusnAh6PiXq D3tP/LCfk4Y/lTVN4ALaiQ== 0000898430-98-001489.txt : 19980422 0000898430-98-001489.hdr.sgml : 19980422 ACCESSION NUMBER: 0000898430-98-001489 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980421 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSP TECHNOLOGY INC CENTRAL INDEX KEY: 0000773720 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 942832651 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14677 FILM NUMBER: 98598214 BUSINESS ADDRESS: STREET 1: 48500 KATO RD CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106577555 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the Fiscal Year Ended January 31, 1998 or ---------------- TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________ Commission File Number 0-14677 DSP TECHNOLOGY INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2832651 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
48500 KATO ROAD, FREMONT, CALIFORNIA 94538 (Address of principal executive offices, zip code) Registrant's telephone number, including area code: (510) 657-7555 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ The aggregate market value of registrant's voting Common Stock held by non- affiliates of the registrant was approximately $16,316,000 (based on the closing sales price of the Company's Common Stock at March 31,1998 as reported by NASDAQ). Shares of Common Stock held by each officer and director and by each person who owns more than 5% of the Company's Common Stock have been excluded because such persons may be deemed to be affiliates. This is not intended to be a conclusive determination of affiliate status for any other purposes. The number of shares outstanding of the registrant's Common Stock at March 31, 1998 was 2,277,360. DOCUMENTS INCORPORATED BY REFERENCE: Information in Part III is incorporated by reference to the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders which is to be filed with the Securities and Exchange Commission before May 1, 1998. This report (including exhibits) contains 71 pages. The Index to Exhibits begins on page 33 of this report. 1 PART I ITEM 1: BUSINESS This report contains, in addition to historical information, forward- looking statements which reflect the Company's current views with respect to future events and financial performance. These foward-looking statements are subject to certain risks and uncertainties, including those discussed in this report. Actual results could differ materially from those projected in the forward-looking statements as a result of competition, technological change and other risks detailed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors that May Affect Future Results". In this report the words "anticipates," "believes," "expects," "intends," "may," "future," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto. INTRODUCTION The Company designs, develops, manufactures, markets and integrates high- speed computer-automated instrumentation for measurement and control applications in three major areas: powertrain testing, vehicle safety and component testing, and general data acquisition and signal analysis. The transportation industry is currently its largest market and major focus. The Company's products are used to gather and measure analog signals generated by transducers and/or detectors which measure physical properties such as temperature, pressure, acceleration and radiation. These products have been used primarily in the transportation industry in applications as diverse as powertrain testing, dynamometer control, automotive combustion research, and vehicle impact testing. To a lesser extent, aerospace companies, universities and government-funded agencies use the Company's products in ultrasonics, chemical kinetics, plasma diagnostics, spectroscopy, fusion research, explosives testing, and vibration analysis. In February 1995, the Company entered into a strategic alliance agreement with FEV Motorentechnik GmbH & CO KG ("FEV"). The purpose of the alliance is to develop and distribute test instrumentation and control products for the transportation industry. FEV is a privately-held company based in Aachen, Germany, and is a leader in complete engine and powertrain research and development and instrumentation for the transportation industry. DSP Technology Inc. (the "Company") was incorporated in California in July 1982 and commenced operations in May 1984. The Company reincorporated in Delaware in September 1997. All references in this report to the "Company" and "DSPT" refer to DSP Technology Inc. and its wholly-owned subsidiaries. STRATEGY The Company's strategy is to focus its resources on its largest market, the transportation market. The Company defines the transportation market as including the following industries and segments: major vehicle manufacturers and their suppliers, the diesel industry (e.g., manufacturers of heavy trucks, farm and construction equipment, and large stationary engines), the fuels and lubricants industry, and small engine manufacturers. The Company believes that the fundamental factors of government environmental regulation, global competition among vehicle manufacturers, and rapid technological progress are expanding the demand for advanced turnkey powertrain test solutions. Large domestic and international customers demand more custom turnkey solutions that require more complex services. The Company believes that investments in this area are necessary and logical steps towards expanding its 2 share of the transportation market. To address its transportation industry customers' needs, the Company announced its strategic decision, in the beginning of fiscal 1997, to: (1) focus more heavily and expand its capabilities on the services side of the business; (2) continue development of new products with higher levels of capability and integration; and (3) take a more aggressive approach to marketing with the goal of becoming a full-service company capable of manufacturing and providing turnkey integration of the Company's products. The Company, starting in fiscal 1997, invested heavily in developing significant service capabilities in the areas of custom manufacturing, system integration, project engineering and management, installation and commissioning. These services are now offered as part of the sale of transportation products as Test Cell Services. The Company continues to invest in the development of data acquisition products. The following systems, BaseLine ADAPT, ADAPT-DAC and ADAPT-CAS, were introduced at the 1998 Society of Automotive Engineers ("SAE") show in Detroit, Michigan in February 1998. See "Products and Customers---Powertrain Testing Products" for description of these products. In fiscal 1997, the Company also invested in new sales and marketing personnel to support the expected growth in sales and increased marketing activity. The added personnel were hired three to six months in advance of the revenue opportunities to permit formal and on-the-job training in the Company's products and processes. The Company has also embarked on setting up marketing alliances to enhance its product offerings. This has resulted in the introduction at the SAE show of RedLine Dyno, a line of low inertia, high response dynamometers. PRODUCTS AND CUSTOMERS The Company manufactures and markets data acquisition and control products in the form of integrated systems, modules and proprietary software developed by the Company. These products are categorized into three application areas: powertrain testing, vehicle safety and component testing, and general data acquisition and signal analysis. Powertrain Testing Products: ---------------------------- Powertrain testing is a critical discipline in the transportation industry. DSPT supplies a wide range of products and services for powertrain test cells. DSPT's RedLine and BaseLine products are accepted as standards by leading automakers around the world. These systems help its customers develop more cost effective, fuel efficient engines. By integrating hardware, software, services and expertise into a cost-effective system, DSPT creates solutions that focus on its customers' specific needs. These solutions, based on industry standards, provide long-term flexibility for changing test requirements. The Company's major customers in the transportation market are General Motors ("GM"), Hyundai Motor ("Hyundai"), Sverdrup Technology, Inc. ("Sverdrup"), Waukesha Engine, FEV, Lubrizol Corporation, Lotus Engineering, Ltd., and Chrysler Corporation. RedLine ADAPT-DAC. The data acquisition and control system is a crucial ------------------ component in a powertrain test cell. RedLine ADAPT-DAC offers real-time control over the engine under test. Multi-processor architecture allows the system to acquire data on hundreds of preset parameters simultaneously as the engine responds to test conditions. It can interface with and control a wide variety of other test instruments and systems, including emission benches, combustion analyzers and other devices. With its networking capabilities, ADAPT-DAC can provide centralized, remote control of an entire suite of test cells. It features innovative graphics and runs on a PC in the Windows environment. The systems sell from $60,000 for a base system up to $500,000 with accessory products, hardware spares, custom software, integration, installation and training. 3 RedLine ADAPT-CAS. The Company introduced the RedLine ADAPT-CAS at the SAE ------------------ show in February 1998. It is the third generation combustion analysis product of RedLine ACAP which was introduced in 1991. ADAPT-CAS incorporates years of feedback from industry leaders around the world. Designed for seamless integration with ADAPT-DAC or with VME or VXI systems from other vendors, it enhances the usefulness and quality of test data, raises the efficiency of test cell operations and increases test safety. It is easy to use and features dynamic graphic displays. Integrated with ADAPT-DAC, the combined system offers a single user interface for operation, display of data, and system configuration. The systems range in price from approximately $30,000 for a base system to over $150,000. RedLine DYNO. The Company offers a line of dynamometers called RedLine ------------- DYNO. These dynamometers are low-inertia, high-response units designed for the quick transient conditions of sophisticated powertrain testing. They interface directly with RedLine ADAPT-DAC and provide another element in the complete solution for powertrain testing. The systems range in price from approximately $25,000 to $125,000. RedLine CONNECT. As test cell electronics proliferate, test-cell wiring ---------------- becomes more complex, time-consuming and error-prone. The RedLine CONNECT system provides a fast, simple, modular solution for interfacing test cell instrumentation and signals. It combines the flexibility of individual signal connections with the speed and convenience of single-point mass termination. These systems range in price from approximately $10,000 to $25,000. BaseLine ADAPT. BaseLine ADAPT is a self-contained data acquisition and --------------- control system needing only a PC workstation and test cell interfaces to implement an operational test system. It is the lower cost alternative to RedLine ADAPT and offers space savings of approximately 70%, a significant advantage in the equipment-crammed environment of today's test cell. Typical systems range in price from approximately $35,000 to $45,000. Test Cell Instrumentation and Accessory Products. The Company provides a ------------------------------------------------- comprehensive array of test cell accessories (e.g., engine supports, coolant control systems, containerized powertrain test cells) as integral parts of RedLine installations. Test Cell Services. Test Cell services personnel work in close partnership ------------------- with its customers to design, install and service a wide variety of powertrain test facilities. In the planning phase, project and applications engineers work closely with customers' selected contractors to design and integrate complex systems and facilities that will meet their needs. During installation, the Company's installers and commissioning engineers work with the customer to ensure timely completion and thorough testing of all equipment. Vehicle Safety and Component Testing Products. ---------------------------------------------- IMPAX Data Acquisition Systems ("IMPAX"). IMPAX is a system typically used ----------------------------------------- in collecting and processing data from full-scale vehicle crash tests, sled simulators and component test stands. In addition, they have been used for investigating lift-off dynamics for space launch vehicles. Systems prices range from about $150,000 to $600,000 depending on the configuration. Major customers for this product are General Motors, Autoliv, Lockheed-Martin, Sandia National Laboratory and Morton International. General Data Acquisition and Signal Analysis Products. ------------------------------------------------------ 4 Signal Acquisition Products ("SigLab"). SigLab high-performance signal --------------------------------------- acquisition products are subsystems for personal computers and workstations in the electronic and electro-mechanical device analysis market. SigLab products provide a cost-effective, portable technology for measurement applications like computer hard disk head positioning or acoustic noise suppression systems in automobiles. The products are controlled by and integrated with the MATLAB software from The MathWorks Inc., of Natick, Massachusetts. The products range in price from $ 5,000 for a base 2-channel unit to $21,000 for an 8-channel system with optional software and additional memory. Major customers for these products are distributors such as Signaltech, Phase Metrics, USAF-Phillips Lab, Honeywell Satellite Systems, Southwest Research Institute and Sigmatest. Custom Data Acquisition Systems. The Company also designs custom systems -------------------------------- for customer-specific measurement or control applications. These systems are configured from the Company's line of modules, such as, signal conditioners, transient recorders, analog-to-digital converters and interface modules. These systems are typically sold to universities, government-funded labs and research and development labs. The typical selling price of a system ranges from about $25,000 to about $300,000 for a complex installation. Major customers for these products are Naval Air Warfare Center, Westinghouse Electric and Aberdeen Proving Grounds. MANUFACTURING AND SUPPLIERS The Company manufactures its products from components and prefabricated parts such as integrated circuits, printed circuit boards, power supplies, and enclosures manufactured by others. Manufacturing operations consist of assembly of printed circuit boards, power supplies, and crates, system integration and final testing. Materials and components used by the Company in manufacturing are available primarily from domestic sources. Where possible, the Company buys from multiple sources to avoid dependence on any single supplier. However, certain custom analog devices are only available from a limited number of suppliers. MARKETING AND SALES In the United States, the Company primarily sells and services its products through its own sales and service organizations located in Michigan and California. In Canada, Western Europe, Korea and Japan, the Company sells its products through independent distributors through whom the Company provides technical and administrative assistance. For its transportation market products, the Company distributes its products through FEV in Europe except for the United Kingdom. In the United Kingdom, the Company operates a sales and customer support subsidiary for its powertrain testing products. The Company's standard terms of sale generally require payment within 30 days of shipment. The following customers accounted for over 10% of fiscal 1998 net sales: GM at 21% of net sales and Hyundai at 14% of net sales. GM accounted for 18% and 11% of net sales in fiscal 1997 and fiscal 1996, respectively. No other customer accounted for 10% or more of the Company's net sales in fiscal years 1998, 1997 or 1996. Export sales, primarily to the United Kingdom, Western Europe, and the Far East, accounted for approximately 35%, 32%, and 18% of sales in 1998, 1997 and 1996, respectively (See Note J of Notes to Consolidated Financial Statements). At January 31, 1998 the Company had an order backlog of approximately $11,500,000, compared to a backlog of approximately $9,500,000 at January 31, 1997, and approximately $4,900,000 at January 31, 1996. Backlog consists of orders believed by management to be firm and scheduled for delivery within twelve months. However, most orders can be rescheduled or canceled by customers without significant penalty. In addition, backlog is dependent on the timing of orders, particularly large orders, and on seasonal spending for capital requirements. Accordingly, backlog at January 31, 1998, or at any other 5 date, may not be indicative of prospective sales. SERVICE AND WARRANTY The Company maintains a telephone "hotline" staffed with qualified technicians to respond to service calls. Most servicing is performed at its facilities in Fremont, California and Ann Arbor, Michigan. The Company generally extends a one year warranty for its products. Warranty costs have been nominal to date. RESEARCH AND DEVELOPMENT The Company's ability to compete successfully in an industry subject to rapid technological change depends on, among other things, its ability to anticipate and respond to such change. Accordingly, the Company is committed to a high level of research and development activity. The Company incurred expenditures for research and development of $2,352,000 in fiscal 1998, $2,203,000 in fiscal 1997, and $2,250,000 in fiscal 1996, representing 11%, 12%, and 14%, of total sales in each such period. In accordance with the Statement of Financial Accounting Standards No. 86 which requires the capitalization of software development costs incurred subsequent to establishment of the technological feasibility of producing the finished software product, the Company capitalized $517,000, $630,000, and $322,000, in fiscals 1998, 1997 and 1996, respectively. There can be no assurance that customers' budgets in the automotive and advanced research markets for data acquisition and control products will continue at present levels or that the Company will be successful in marketing any new product it develops. In addition, there can be no assurance that the Company will be able to develop, manufacture or market additional products as a result of its efforts; that expenditures in addition to those currently anticipated may not be required to complete the research and development or that, if required, financing for these expenditures will be available; that future sales from existing or developed products will be significant; or that any sales will be profitable. COMPETITION Competition, from both U.S. and foreign competitors, is strong and active. Some of these competitors are substantially larger companies with greater resources. Management believes that these companies include AVL located in Graz, Austria, and Sverdrup, a system integrator based in Tennessee. The Company competes primarily on the basis of product diversity, features and functions, price/performance, flexibility, and technical support. In addition, the Company believes that an additional competitive factor in the automotive market is its installed base in the United States. The Company believes that it competes favorably with respect to all these factors. Systems integration experience and ability is increasingly a factor in large system orders and the Company believes that it has the personnel and the resources to ably compete in this area, although many of its competitors are substantially larger with greater resources. PROPRIETARY RIGHTS The Company relies upon a combination of copyright, trade secret laws and non-disclosure and licensing agreements to establish and maintain its proprietary rights to its products. The laws of certain foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. Although the Company continues to implement protective measures and intends to defend its proprietary rights, there can be no assurance that these measures will be successful. The Company believes, however, that, because of the rapid pace of technological change in the automated test, measurement and control industries, the legal protections for its products are less significant factors in the Company's success than the knowledge, ability, and experience of the Company's employees, the frequency of product enhancements and the timeliness and quality of support services provided by the 6 Company. The Company is subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights. Certain technology used in the Company's products is licensed from third parties on a non-exclusive basis. These license agreements generally require the Company to pay royalties and to fulfill confidentiality obligations in order to maintain the licenses. The termination of any of these licenses may have a material adverse effect on the Company's operations. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of its products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms. EMPLOYEES The Company had 145 employees at January 31, 1998. Of these employees, 92 worked in manufacturing and engineering, 37 in marketing and sales and 16 in administration. None of the Company's employees is represented by a labor union and there has never been a disruption of operations due to labor dispute. 7 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth information as to each executive officer as of March 31, 1998:
NAME AGE OFFICE F. Gil Troutman, Jr. 54 President and Chief Executive Officer Alan S. Broad 51 Senior Vice President Joe M. Millares, Jr. 44 Vice President, Finance, Chief Financial Officer and Secretary Larry Moulton 52 Director of Operations
All officers are elected by the Board of Directors (the "Directors"). Elected officers hold office until the first meeting of the Directors following the Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a successor is chosen and qualified. There are no family relationships among the officers and/or directors. Mr. Troutman has served as Chief Executive Officer since October 1989 and as a Director and President since July 1988. From 1985 until July 1988, Mr. Troutman held the position of Product Line Manager of the Test Systems and Instruments Group of GenRad, Inc. Prior to this, he held various other management positions with GenRad, Inc. since 1967, including the position of National Sales Manager of all GenRad products from 1982 to 1985. Dr. Broad has served as Senior Vice President since March 1986 and as Vice President of Engineering since April 1985. In 1981, Dr. Broad co-founded Transiac and served as Director and Vice President of Transiac until it was acquired by the Company in 1985. Mr. Millares has served as Vice President, Finance, Chief Financial Officer and Secretary since October 1989, and as Controller since September 1984. From 1980 to 1984, he served as Corporate Controller for Transend Corporation, a data communications software/hardware company. Mr. Millares is a Certified Public Accountant in California. Mr. Moulton has served as Director of Operations since November 1996 and was elected as an executive officer of the Company in February 1997. From 1994 to 1996, he served as Vice President of Sales and Marketing for Eagle Test Systems, Inc., a manufacturer of test systems for the semiconductor industry. From 1990 to 1994, he held the positions of General Manager, Data Acquisition Division and Vice President of Keithley Instruments, Inc., a publicly-held manufacturer of hardware and software data acquisition products. ITEM 2: PROPERTIES The Company's facilities consist of approximately 28,000 square feet of space in Fremont, California and about 21,000 square feet of space in Ann Arbor, Michigan which are leased under operating leases. The Fremont facility lease which expires in October 1998 provides for monthly rent payments of $13,009 during the first year and progressing to $15,146 during the final year. The Company is currently negotiating to extend its Fremont facility lease. The Ann Arbor facility leases consist of a) a seven year lease for one building which expires in January 2000, providing for monthly rent payments starting in January 1993 of $8,551 during the first year and increasing annually until the monthly payments reach $10,257 during the seventh year; and b) a 31-month lease which expires in June 1999, with monthly rent payments of $4,308 from December 1996 through May 1998 and increasing to $4,602 per month thereafter. The Company is obligated to pay real estate taxes, insurance and maintenance expenses associated with the leased facilities. Management believes that the existing facilities are adequate for the Company's present operation. 8 ITEM 3: LEGAL PROCEEDINGS Not applicable. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended January 31, 1998. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's Common Stock is currently traded on the NASDAQ Market under the symbol DSPT. The following table sets forth, for the periods indicated, the high and low closing sales prices of the Common Stock as reported by NASDAQ.
Year ended January 31, 1998 Year ended January 31, 1997 --------------------------- --------------------------- High Low High Low ---- --- ---- --- First Quarter $ 6-3/8 $5-3/8 $6-5/8 $4-1/4 Second Quarter 6 4-7/8 6-3/4 5 Third Quarter 11-5/8 5-5/8 5-3/4 4-1/2 Fourth Quarter 11-5/16 8 6-5/8 4-1/4
HOLDERS The approximate number of holders of record of the Company's Common Stock at March 31, 1998 was 86. The Company believes that these recordholders hold beneficially for more than 500 shareholders. DIVIDEND POLICY The Company has not paid dividends on its common stock. The Board of Directors intends to retain earnings for the foreseeable future for the Company's business. There are no dividend restrictions in the Company's bank line of credit. ITEM 6: SELECTED FINANCIAL DATA The following table presents selected historical financial data for the Company derived from the audited financial statements of the Company and should be read in conjunction with Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and respective Notes thereto, included elsewhere in this report. 9 DSP Technology Inc. (In thousands, except per share amounts)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Operating Results Data (for the year): - ------------------------------------- Net sales $22,038 $17,987 $15,538 $12,977 $9,180 Net income 1,646 914 1,277 874 250 Net income per common share (diluted) .68 .40 .55 .40 .12 Balance Sheet Data (at year end): - -------------------------------- Working capital $ 8,173 $ 5,726 $ 5,472 $ 4,190 $3,644 Total assets 16,730 11,799 10,294 8,744 6,774 Long-term obligations -- -- -- -- -- Stockholders' equity 10,657 8,687 7,698 6,268 5,390
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table sets forth, for the indicated periods, the percentages that certain items in the Consolidated Statements of Income bear to net sales. The table and subsequent discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
Year ended January 31, ------------------------- 1998 1997 1996 ------- ------ ------ Net sales 100% 100% 100% Cost of sales 46 44 40 Research and development 11 12 14 Marketing, general and administrative 31 37 33 Operating income 12 7 13 Net income 7 5 8
Net sales increased by 23% to $22,038,000 in fiscal 1998 and by 16% to $17,987,000 in fiscal 1997. The increases in fiscal 1998 and fiscal 1997 were primarily due to continued increase in demand for the Company's RedLine data acquisition and control products and custom turnkey services. Cost of sales as a percentage of net sales were 46%, 44%, and 40% in fiscals 1998, 1997 and 1996, respectively. As anticipated, the increase in cost of sales for fiscal 1998 is a result of product mix with lower margin turnkey service-related revenues becoming a bigger part of the Company's business. The increase in cost of sales in fiscal 1997 primarily reflects the expansion of the service staff to increase the Company's capacity to build, install and commission RedLine products. These new personnel were brought on-board ahead of time to support expected growth in service-related revenues. Cost of sales for the Company's core products (e.g., RedLine ADAPT, RedLine ACAP) remain at historical 40% levels. Research and development expenses remained in the $2.2 million to $2.3 million range for the three years reported. As a percentage of net sales, however, research and development expenses decreased to 11% in fiscal 1998 from 12% and 14% in fiscals 1997 and 1996, respectively. The slight 10 increase in fiscal 1998 expenses in absolute dollars over the previous year was due to higher development costs associated with the new RedLine products that were recently introduced at the SAE Show in Detroit, Michigan. The decrease in expenses in fiscal 1997 was due primarily to the higher capitalization of software development costs in fiscal 1997 which more than offset increased personnel staffing. Marketing, general and administrative ("MG&A") expenses increased by 3% to $6,916,000 in fiscal 1998, and decreased as a percentage of sales to 31% in fiscal 1998 from 37% in fiscal 1997. The numbers reflect the Company's success this year in using its resources more efficiently. MG&A expenses increased by 30% to $6,708,000 (or 37% of sales) in 1997 from $5,145,000 (or 33% of net sales) in fiscal 1996. The increase in fiscal 1997 resulted from additional sales and marketing staff, costs associated with improvements in the Company's information technology infrastructure, and higher internal sales commissions due to higher shipments and sales bookings. Net other income in fiscal 1998 increased to $225,000 after decreasing to $123,000 in fiscal 1997 from $136,000 in fiscal 1996. On average, in 1998, the Company had greater available cash to invest or to take advantage of vendor early payment discounts this year than in fiscal 1997. The lower net other income in fiscal 1997 reflects lower available cash invested in interest-bearing accounts compared to fiscal 1996. The effective tax rates were approximately 40% in fiscal 1998, 33% in fiscal 1997, and 39% in fiscal 1996. The higher tax rates this year reflect higher domestic income contribution this year compared to last year. Domestic tax rates historically have been higher than the Company's foreign subsidiary's tax rates. The lower tax rates in fiscal 1997 reflect the increased profit contributions of the Company's UK subsidiary which benefited from a lower tax rate. Other factors that may affect the tax rates include R&D tax credits, differences in state tax rates, software capitalization levels and foreign income contributions. As a result of the factors discussed above, net income increased to $1,646,000, or $.68 per diluted share in fiscal 1998 compared to $914,000, or $.40 per diluted share in fiscal 1997 and to $1,277,000, or $.55 per diluted share in fiscal 1996. FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to the other information contained in this Report, the following are important factors that should be considered carefully in evaluating the Company and its business. New Products and Rapid Technological Change. The markets for the -------------------------------------------- Company's products are characterized by continued demands for increasingly sophisticated measurement and control systems and turnkey solutions. The Company's success depends upon its ability to introduce new products and to enhance its existing products with features that meet changing end user requirements. There can be no assurance that new products or enhancements will gain market acceptance or that the Company will be successful in developing product enhancements or new products that respond to technological change, evolving industry standards and changing customer requirements. Development and Management of Systems Integration Services. At the ----------------------------------------------------------- beginning of fiscal 1997, management began to expand the services side of our transportation market business. These services include systems integration, project management, commissioning and installation and, coupled with our RedLine products, management believes these capabilities will allow us to pursue further our growth in the transportation market by providing full-service to our customers. These services provide us the capability to provide turnkey systems where they are required. Hence, the Company has invested in project management, custom manufacturing, system integration, installation and commissioning staff 11 during the past two years. The Company believes that the successful marketing and expansion of its transportation products will be increasingly dependent on its ability to offer these services. However, the introduction of these services raises several risks for the Company. Specifically, the success depends on the time it takes for these personnel and future staff to come up to speed on our products, customers and the services they will provide; ability to compete for qualified personnel in various technical positions; market acceptance of the services; timing of service revenues; and the ability to manage customer projects profitably. The successful management of these projects depends on the timely availability and quality of key products, the availability of key personnel, the ability to integrate different products from a variety of vendors effectively and the management of difficult scheduling and delivery problems. Most of the Company's systems integration projects use fixed price contracts. The pricing of fixed price contracts requires accurate cost estimation in order to be profitable. Potential Fluctuations in Quarterly Results. The Company's quarterly ------------------------------------------- operating results may vary significantly, depending on a number of factors, some of which could adversely affect the Company's operating results and the trading price of the Company's Common Stock. These factors include timing of receipt of system orders from and shipments to major customers; variation in the Company's product mix and component costs; economic conditions prevailing within the Company's geographic markets and in the world-wide automotive industry; market acceptance of new products and services; the timing and levels of operating expenditures; and exchange rate fluctuations. Any unfavorable change in these or other factors could have a material adverse effect on the Company's operating results for a particular quarter. Quarterly sales depend in part on the volume and timing of orders received during a quarter, which are difficult to forecast. Moreover, a disproportionate percentage of the Company's net sales in any quarter are typically generated in the last month of a quarter. As a result, a shortfall in net sales in any quarter as compared to expectations may not be identifiable until the end of the quarter. In addition, a significant portion of the Company's sales are derived from a few customers. Hence, a decrease in the purchasing levels from one or more of these customers could adversely impact operating results. Dependence on International Sales. Part of the Company's revenue growth in --------------------------------- the past few years was due to increases in the Company's international sales, particularly in Western Europe and Asia. International sales accounted for approximately 35%, 32%, and 18% of net sales in fiscals 1998, 1997 and 1996. The Company's international sales are subject to the risks inherent in international sales, including political and economic changes and disruptions, various regulatory requirements, and tariffs or other barriers. In addition, fluctuations in exchange rates may render the Company's products less competitive relative to local product offerings or may cause foreign customers to delay or decrease potential orders. One or more of these factors may have a material effect on the Company's future international sales and, consequently, on the Company's operating results. Competition. The markets for the Company's products are intensely ----------- competitive and subject to rapid technological change. Some of the Company's competitors have significantly greater financial, technical, product development, manufacturing or marketing resources than the Company. In addition, some of these competitors have a larger installed base than the Company, particularly outside the United States. The Company believes that its ability to compete depends on a number of factors, including price, product functionality, product quality and reliability, system integration capabilities, and post-sale service and support. There can be no assurance that the Company will be able to continue to compete successfully with respect to these factors. Competitors could introduce additional products or add features to their existing products that are superior to the Company's products or that achieve greater market acceptance. Because of the foregoing factors, as well as other factors affecting the Company's operating 12 results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $8,145,000 at January 31, 1998 from $5,726,000 at January 31, 1997, while the current ratio decreased to 2.5 to 1.0 from 3.0 to 1.0. In fiscal 1998, cash and cash equivalents increased to $4,701,000 from $1,323,000 due primarily to a $3,915,000 increase in operating activities and lower capital expenditure levels. At January 31, 1998, the Company had a $1,000,000 secured bank line of credit. Cash flows generated from operations in fiscal 1998 include $1,128,000 received from customers as deposits on future orders, the revenues of which will be recognized in future periods. As such, cash flows from operations will be proportionately reduced in these periods. The Company's management believes that cash and cash equivalents, funds from operations and funds available under its bank line of credit will be sufficient to satisfy its anticipated requirements in 1999. At January 31, 1998, the Company had no material outstanding commitments to purchase capital equipment. YEAR 2000 COMPLIANCE The Company believes that its products are Year 2000 compliant. The Company is currently reviewing its internal management information systems, billing, outside payroll and other informational service functions to determine the nature and extent of any Year 2000 issues related to such functions. In addition, Year 2000 issues may also arise with respect to products furnished by third-party suppliers that may result in unforseen costs or delays to the Company and therefore may have a material adverse effect on the Company. 13 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DSP TECHNOLOGY INC. AND SUBSIDIARIES Index to Consolidated Financial Statements
Page ---- Report of Independent Certified Public Accountants 15 Consolidated Balance Sheets 16 Consolidated Statements of Income 17 Consolidated Statement of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 20 Index to Supplementary Data Auditors Report on Schedule 29 Valuation and Qualifying Accounts 30
14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of DSP Technology Inc.: We have audited the accompanying consolidated balance sheets of DSP Technology Inc. and subsidiaries as of January 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DSP Technology Inc. and subsidiaries as of January 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. GRANT THORNTON LLP San Jose, California March 6, 1998 15 DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
January 31, ------------------------ 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 4,701 $ 1,323 Accounts receivable, net of allowance for doubtful accounts of $150 in 1998 and $50 in 1997 5,581 4,784 Inventories 2,682 2,015 Deferred income taxes 577 266 Prepaid expenses and other 216 192 ------- ------- Total current assets 13,757 8,580 Property and equipment, net 1,341 1,540 Cost in excess of net assets of acquired business, net of accumulated amortization of $641 in 1998 and $523 in 1997 244 362 Other assets 1,388 1,317 ------- ------- $16,730 $11,799 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 687 $ 799 Accrued liabilities 3,755 1,849 Income taxes payable 1,142 206 ------- ------- Total current liabilities 5,584 2,854 Deferred income taxes 489 258 Commitments -- -- Stockholders' equity: Preferred stock; 2,500,000 shares authorized; none issued -- -- Common stock; 25,000,000 shares authorized, $.001 par value; shares issued and outstanding: 2,264,860 in 1998 and 2,179,962 in 1997 3,301 2,988 Retained earnings 7,356 5,699 ------- ------- Total stockholders' equity 10,657 8,687 ------- ------- $16,730 $11,799 ======= =======
The accompanying notes are an integral part of these financial statements. 16 DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Year ended January 31, ---------------------------- 1998 1997 1996 ------- ------- -------- Net sales $22,038 $17,987 $15,538 Cost of sales 10,227 7,842 6,187 ------- ------- ------- Gross profit 11,811 10,145 9,351 Operating expenses: Research and development 2,352 2,203 2,250 Marketing, general and administrative 6,916 6,708 5,145 ------- ------- ------- 9,268 8,911 7,395 ------- ------- ------- Operating income 2,543 1,234 1,956 Other income, net 225 123 136 ------- ------- ------- Income before income taxes 2,768 1,357 2,092 Income taxes 1,122 443 815 ------- ------- ------- Net income $ 1,646 $ 914 $ 1,277 ======= ======= ======= Net income per share: Basic $ .74 $ .42 $ .60 ======= ======= ======= Diluted $ .68 $ .40 $ .55 ======= ======= ======= Weighted average shares used in computing basic net income per share 2,211 2,168 2,130 ======= ======= ======= Weighted average shares and equivalents used in computing diluted net income per share 2,437 2,304 2,331 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 17 DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
Common stock Total ---------------- Retained stockholders' Shares Amount earnings equity ------ ------- -------- ------------- Balance at January 31, 1995 2,109 $2,767 $3,501 $ 6,268 Exercise of stock options 45 153 153 Net income 1,277 1,277 ----- ------ ------ ------- Balance at January 31, 1996 2,154 $2,920 $4,778 $ 7,698 Exercise of stock options 26 68 68 Foreign exchange translations 7 7 Net income 914 914 ----- ------ ------ ------- Balance at January 31, 1997 2,180 $2,988 $5,699 $ 8,687 Exercise of stock options 85 313 313 Foreign exchange translations 11 11 Net income 1,646 1,646 ----- ------ ------ ------- Balance at January 31, 1998 2,265 $3,301 $7,356 $10,657 ===== ====== ====== =======
The accompanying notes are an integral part of this financial statement. 18 DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended January 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities: Net income $1,646 $ 914 $ 1,277 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,107 847 741 Deferred income taxes (80) 217 -- Changes in operating assets and liabilities: Accounts receivable (797) (1,482) (299) Inventories (667) 180 (388) Prepaid expenses and other (24) (149) (35) Accounts payable (112) 340 (103) Accrued liabilities 1,906 478 (28) Income taxes payable 936 (416) 252 ------ ------- ------- Net cash provided by operating activities 3,915 929 1,417 ------ ------- ------- Cash flows from investing activities: Purchases of property and equipment (407) (1,015) (521) (Purchases) redemptions of certificates of deposit, net -- 199 (199) Investment in software development (517) (630) (322) Other 74 (44) (46) ------ ------- ------- Net cash used in investing activities (850) (1,490) (1,088) ------ ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock 313 68 153 ------ ------- ------- Increase (decrease) in cash and cash equivalents 3,378 (493) 482 Cash and cash equivalents at beginning of period 1,323 1,816 1,334 ------ ------- ------- Cash and cash equivalents at end of period $4,701 $ 1,323 $ 1,816 ====== ======= ======= Supplemental disclosure of cash flow information: Cash paid during year for income taxes $ 23 $ 639 $ 433 ====== ======= ======= Cash paid during year for interest $ 22 $ 22 $ 12 ====== ======= =======
The accompanying notes are an integral part of these financial statements. 19 DSP TECHNOLOGY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS. The Company is engaged in a single business consisting of the design, manufacture, integration, marketing and maintenance of high-speed, computer-automated measurement and control systems for the worldwide automotive powertrain, vehicle safety and advanced research and development markets. The Company's principal markets are in the United States, United Kingdom, Western Europe, and the Far East. The Company's fiscal year ends on the Sunday nearest to January 31. However, for financial statement purposes, each fiscal year is presented as if it ended on January 31. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. INVENTORIES. Inventories are stated at the lower of cost (first-in, first- out) or market. REVENUE RECOGNITION. The Company recognizes revenue primarily upon shipment. The Company's systems integration projects use fixed price contracts and revenue is recognized as it is earned pursuant to contract terms. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the assets (three to seven years) or the lease term if shorter. INTANGIBLE ASSETS. Cost in excess of net assets (`goodwill') is amortized on a straight line basis over 25 years. The Company evaluates the realizability of goodwill by comparing the carrying value to the undiscounted future cash flows of the related assets. Purchased technology, is included in other assets and amortized over five years. Effective February 1, 1996, impairments, if any, are recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to Be Disposed Of," if applicable. RESEARCH AND DEVELOPMENT. Expenditures for research and development are expensed as incurred, except for certain costs incurred in developing computer software to be sold, which have been capitalized in accordance with the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." Such costs are capitalized once technological feasibility of the product has been established. Capitalized software costs aggregated $517,000, $630,000 and $322,000 for the years ended January 31, 1998, 1997 and 1996, respectively. Capitalized software is included in other assets and is being amortized over the life of the product on a straight-line basis. The Company evaluates the realizability of capitalized software on an ongoing basis relying on a number of factors including operating results, business plans, market trends and product development cycles. INCOME TAXES. The Company accounts for income taxes using an asset and liability approach for financial accounting and reporting purposes. 20 NET INCOME PER SHARE. The Company adopted SFAS No. 128, "Earnings per Share," in the fourth quarter of fiscal 1998. Under SFAS No. 128, the Company presents two earnings per share ("EPS") amounts. Basic EPS is calculated based on net income available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding. All prior period EPS amounts have been restated to conform to the provisions of the statement.
Year ended January 31, ------------------------ 1998 1997 1996 ------ ------ ------ (In thousands, except per share amounts) Number of shares on which basic EPS is calculated: Average outstanding during the year 2,211 2,168 2,130 Add: Incremental shares under stock option plans 226 136 201 ------ ------ ------ Number of shares on which diluted EPS is calculated 2,437 2,304 2,331 ====== ====== ====== Net income $1,646 $ 914 $1,277 ====== ====== ====== Basic EPS $ .74 $ .42 $ .60 Diluted EPS $ .68 $ .40 $ .55
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents. These instruments are recorded at their carrying values which approximate fair values because of their short maturity. USING ESTIMATES. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS. Certain reclassifications have been made in the fiscal 1997 financial statements to conform with the fiscal 1998 presentation. RECENTLY ISSUED ACCOUNTING STANDARDS. In fiscal 1999, the Company will implement two accounting standards issued by the Financial Accounting Standards Board in June 1997. SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," will have no effect on the Company's financial position or results of operations as they require only changes in or additions to current disclosures. During 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue Recognition." This SOP provides guidance on revenue recognition on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company is taking steps to meet the requirements of the SOP and expects that it will not have a material effect on the financial position or results of operations of the Company. 21
NOTE B - INVENTORIES Inventories consist of: January 31, ----------- 1998 1997 ---- ---- (Thousands) Raw materials $ 1,695 $ 1,221 Work-in-process 637 476 Finished goods 350 318 ------- ------- $ 2,682 $ 2,015 ======= =======
NOTE C - PROPERTY AND EQUIPMENT Property and equipment consist of:
January 31, ----------- 1998 1997 ---- ---- (Thousands) Machinery and equipment $ 734 $ 717 Office furniture 1,914 1,717 Computer equipment 2,263 2,070 ------- ------- 4,911 4,504 Accumulated depreciation and amortization (3,570) (2,964) ------- ------- $ 1,341 $ 1,540 ======= =======
NOTE D - Other Assets Other assets consist of:
January 31, ----------- 1998 1997 ---- ---- (Thousands) Capitalized software, net of accumulated amortization of $849 in 1998 and $544 in 1997 $ 1,199 $ 987 Purchased technology, net of accumulated amortization of $264 in1998 and $190 in 1997 104 178 Other 85 152 ------- ------- $ 1,388 $ 1,317 ======= =======
NOTE E - BANK LINE OF CREDIT At January 31, 1998, the Company has a $1,000,000 line of credit with a bank renewable annually in May. Under the provisions of the line of credit agreement, the Company may borrow amounts up to $1,000,000 at the bank's prime rate of interest (8.50% at January 31, 1998). Borrowings are collaterized by all unencumbered assets of the Company and the Company must maintain certain financial ratios and be profitable on an annual basis. There was no outstanding balance at January 31, 1998 or 1997. Funds were borrowed at a weighted average interest rate of 8.63% and 8.15% during 1998 and 1997, respectively. 22 NOTE F - ACCRUED LIABILITIES Accrued liabilities consist of:
January 31, ----------- 1998 1997 ---- ---- (Thousands) Employee compensation and benefits $ 755 $ 605 Commissions 112 105 Customer deposits 1,969 841 Other 919 298 ------ ------ $3,755 $1,849 ====== ======
NOTE G - INCOME TAXES Earnings before taxes consists of:
Year ended January 31, ---------------------- 1998 1997 1996 ---- ---- ---- (Thousands) U.S. operations $2,269 $ 962 $1,883 Foreign operations 499 395 209 ------ ------ ------ $2,768 $1,357 $2,092 ====== ====== ======
Income tax expense consists of:
Year ended January 31, ---------------------- 1998 1997 1996 ---- ---- ---- (Thousands) Currently payable: Federal income taxes $ 800 $ 67 $ 575 State income taxes 227 43 182 Foreign taxes 175 116 58 ------ ------ ------ 1,202 226 815 Deferred: Federal income taxes (71) 184 -- State income taxes (9) 33 -- ------ ------ ------ (80) 217 -- ------ ------ ------ $1,122 $ 443 $ 815 ====== ====== ======
The difference between income tax rates computed by applying the Federal statutory income tax rate to income before income taxes and the actual effective tax rate is reconciled as follows:
Year ended January 31, ------------------------- 1998 1997 1996 ------- ------ ------ Federal statutory rate 34.0% 34.0% 34.0% Goodwill .5 1.1 .7 State income taxes 5.4 2.7 5.7 Research and development credits (1.8) (3.3) (1.8) Benefit of foreign sales corporation (1.0) (3.8) (1.6) Other 2.4 2.0 1.9 ---- ---- ---- Effective tax rate 40.5% 32.7% 38.9% ==== ==== ====
At January 31, 1998 and 1997, respectively, the major components of deferred tax assets are: 23 inventory reserves and cost capitalization - $ 284,000 and $ 102,000; receivable and warranty reserves - $ 105,000 and $ 35,000; and accrued compensation-$ 126,000 and $90,000. The major item in non-current deferred tax liabilities is research and development expenses of $481,000 at January 31, 1998 and $335,000 at January 31, 1997. NOTE H - STOCK OPTION PLANS The Company has two stock option plans, the 1991 Option Plan ("1991 Option Plan") and the 1991 Directors Option Plan ("1991 Directors Option Plan") accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. The 1991 Option Plan provides for the granting of incentive and non-statutory options to employees (including officers and directors who are employees). The 1991 Directors Option Plan provides for the granting of nonqualifed stock options to directors of the Company who are not employees of the Company. The options, which have terms of five or ten years when issued, typically vest over three years. The exercise price of each option equals the market price of the Company's stock on the date of grant or, in the case of those holding more than 10% of the Company's outstanding common stock, 110% of the market price. Accordingly, no compensation cost has been recognized for grants from either plan. A total of 1,018,327 shares of the Company's common stock have been reserved for issuance under the 1991 Option Plan, of which 214,365 shares are available for grant at January 31, 1998. The 1991 Directors Option Plan has 75,000 common stock shares reserved, of which 12,000 shares are available for grant at January 31, 1998. Had compensation costs for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and income per share would have been reduced to the pro forma amounts indicated below. Pro forma results may not be indicative of pro forma results in future periods because the pro forma amounts do not include pro forma compensation cost for options granted prior to February 1, 1995.
Year ended January 31, ------------------------- 1998 1997 1996 ------- ----- ------- Net income (In thousands): As reported $1,646 $ 914 $1,277 Pro forma $1,310 $ 678 $1,158 Net income per share (diluted): As reported $ .68 $ .40 $ .55 Pro forma $ .55 $ .30 $ .51
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model. 24 A summary of the status of the various stock option plans as of January 31, and changes during the years ending on those dates is presented below.
1998 1997 1996 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ---------- ------ --------- ------ ---------- (In thousands) (In thousands) (In thousands) Outstanding at beginning of year 602 $4.47 555 $4.29 452 $3.48 Granted 103 6.09 95 5.11 165 6.36 Exercised (85) 3.69 (25) 2.67 (45) 3.40 Forfeited (20) 5.90 (23) 4.81 (17) 5.46 --- --- --- Outstanding at end of year 600 4.81 602 4.47 555 4.29 Weighted-average fair value of options granted during the year $4.27 $3.18 $3.99 Expected term (years) 7 6 6 Volatility 67.0% 60.0% 60.0% Risk free interest rate 6.3% 6.8% 6.5% Dividend yield -- -- --
The following information applies to options outstanding at January 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------- -------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise Range of Exercise Prices at 1/31/98 Life Price at 1/31/98 Price - ----------------------------- ------------ ----------- --------- ------------ --------- (In thousands) (In years) (In thousands) $0.875 - 1.250 37 2 $1.23 37 $1.23 2.625 - 3.875 156 6 3.21 156 3.21 4.000 - 6.000 210 8 5.16 112 5.03 6.125 - 9.375 197 9 6.36 92 6.33
NOTE I - COMMITMENTS Leases. The Company leases its facilities in Fremont, California and Ann Arbor, Michigan under operating leases which expire in October 1998 and January 2000, respectively. Rental expenses were $350,000 in 1998, $303,000 in 1997, and $286,000 in 1996. Future minimum rental commitments for all leases with initial non- cancelable lease terms of more than one year are $310,000 in 1999 and $141,000 in 2000. NOTE J - MAJOR CUSTOMERS AND FOREIGN OPERATIONS One customer accounted for 21%, 18% and 11% of net sales for 1998, 1997 and 1996, respectively. One other customer accounted for 14% of net sales in 1998. 25
Foreign sales were as follows: Year ended January 31, ------------------------------- 1998 1997 1996 ----------- -------- ------ (In thousands) United Kingdom ("UK") $ 2,636 $2,904 $1,120 Asia/Pacific Rim 3,496 1,476 1,322 Western Europe, excluding UK 1,457 1,352 367 Other countries 152 28 47 ------- -------- ------ $ 7,741 $5,760 $2,856 ======= ======== ======
A summary of the Company's operations by geographic area is presented below:
Year ended January 31, -------------------------- 1998 1997 ---- ---- (Thousands) Net Sales United States $20,514 $16,311 United Kingdom 2,636 2,904 Eliminations (1,112) (1,228) Operating Margin United States $ 2,022 $ 885 United Kingdom 501 395 Eliminations 20 (46) Identifiable Assets United States $15,229 $10,864 United Kingdom 1,770 1,391 Eliminations (269) (456)
NOTE K - EMPLOYEE BENEFIT PLAN The Company has established the DSP Technology Inc. 401(k) Profit Sharing Plan covering substantially all employees of the Company who have at least six months of service and are at least twenty-one years of age. The amount participants may voluntarily contribute in any year is established by law and subject to cost of living adjustments. The Company has the option to make matching contributions on a year to year basis. Contributions to the plan by the Company in 1998, 1997, and 1996 aggregated $85,000, $69,000, and $46,000, respectively. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS Information with respect to the Registrant's directors contained in Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption, "ELECTION OF DIRECTORS," is hereby incorporated by reference. Information with respect to executive officers of the Registrant is contained in 26 Part I of this Report. ITEM 11: EXECUTIVE COMPENSATION Information contained in Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER MATTERS" is hereby incorporated by reference. ITEM 12: SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained in Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption, "GENERAL INFORMATION---Stock Ownership of Certain Beneficial Owners and Management" is hereby incorporated by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained in Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER MATTERS---Certain Relationship and Related Transactions" is hereby incorporated by reference. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The financial statements required in accordance with this Item have been filed as part of this Report under Part II, Item 8. (a)(2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedule has been filed as part of this Report:
Schedule Description Page No. - -------- ----------- -------- Auditors' Report on Schedule 29 II Valuation and Qualifying Accounts 30
Financial statement schedules not listed above have been omitted because the information required to be set forth therein is inapplicable or is shown in the Consolidated Financial Statements or Notes thereto. 27 (a)(3) Exhibits The following exhibits are filed or incorporated by reference as part of this Report: Ex. No. Description - ------- --------------------------------------------- 3.1 Certificate of Incorporation (1) 3.2 Amendment to Restated By-laws (1) 10.1 Profit Sharing Plan Employees' Retirement Trust (2) ** 10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) ** 10.3 1991 Directors Stock Option Plan, as amended (4) ** 10.4 Form of 1991 Directors Stock Option Plan Agreement (3) ** 10.5 1991 Stock Option Plan , as amended (4) ** 10.6 Form of 1991 Stock Option Plan Agreement (3) ** 10.7 Lease Agreement dated July 15, 1992 between Varsity Drive Company Inc. and DSP Technology Inc. (4) 10.8 Lease Agreement dated August 2, 1993 between Minos Management Company and DSP Technology Inc.(5) 10.9 Strategic Alliance Agreement By and Between FEV Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated February 26, 1995. + 10.10 Form of Indemnity Agreement 21.1 Subsidiaries of Registrant (5) 23.1 Consent of independent Certified Public Accountants (to incorporate report on consolidated financial statements into Company's Form S-8 Registration Statements) 24.1 Power of Attorney (6) 27.1 Financial Data Schedule ___________________________________ ** Compensatory plan or arrangement.____________ + Confidential treatment has been requested for certain portions of this exhibit. (1) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18, 1997. (2) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987. (3) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992. (4) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993. (5) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994. (6) Included on page 33 to this Report. (b) REPORTS ON FORM 8-K None. 28 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Stockholders of DSP Technology Inc.: In connection with our audits of the consolidated financial statements of DSP Technology Inc. and subsidiary companies referred to in our report dated March 6, 1998, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended January 31, 1998. In our opinion, this schedule presents fairly the information required to be set forth therein. San Jose, California March 6, 1998 29 Schedule II DSP TECHNOLOGY Inc. Valuation and Qualifying Accounts (Thousands)
Additions Balance at Charged to Balance at Beginning Costs and at End of Year Expenses Deductions of Year ---------- -------- ----------- ---------- Allowance for doubtful accounts: Year ended: January 31, 1996.............. 50 0 0 (1) 50 January 31, 1997.............. 50 0 0 (1) 50 January 31, 1998.............. 50 100 0 (1) 150 Reserve for inventory obsolescence: Year ended: January 31, 1996.............. 244 71 (24) 291 January 31, 1997.............. 291 0 (133) 158 January 31, 1998.............. 158 309 0 467
(1) Uncollectible accounts written off, net of recoveries 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 21st day of April 1998. DSP TECHNOLOGY INC. By: /s/ Jose M. Millares ---------------------------------- JOSE M. MILLARES Chief Financial Officer 31 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints F. Gil Troutman, Jr. and Jose M. Millares, Jr., or either of them, his attorneys-in-fact, each with power of substitution, for him in any and all capacities, to sign this Annual Report on Form 10-K, and any amendments thereto, and to file the same, with Exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ Howard O. Painter, Jr. Chairman of the Board April 15, 1998 - -------------------------- Howard O. Painter, Jr. /s/ F. Gil Troutman, Jr. Director, Chief Executive Officer April 15, 1998 - ------------------------ and President (Principal F. Gil Troutman, Jr. Executive Officer) /s/ Jose M. Millares Vice President, Finance April 15, 1998 - -------------------- (Principal Financial Jose M. Millares and Accounting Officer and Secretary) /s/ J. Scott Kamsler Director April 15, 1998 - -------------------- J. Scott Kamsler /s/ Michael A. Ford Director April 15, 1998 - ------------------- Michael A. Ford 32 EXHIBIT INDEX Ex. No. Description - ------- --------------------------------------------- 3.1 Certificate of Incorporation (1) 3.2 Amendment to Restated By-laws (1) 10.1 Profit Sharing Plan Employees' Retirement Trust (2) ** 10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) ** 10.3 1991 Directors Stock Option Plan, as amended (4) ** 10.4 Form of 1991 Directors Stock Option Plan Agreement (3) ** 10.5 1991 Stock Option Plan, as amended (4) ** 10.6 Form of 1991 Stock Option Plan Agreement (3) ** 10.7 Lease Agreement dated July 15, 1992 between Varsity Drive Company Inc. and DSP Technology Inc. (4) 10.8 Lease Agreement dated August 2, 1993 between Minos Management Company and DSP Technology Inc.(5) 10.9 Strategic Alliance Agreement By and Between FEV Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated February 26, 1995. + 10.10 Form of Indemnity Agreement 21.1 Subsidiaries of Registrant (5) 23.1 Consent of independent Certified Public Accountants (to incorporate report on consolidated financial statements into Company's Form S-8 Registration Statements) 24.1 Power of Attorney (6) 27.1 Financial Data Schedule ___________________________________ ** Compensatory plan or arrangement. + Confidential treatment has been requested for certain portions of this exhibit. (1) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18, 1997. (2) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987. (3) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992. (4) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993. (5) Incorporated by reference to the corresponding Exhibit filed as part of the Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994. (6) Included on page 33 to this Report. (b) REPORTS ON FORM 8-K None. 33 EX-10.9 2 STRATEGIC ALLIANCE AGREEMENT BETWEEN FEV AND DSP EXHIBIT 10.9 STRATEGIC ALLIANCE AGREEMENT BY AND BETWEEN FEV MOTORENTECHNIK GMBH & CO. KG AND DSP TECHNOLOGY INC. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. STRATEGIC ALLIANCE AGREEMENT This Agreement is entered into by and between FEV Motorentechnik GmbH & Co. KG ("FEV") with a place of business at Neuenhofstrasse 181, D-52078 Aachen and DSP Technology Inc. ("DSPT") with a place of business at 48500 Kato Road, Fremont, California 94538. The effective date of this Agreement shall be February 26, 1995 ("Effective Date"). WHEREAS, FEV and DSPT, providing complementary products, desire to combine resources to survive the strong competition in the field of test and instrumentation products for the Transportation Industry. NOW THEREFORE, the Parties agree to enter into a strategic alliance to achieve the aforementioned goals and hereby agree as follows: 1. Definitions. This Agreement and the definitions herein are limited to Test ----------- and Instrumentation Products, unless otherwise explicitly stated. 1.1 Continuous Product Improvement shall mean minor changes to software or ------------------------------ hardware such as bug fixes, hardware ECOs (internal engineering change orders) without adding new functionality (features and/or functions) to a Product or PreExisting Product. These do not require a Product Appendix. 1.2 Competitor shall mean any person or legal entity and its subsidiaries ---------- which develops and/or markets one or more products or services for the Transportation Industry which are the same or substantially similar to those of DSPT or FEV, respectively. Competitors of each Party shall be set forth under the other Party's name (as Target) on the Competitor List, which shall be initially delivered and executed by both Parties upon execution of this Agreement and which may be modified from time to time by mutual agreement of the Management Team, as evidenced by each Party executing such revised Competitor List. Neither Party shall unreasonably withhold approval of modifications to the other Party's Competitor List to add an entity as a Competitor of a Party in cases of evident and substantial competition by an entity with such Party. 1.3 Developers shall mean employees, agents or contractors of either Party. ---------- 1.4 Documentation shall mean any and all of the documents and other ------------- materials, prepared in accordance with industry standards and practices, relating to the Independent Technology or Joint Technology necessary to manufacture the Products, PreExisting Products or Enhanced Products. 1.5 Enhancements shall mean any additions to functionality (new features ------------ and/or functions), specifically designed for use in and primarily sold to the Transportation Industry, to any Product, PreExisting Product or Enhanced Product hardware and/or software, which is successfully developed pursuant to a Product Appendix. 1.5.1 Customer Proprietary Enhancement shall mean a customer -------------------------------- requested addition or change in functionality (features or functions) in Products, PreExisting Products or Enhanced Products, in either hardware or software, that is proprietary to that customer, and such customer has requested in writing not to share such proprietary information with the other Party. While these do not require a Product Appendix, to the extent permissible, the developing Party must inform the other Party in writing that such Customer Proprietary Enhancements have been requested. 1.5.2 Localized Enhancement shall mean an Enhancement with --------------------- specialized functions for a particular market or customer where such Enhancement is not proprietary to such customer. This requires a Product Appendix. 1.6 Enhanced Product shall mean a PreExisting Product or New Product ---------------- with one or more Enhancements. 1.7 Free Products shall mean [*]. All Free Products in existence as ------------- of the Effective Date shall be set forth on the "Free Products List," which shall be initially delivered and executed by the Management Team upon execution of this Agreement. The Free Products List may be modified from time to time by mutual agreement of both Parties, as evidenced by the Management Team executing such revised Free Products List. 1.8 GPM (Guidelines for Product Management) shall mean guidelines -------------------------------------- which [*]. 1.9 Group Managers shall mean the highest ranking manager of each -------------- Party who is directly responsible for that Party's integrated Test and Instrumentation Products for the Transportation Industry. 1.10 Independent Technology shall mean Technology solely owned by ---------------------- either Party which is not publicly available and which is in existence and has been incorporated into a PreExisting Product or a Free Product or any other product solely owned by either Party as of the date it is contributed to a Product Appendix pursuant to Paragraph 12.2 ("Technology Exchange"). 1.11 Intellectual Property Rights shall mean all patents and other ---------------------------- patent rights (such as continuations, continuations in part, and reissues), utility models, copyrights and mask work rights, including without limitation, all applications and registrations with respect thereto, rights in trade secrets, know-how, trademarks and trade names and all other intellectual property rights which are held by one or both Parties in any jurisdiction. 1.12 Invention shall mean any Invention or discovery which is or may --------- be patentable or otherwise protectable under Title 35 of the United States Code or Section 1 et seq. of the German Patentgesetz and Gebrauchsmustergesetz (the "Patent Laws") as applicable. For the purposes of this Agreement, an invention or discovery shall be deemed to be an Invention when a Party determines that it is patentable under the Patent Laws of that Party's nationality, or the Parties mutually determine that it is patentable under either of the Patent Laws. 1.13 Joint Inventions shall mean those Inventions that [*]. ---------------- [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2 1.14 Joint Technology shall mean [*]. ---------------- 1.15 Management Team shall mean Geschftsfuhrender Gesellschafter of --------------- FEV and CEO of DSPT. 1.16 Manufacturing Cost shall mean [*]. ------------------ 1.17 New Product shall mean [*]. The New Products include but are not ----------- limited to those Products listed on the New Products List initially delivered and executed by both Parties upon execution of this Agreement. 1.18 Net Realized Revenue shall mean the price paid by the customer -------------------- for Products, PreExisting Products and Enhanced Products, and documented in the invoice, [*]. 1.19 Parallel Product shall mean a product, [*]. ---------------- 1.20 Party shall mean either FEV or DSPT, and Parties shall mean FEV ----- and DSPT. 1.21 PreExisting Product shall mean [*]. ------------------- 1.22 Patents shall mean all patents owned solely by a Party, or ------- jointly by the Parties. 1.23 Product(s) shall mean: ---------- (i) Enhancements (ii) Localized Enhancements (iii) New Products [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3 1.24 Product Appendix shall mean [*]. The Product Appendix Form shall ---------------- be developed by the Parties and delivered upon execution of this Agreement, and may be modified from time to time by mutual agreement of both Parties. Each Product Appendix shall incorporate by reference the terms and conditions of this Agreement. Draft Product Appendices for those products on the New Product List and for certain Enhancements and PreExisting Products shall be initially delivered and executed by the Parties upon execution of this Agreement and shall be modified and completed after the Effective Date, as evidenced by the mutual execution of such Product Appendices by the Parties. 1.25 Product Development shall mean the development of Enhancements ------------------- and New Products, in addition to the Continuous Product Improvement of PreExisting Products, Enhancements, and New Products. 1.26 Product Leader shall mean the Party who is responsible for -------------- complete product management consistent with the terms of the Product Appendix. The initial Product Leaders are set forth on the Product Leader List initially delivered and executed by both Parties upon execution of this Agreement. 1.27 Product Managers shall mean those managers within FEV and DSPT ---------------- that are responsible for the product management of Products, PreExisting Products and Enhanced Products and for resolving in good faith by unanimous agreement any issues relating to their responsibilities. One Product Manager shall be appointed by the Group Manager for each Party for each Product Appendix in accordance with Paragraph 4.7 ("Management"). 1.28 Product Share Tables shall mean tables included in each Product -------------------- Appendix defining for each Product, PreExisting Product and Enhanced Product [*]. 1.29 Proprietary Information shall mean, except as otherwise ----------------------- provided in this Agreement, all information marked or designated by a Party as "Proprietary" or "Confidential;" and all information, whether or not in written form, which the receiving Party knows or has reason to know is confidential information of the other Party. As used herein, Proprietary Information includes, but is not limited to, discoveries, ideas, designs, drawings, specifications, techniques, models, data, documentation, customer lists, marketing plans, and financial and technical information. 1.30 Rest of World ("ROW") shall mean [*]. --------------------- 1.31 Technology shall mean proprietary expertise, algorithms, ---------- Inventions, trade secrets, ideas, know-how, Patents, copyrightable works, data, designs, processes, specifications, fabrication techniques or parameters or procedures, packaging techniques, recipes, device structures, chemical constituents and formulations, patent applications, and other information owned solely or jointly by the Parties relating to products for the Transportation Industry, including their design, development, manufacture, fabrication, testing or servicing. Technology shall not include Third Party Technology. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4 1.32 Territory shall mean such countries [*] as set forth on the --------- Territory List to be initially delivered and executed by the Parties upon execution of this Agreement. The Territory List may be modified from time to time by mutual agreement of the Management Team, as evidenced by each Party executing such revised Territory List. 1.33 Test and Instrumentation Product shall mean any tool or piece -------------------------------- of equipment for measurement and control in the field of research, development and testing for the Transportation Industry. 1.34 Third Party Technology shall mean any technology jointly owned ---------------------- by any Party with any third party or licensed by any Party from any third party. 1.35 Transportation Industry shall mean the automotive industry, ----------------------- off-road equipment manufacturers, marine engine industry, supplier industry, fuels and lubricant industry, automotive engineering development companies, companies developing, manufacturing or selling combustion engines for power generation, and other combustion engine-related companies not specified. 1.36 Transfer of Control shall mean: ------------------- 1.36.1 in the case of DSPT: (a) [*]. (b) [*]. 1.36.2 in the case of FEV: (a) [*]. (b) [*]. (c) [*]. (i) [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5 [*]. (ii) [*]. (iii) [*]. 1.36.3 [*]. 2. Overview of the Strategic Alliance. ---------------------------------- 2.1 Goals. The Parties intend to [*], which can effectively compete in ----- the Transportation Industry. Consistent with the mission, goals and business plan of the strategic alliance as approved and revised by the Management Team from time to time, the Parties will: 2.1.1 [*]. 2.1.2 [*]. 2.2 Proposal of New Product and Enhancements. The Parties agree that in ---------------------------------------- order to strengthen the strategic nature of this alliance, neither Party will develop or market [*]. 2.3 Parallel Products. [*]. ----------------- 2.4 [*] Distributorship. -------------------- 2.4.1 DSPT hereby appoints FEV [*] distributor within FEV's Territory of DSPT's PreExisting Products. FEV shall not promote or distribute any products which are directly competitive to such PreExisting Products without the prior written approval of DSPT. FEV hereby appoints DSPT [*] distributor within DSPT's Territory of FEV's PreExisting Products. DSPT shall not promote or distribute any products which are directly competitive to such PreExisting Products without the prior written approval of FEV. Nothing in this Agreement, however, shall prevent either Party from accepting unsolicited orders for its PreExisting Products from outside of its respective Territory. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6 2.4.2 Effective upon the distribution by DSPT of more than [*], DSPT hereby appoints FEV as the [*] of DSPT. DSPT shall provide FEV with notice immediately upon the distribution of the [*]. FEV may decline such appointment [*] by notifying DSPT in writing, and DSPT shall then be [*]. FEV shall not promote or distribute any products which are directly competitive to the Free [*] without the prior written approval of DSPT. Effective upon the distribution by FEV of more than three [*], FEV hereby appoints DSPT as the [*] of FEV. FEV shall provide DSPT with notice immediately upon the distribution of the [*]. DSPT may decline such appointment [*] by notifying FEV in writing, and FEV shall then be free to [*]. FEV shall not promote or distribute any products which are directly competitive to the [*] without the prior written approval of FEV. Nothing in this Agreement, however, shall prevent either Party from accepting unsolicited orders for its [*] from outside of its respective Territory. 2.4.3 The Parties shall mutually agree as necessary to the further terms and conditions of the [*] distributorship arrangements set forth in Paragraphs 2.4.1 and 2.4.2. 3. Product Appendix Procedure. -------------------------- 3.1 Either Party may [*] and submitting [*] it to the [*] for written approval prior to completion of [*]. 3.2 The Parties agree that the development of a [*] and that the [*] of the [*] by both Parties will be a [*]. However, major changes in the [*] and manufacturing site have to be [*]. Other changes may be [*]. [*] will be [*] by the Management Team, so that the Product Share Tables are consistent with the work performed. 3.3 For the Product Appendix procedure the following general rules will apply: 3.3.1 A Product Appendix is not required for Continuous Product Improvements. However, the other Party needs to be kept completely informed of such improvements, as set forth in the GPM and in Paragraph 12.1 ("Technology Exchange"). 3.3.2 One Product Appendix is required for each (i) PreExisting Product to be distributed pursuant to Paragraph 2.4 ("[*] Distributorship"), (ii) Product, and (iii) Enhanced Product. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7 3.4 If a Party proposes that the Parties develop a New Product by means of a draft Product Appendix and the other Party declines (in writing or by failing to take action for [*] to participate in the development, the proposing Party is thereafter entitled to [*], subject to the provisions of Paragraphs 3.4.1, 3.4.2 and 3.4.3. If a Party proposes that the Parties develop Enhancements by means of a draft Product Appendix and the other Party declines, (in writing, or by failing to take action for [*], to participate in the development, the other Party is thereafter entitled to [*]. However, the declining Party reserves the right to [*]. The proposing Party shall notify the declining Party, immediately and in writing, of the [*]. 3.4.1 GPM P-1 Phase. If a Party initially elects not to ------------- participate in a Product Appendix and the other Party proceeds with such Product Development, the declining Party may [*]. 3.4.2 GPM P-1 Phase Completion. If a Party initially elects ------------------------ not to participate in a Product Appendix, the declining Party may [*]. 3.4.3 Post GPM P-1 Phase. If a Party initially elects not to ------------------ participate in a Product Appendix and the other Party proceeds with such Product Development and distribution, the declining Party may [*]. 3.5 Notwithstanding the foregoing, neither Party shall be permitted to submit a draft Product Appendix for any Enhancement or New Product, or develop a product without such Product Appendix, which the Proposing Party has reason to know (a) [*], and (b) [*]. Such consent is not to be unreasonably withheld or delayed. Moreover, neither Party shall submit a draft Product Appendix for any Enhancement or series of Enhancements or for Localized Enhancements, or develop such enhancements without such Product Appendix, which enhancements the Proposing Party knows are unnecessary, or impractical, or unmarketable, or not cost-effective. Submission of Product Appendices for Enhancements or development of enhancements [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 8 [*]. 4. Management. ---------- 4.1 The management structure will consist of the Management Team, Group Managers and Product Managers. 4.2 The Management Team will meet a minimum of four times per year at [*] times and locations (or telephonically) to: 4.2.1 exchange information as defined in a Sample Agenda which shall be initially delivered and executed by both Parties upon execution of this Agreement and which may be modified from time to time [*] of the Management Team of both Parties. 4.2.2 FEV, its Geschaftsfuhrer and its Group Manager and other FEV affiliates and any other persons with access to this information will each be governed by DSPT's insider trading compliance policy as set forth in DSPT's insider trading policy, which shall be delivered upon execution of this Agreement, while this Agreement remains in effect. Each Party shall restrict access to the information provided under Paragraph 4.2.1 to the Parties listed or to others in the respective organizations with a "need to know." 4.3 The Management Team will approve the distribution and marketing approach for the Products. The Management Team will also approve the designation of any joint ventures or distributors as necessary for distribution and marketing of the Products. 4.4 Either FEV or DSPT will be designated in the Product Appendix as being the Product Leader, as approved by the Management Team. 4.5 [*]. 4.6 DSPT [*] FEV Test Technology Group [*]. Also, FEV [*] DSPT Transportation Group [*]. [*]. 4.7 The Product Managers will have primary responsibility for the working level day-to-day product management of Products developed under the terms of a Product Appendix and for resolving in good faith by unanimous agreement any issues relating to their responsibilities. Each Group Manager shall appoint a Product Manager for each New Product or Enhancement to be developed. The two Product Managers designated for each Product Appendix may vary from appendix to appendix. If the Group Manager fails to appoint such Party's Product Manager for any project, the Group Manager shall serve in such role. Such Product Managers shall initially be described in the applicable Product Appendix. Either Party [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 9 may change the identity of such Party's Product Manager at any time upon prior written notice to the other Party, but the Parties agree to exercise reasonable restraint in exercising this right so that there is a reasonable continuity of supervision for each development project. 4.8 Each Product Manager shall be responsible for keeping the other Party's Product Manager informed of the progress of the project and any problems encountered with respect to the research and development work being performed in accordance with the applicable Product Appendix and for responding to any reasonable inquiry made by the other Product Manager regarding any such development work. Each Party has to submit all of the required information as defined in the GPM and Paragraph 12.1 ("Technology Exchange"), and handle the disclosure and receipt of information in accordance with Paragraph 19.7 ("Proprietary Information; Nondisclosure") of this Agreement. 5. Resolution of Technical and Business Issues. ------------------------------------------- 5.1 [*]. 5.2 [*]. 5.3 [*]. 6. Contributions of the Parties. ---------------------------- 6.1 DSPT and FEV will (i) share in contributing engineering personnel and equipment necessary to carry out each Party's respective portion of the proposed research and development, (ii) share in contributing the use of facilities, and (iii) share in providing other resources to the development effort. Where practicable, the Parties will bear expenses in proportion to their respective portions of the proposed research and development, with final decisions on sharing of expenses and resources to be made by the Group Managers by mutual agreement. 6.2 Both Parties will [*]. 6.3 Both Parties will [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 10 6.4 Both Parties will, as practicable, in a reasonably timely manner, [*], including, but not limited to [*]. 6.5 Both Parties will be [*]. 6.6 Both Parties will, in general, [*]. [*] will be monitored and compared to the development plan in the Product Appendix and the GPM during the development of the Product or Enhanced Product. [*]. 6.7 The Party who manufactures the Products, Enhanced Products and PreExisting Products will be [*]. The purpose of [*] is to [*] on the [*] so that over time [*]. The Parties agree to use reasonable efforts to use information from [*] where commercially reasonable. 6.8 Each Party will [*]. 7. Product Revenue Shares. ---------------------- 7.1 The Product Share Table for Products, PreExisting Products and Enhanced Products shall [*]. 7.2 Payment. The Parties shall be paid monthly in U.S. Dollars ------- within thirty (30) days of the end of the month in which the customer invoice is partially or fully paid. Payment to the Parties will reflect any reversals due to Product, PreExisting Product or Enhanced Product returns occurring in that month. 8. Costs. Each Party [*]. During the performance of this Agreement, each ----- Party shall provide the other Party with reasonable office space, equipment and secretarial help without charge for use by such Party when visiting the facility of the other Party. 9. Loaned Equipment, Capital Equipment and Supplies. ------------------------------------------------ [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 11 9.1 Each Party will provide the other Party with the equipment and documentation mutually agreed upon in writing by the Parties as necessary for development of the Products described in the Product Appendices as defined in the GPM. All such equipment and documentation will be returned to the lending Party at its request after termination of the Product Development activities hereunder. All equipment loaned by one Party to the other Party shall remain the property of the lending Party. The lending Party shall pay shipping costs for delivery of the equipment to the borrowing Party. Any equipment shall be returned to the lending Party by the borrowing Party, shipping and insurance costs prepaid by the Party returning it. While in the possession of the borrowing Party, the equipment shall be maintained by such Party in good working order and shall be fully insured by such Party. 9.2 Capital equipment and supplies requirements for each Product Appendix and the GPM which were acquired by one Party shall be the sole property of the acquiring Party absent prior written agreement by the Parties to the contrary. Capital equipment and supplies requirements for each Product Appendix and the GPM which were acquired by use of funds from both Parties shall be the joint property of the Parties, and each Party's ownership shall be in proportion to the portion of the total cost of each item paid for by such Party, absent prior written agreement by the Parties to the contrary. Unless otherwise agreed by the Parties, upon termination of a Product Appendix in connection with which capital equipment has been acquired with the funds of both Parties, the Party owning the majority share of such equipment shall purchase the other Party's ownership interest in full, after deducting depreciation based on a mutually agreed upon depreciation schedule. 10. Manufacturing. ------------- 10.1 The Party identified as the manufacturing Party for a Product, PreExisting Product or Enhanced Product on the applicable Product Share Table shall manufacture and deliver such Product, PreExisting Product or Enhanced Product as required by the GPM and the applicable Product Appendix. The Product Leader will coordinate with the Party in the role of manufacturer to deliver all Documentation as defined in the GPM and Paragraph 12.1 ("Technology Exchange") to such manufacturing Party. 10.2 Each Party will [*]. Each Party will use reasonable efforts to ensure that it has no contracts, agreements, understandings or arrangements of any kind with any of its vendors which prevent or will prevent the other Party from buying directly from any such vendor any item or service related to the Products, Enhanced Products or PreExisting Products. Each Party hereby agrees that it will use reasonable efforts to ensure that the other Party is able to directly purchase any time or service related to the Products, Enhanced Products or PreExisting Products which such Party buys from any such vendor under any volume discounts or quantity pricing and terms applicable to such Party. Such vendor list will indicate which of such vendors are sole source vendors. As used herein, a "sole source vendor" shall mean a vendor who is the only manufacturer of a part known and "sole source part" shall mean a part which is manufactured by only one manufacturer. The Party providing the vendor list agrees to notify the other Party of the identity of a second manufacturer of a sole source part promptly after learning the identity of any such manufacturer. All vendor lists provided by a Party shall be deemed to be Proprietary Information of that Party. 10.3 Each Party will provide support to the other Party for all Products, PreExisting Products and Enhanced Products, and such support shall consist at a minimum of off-site telephone, facsimile and electronic mail support, in the form of consultations, assistance and advice. 10.4 In the case where a Party has contributed Independent Technology, such contributing Party will provide support to the manufacturing Party in the form of (a) instruction [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12 in use of the Documentation and (b) technical support to answer questions related to the manufacturing of the PreExisting Products, Products or Enhanced Products. In the event that the manufacturing Party encounters a problem, the other Party shall provide any data which the manufacturing Party may reasonably request in order to verify, diagnose and correct the error, defect or nonconformity. The Parties shall implement temporary workaround procedures where necessary and shall work in good faith to initiate and complete permanent corrective measures for such problems. 11. Product Distribution. -------------------- 11.1 All Products and Enhanced Products will [*]. 11.1.1 The Parties may [*]. 11.1.2 The Parties may [*]. 11.2 The responsibilities of the Group Managers of both Parties will include, but not be limited to, the following: 11.2.1 Tactical marketing tasks in the geographic market, including but not limited to: assistance in product definition; product profitability; advertising and public relations; product and competitive positioning; conferences, seminars and exhibitions; and pricing; 11.2.2 Key account selling, including but not limited to: establishing target accounts and determining account strategy; 11.2.3 Technical sales, including but not limited to: presentations; business plans and proposals; customer need identification and selling against the competition; 11.2.4 Customer support, including but not limited to: hotline; hardware and software support; customer training; commissioning customer dynamometer test cells; [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 13 applications engineering; project management; system integration; application software engineering; and equipment maintenance and services; and 11.2.5 Detailed sales forecast for manufacturing, revised monthly. 12. Technology Exchange. ------------------- 12.1 The FEV and DSPT employees assigned to each Product Appendix shall [*]. (a) [*]. (b) [*]. (i) [*]. (ii) [*]. (iii) [*]. (c) [*]. (d) [*]. (e) [*]. 12.1.1 For the purpose of effective exchange of technical information and know-how, and the assurance of quality manufacture of Products and Enhanced Products, the Parties shall [*]. 12.2 Each Party will, in its discretion, [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 14 [*]. 12.3 [*]. 12.4 [*]. 12.5 In the case where Parties agree, pursuant to the terms of a particular Product Appendix, to distribute a Product, Enhanced Product or PreExisting Product under a trademark owned by one of the Parties, the trademark license terms described in Paragraph 22 ("Limited Right to Use Trademarks") will be applicable. In the case where the Parties agree, pursuant to the terms of a particular Product Appendix, to distribute a Product, Enhanced Product or PreExisting Product under a new trademark, the Group Managers will meet and mutually agree upon the new trademarks, and the ownership of such trademarks will be registered by one of the Group Managers as mutually agreed upon. In any case where the Parties have mutually agreed in the applicable Product Appendix that one or more trademark(s) of a Party will be used on Products, Enhanced Products or PreExisting Products or where a new trademark for use by both Parties is registered only by one Party, the trademark owner will grant the other Party a nonexclusive, limited right, to the extent that trademark owner has the authority to grant such limited right, to use the trademark owner's trademarks described in the applicable Product Appendix only on the Products, Enhanced Products and PreExisting Products designated therein, in product literature, promotion and advertising for the Products, Enhanced Products or PreExisting Products. Such license will terminate [*]. 12.6 The designation of a product as an Enhancement in the applicable Product Appendix is a conclusive determination of the status of such product. 12.7 The designation of a product as a New Product in the applicable Product Appendix is a conclusive determination of the status of such product. 12.8 In the event that either Party proposes to contribute Third Party Technology to a proposed Product Appendix, the Parties shall, prior to the execution of such proposed Product Appendix, mutually agree as to the appropriate arrangements regarding the terms of a license to use such Third Party Technology in any successfully developed New Product or Enhancement developed pursuant to such proposed Product Appendix. 13. Term and Termination. -------------------- [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15 13.1 The initial term of the Agreement will be a period of three (3) years from the Effective Date (the "Initial Term") and the Agreement will remain in effect thereafter unless and until terminated hereunder. 13.2 [*]. 13.3 Each Product Appendix will remain in effect as long as [*]. 13.3.1 [*]. 13.3.2 [*]. 13.3.3 [*]. 13.3.4 [*]. 13.3.4.1 (a) [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 16 (b) [*] 13.3.4.2 [*] 13.3.4.3 [*] 13.3.4.4 [*] [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 17 [*] 13.3.5 [*] 13.3.6 [*] 13.3.7 [*] 14. Termination Effect. ------------------ 14.1 Except as set forth below, upon termination of any or all Product Appendices or this Agreement, [*] 14.2 Upon termination of the Agreement (or a Product Appendix or Product Appendices),[*] (a) [*] or [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 18 (b) [*] or (c) [*] or (d) [*] After [*] years from termination: 14.2.1 [*] 14.2.2 [*] 14.2.3 [*] 14.3 [*] 14.4 [*] 14.5 [*] [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 19 [*] 14.6 [*] 14.7 Effect of Termination on Joint Ventures. [*] --------------------------------------- 14.8 Payment of Compensation. [*] ----------------------- 15. Continuing Manufacturing Obligation. ----------------------------------- 15.1 [*] 15.2 [*] 16. Limitation of Liability; Indemnification in Connection with ----------------------------------------------------------- Distribution. - ------------ 16.1 SUBJECT TO [*] NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, SPECIAL, INDIRECT OR INCIDENTAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER IN AN ACTION BASED ON [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 20 CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING THE FAILURE OF ANY OTHER REMEDY PROVIDED HEREIN. 16.2 Each Party shall bear its own risks of any claims of any loss, injury or damage by a private third party, government, or governmental or regulatory agency arising out of or in connection with the development, design, manufacture or distribution of Products and Enhanced Products by each Party, and shall promptly inform the other Party of any action based on such claim. Each Party, at its own expense, shall carry adequate liability and property insurance to cover such risks, and if requested by the other Party, shall deliver to the other Party evidence reasonably satisfactory to the other Party of such insurance. Nothing in the Paragraph 16.2, however, shall be deemed to prohibit either Party from joining the other Party as a party in any such action, or from seeking indemnification to which the Party may be entitled under any applicable legal or equitable principle (pursuant to Paragraph 23.8.2 ("Arbitration") of this Agreement) from the other Party for any costs, expenses or damages incurred by such Party as a result of such action. 17. Disclaimers. NOTHING IN THIS AGREEMENT SHALL BE INTERPRETED OR ----------- CONSTRUED AS: A WARRANTY OR REPRESENTATION OF EITHER PARTY AS TO THE VALIDITY OR SCOPE OF ANY PATENT; A WARRANTY OR REPRESENTATION THAT ANY PRODUCT OR PREEXISTING PRODUCT MADE, USED OR OTHERWISE DISPOSED OF BY EITHER PARTY IS OR WILL BE FREE FROM INFRINGEMENT OF PATENTS, TRADEMARKS OR COPYRIGHTS OF THIRD PARTIES; REQUIRING EITHER PARTY TO INDEMNIFY THE OTHER PARTY IN THE EVENT OF A CLAIM BY ANY THIRD PARTY THAT ANY TECHNOLOGY, PREEXISTING PRODUCT OR PRODUCT SUPPLIED PURSUANT TO THIS AGREEMENT INFRINGES SUCH THIRD PARTY'S PATENTS, TRADEMARKS OR COPYRIGHTS, AS THE PARTIES SPECIFICALLY AGREE THAT THEY EACH BEAR THEIR OWN RISKS IN THIS REGARD. EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, REQUIRING EITHER PARTY TO FILE, SECURE, OR MAINTAIN IN FORCE ANY PATENT, PATENT APPLICATION, COPYRIGHT REGISTRATION, OR SEMICONDUCTOR CHIP PROTECTION ACT REGISTRATION; EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, AN OBLIGATION THAT EITHER PARTY WILL ENFORCE ANY INTELLECTUAL PROPERTY RIGHTS, INCLUDING RIGHTS RELATING TO TRADEMARKS AND TRADE NAMES, AGAINST A THIRD PARTY FOR THE BENEFIT OF THE OTHER PARTY; GRANTING BY IMPLICATION, ESTOPPEL, OR OTHERWISE ANY LICENSES OR SUBLICENSING RIGHTS NOT EXPRESSLY GRANTED PURSUANT TO THIS AGREEMENT; EXCEPT FOR RIGHTS EXPRESSLY GRANTED BY THIS AGREEMENT, CONFERRING ANY RIGHT TO USE IN ADVERTISING, PUBLICITY, OR OTHERWISE ANY TRADEMARK OR TRADE NAME; OR 21 A REPRESENTATION OR WARRANTY OF ANY KIND REGARDING THE PERFORMANCE OF ANY TECHNOLOGY, PREEXISTING PRODUCT OR PRODUCT SUPPLIED PURSUANT TO THIS AGREEMENT, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY PREEXISTING PRODUCT OF EITHER OF THE PARTIES, ANY NEW PRODUCT OR ENHANCEMENTS INCORPORATING OR FABRICATED BY USE OF ANY OF THE TECHNOLOGY DEVELOPED OR LICENSED HEREUNDER. 18. Representations and Warranties. ------------------------------ 18.1 DSPT hereby represents and warrants to FEV as follows: 18.1.1 DSPT Organization and Standing. DSPT is a corporation duly ------------------------------ organized, validly existing and in good standing under the laws of California, with all requisite power and authority to own, lease and operate its properties and to conduct its business as now being conducted. 18.1.2 DSPT Authorization. DSPT has all corporate rights, power and ------------------ authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by DSPT and the consummation by DSPT of the transactions contemplated hereby have been duly authorized by all necessary corporate action on behalf of DSPT. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not conflict with, or result in any breach of, any of the material terms, provisions or conditions of any material agreement or instrument to which DSPT is a Party or by which DSPT is bound. 18.1.3 DSPT Authority to Grant Rights. DSPT has full legal authority ------------------------------ to grant all of the rights granted to FEV hereunder without violating any agreements between DSPT and any third party. 18.2 FEV hereby represents and warrants to DSPR as follows: 18.2.1 FEV Organization and Standing. FEV is a GmbH & Co. KG duly ----------------------------- organized, validly existing and in good standing under the laws of Germany, with all requisite power and authority to own, lease and operate its properties and to conduct its business as now being conducted. 18.2.2 FEV Authorization. FEV has all corporate rights, power and ----------------- authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by FEV and the consummation by FEV of the transactions contemplated hereby have been duly authorized by all necessary corporate action on behalf of FEV. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not conflict with, or result in any breach of, any of the material terms, provisions or conditions of any material agreement or instrument to which FEV is a Party or by which FEV is bound. 18.2.3 FEV Authority to Grant Rights. FEV has full legal authority ----------------------------- to grant all of the rights granted to DSPT hereunder without violating any agreements between FEV and any third party. 19. Proprietary Rights. ------------------ 22 19.1 [*] 19.2 [*] 19.3 [*] 19.4 Obtaining and Maintaining Intellectual Property Rights: Use. ----------------------------------------------------------- 19.4.1 Each Party agrees to execute, upon written request of the other Party, [*] and that is subject to copyright protection to the other Party ([*]). Such transfer shall be executed in the form attached to this Agreement as Exhibit A ("[*]"). - --------- 19.4.2 Each Party agrees to assist the other Party in any reasonable manner to obtain and enforce Intellectual Property Rights [*] for the requesting Party's benefit in any and all countries, and each Party agrees to execute, when requested, applications and assignments to the requesting Party and any other lawful documents deemed necessary by the requesting party to carry out the ownership provisions of this Agreement. If called upon to render assistance under this Paragraph 19.4.2, a Party will be entitled to a fair and reasonable fee, in addition to reimbursement of expenses incurred, at the prior written request of the other Party. 19.4.3 Each Party agrees to use reasonable commercial efforts to apply appropriate patent markings, and copyright and trademark notices to each Product, Enhanced Product or PreExisting Product it distributes. 19.5 Employee and Contractor Agreements. Each Party represents that all ---------------------------------- persons who perform work for a Product Appendix (whether employees or contractors) shall have executed appropriate agreements which vest all Intellectual Property Rights related to a Product Appendix in such Party in accordance with the terms of this Agreement. FEV and/or DSPT, as applicable, agree to require, by written agreement, their employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by FEV and/or DSPT each Joint Invention made under a Product Appendix in order that FEV and/or DSFIT can execute all papers necessary to file patent applications on each Joint Invention. FEV or DSPT, as applicable shall instruct such employees through employee agreements or other suitable education programs on the importance of reporting Inventions in sufficient time to permit the filing of patent applications prior to United States, German or any other foreign statutory bar. 19.6 Status Meeting. The Parties will [*] -------------- [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 23 [*] 19.7 Proprietary Information; Nondisclosure. -------------------------------------- 19.7.1 Obligation. Each Party shall, following receipt of ---------- Proprietary Information, keep in confidence and trust all such Proprietary Information, and shall not use or disclose such Proprietary Information other than as permitted under this Agreement unless otherwise mutually agreed in writing by the Parties. The receiving Party shall use the same degree of care to avoid unauthorized dissemination of such Proprietary Information as it employs with regard to its own information of a similar nature which it does not desire to have disseminated, and in all cases the receiving Party warrants that such degree of care is at least reasonable care. Each Party agrees to advise those employees and others who have a need to know and who have access to the Proprietary Information of the disclosing Party of their respective responsibilities with respect to such Proprietary Information at the time such access is first granted and also at the time such employees are transferred or reassigned within the receiving Party or at the time of termination of employment with the receiving Party, whichever first occurs. It is understood that receipt of Proprietary Information under this Agreement shall not create any obligation in any way limiting or restricting the assignment and/or reassignment of the employees of either Party within the organization of such Party. 19.7.2 Exceptions. Information shall not be deemed Proprietary ---------- Information, and the receiving Party shall have no obligation with respect to any information which (a) is already known to the receiving Party without nondisclosure restrictions before it is first received from the disclosing Party as indicated by written records; (b) is or becomes publicly known through no act or omission of the receiving Party; (c) is received by the receiving Party from a third Party without nondisclosure restrictions and without breach of this or any similar Agreement; or (d) is developed by the receiving Party independently and without benefit of the information revealed pursuant to this Agreement. Further, a Party may disclose Proprietary Information: (x) in response to a valid order of a court or subdivision thereof, provided, however, that the Party -------- ------- making the disclosure pursuant to the order shall first have given notice to the other Party and have made a reasonable effort to obtain a protective order requiring that the Proprietary Information so disclosed be used only for the purposes for which the order was issued; (y) as otherwise required by law; or (z) as necessary to establish rights under this Agreement. 19.7.3 Third Party Proprietary Information. Neither Party shall ----------------------------------- disclose to the other Party or to any employee or contractor of the other Party any proprietary information of any third Party in contravention of any Agreement with such third Party. If any such third Party proprietary information is subject to use or disclosure restrictions imposed by such third Party, the disclosing Party shall provide written notice of such restrictions to the receiving Party prior to the time of disclosure and the receiving Party shall advise the disclosing Party as to whether or not such information is desired under such restrictions. If the receiving Party agrees to receive the third Party proprietary information, the receiving Party shall comply with any such restrictions identified by the disclosing Party in the written notice. 19.7.4 Disclosure by Marketing of Products or Services. The marketing ----------------------------------------------- of any product or service which inherently discloses the Proprietary Information of either Party shall not in itself be deemed to be a prohibited publication or disclosure of such Proprietary Information for purposes of Paragraph 19.7 ("Proprietary Information; Nondisclosure") of this Agreement. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 24 19.7.5 Disclosure by Publication. From time to time the Parties may, ------------------------- individually or jointly, wish to present papers or publish papers on the research conducted under this Agreement. Prior to any such presentation or publication the presenting/publishing Party will allow the other Party a reasonable opportunity, and shall provide notice thereof at least fifteen (15) days prior to the proposed presentation, to review the proposed presentation materials or publication to insure that the release of such information to the general public will be consistent with the treatment required for such information under the terms of this Agreement. Neither Party will present or publish any information containing Joint Technology without mutual agreement that such information can be made public consistent with the terms of this Agreement. 20. Filing of Patent Applications. ----------------------------- 20.1 Joint Invention. --------------- 20.1.1 In the [*] status meetings, DSPT and FEV will [*]. 20.1.2 [*]. 20.2 No Disclosure. Neither Party shall disclose in any patent ------------- application it may file, any Invention, discovery, technology or improvement owned solely by the other Party without first obtaining the written permission of the other Party prior to making such disclosure. 20.3 Infringement Claims. With respect to Independent Technology, ------------------- each Party shall be responsible for filing, at its own expense, any action alleging that a third Party has infringed or misappropriated the ownership rights of such Party. Neither Party shall have any obligation to file any such action, and there shall be no accounting to the other Party in the event of a favorable judgment of award in such an action. Each Party acknowledges that the other Party is free to settle any such disputes as deemed appropriate by the other Party so long as such settlement is consistent with any Intellectual Property Rights treatment required by the terms of this Agreement. DSPT and FEV agree to cooperate with each other in any Intellectual Property Rights litigation by one of the Parties as a licensee of the other Party's Independent Technology, so long as the licensee Party reimburses the owner Party for reasonable attorneys' fees and out-of pocket costs. [*]. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 25 21. Invention Disclosure and Filing of Patent Application by FEV and DSPT. --------------------------------------------------------------------- 21.1 Disclosure. The disclosure by the inventing Party to the other ---------- Party shall be in the form of a written report and shall identify the inventor(s), The disclosure must (i) be sufficiently complete in technical detail to convey a clear understanding to the extent known at the time of the disclosure, of the nature, purpose, operation, and the physical, chemical, biological or electrical characteristics of the [*], and (ii) the disclosure must also identify any publication, on sale or public use of the [*] and whether a manuscript describing the [*] has been submitted for publication at the time of disclosure. In addition, after disclosure, the disclosing Party will promptly notify the other Party of the acceptance of any manuscript describing the [*] for publication or of any sale or public use planned by FEV and/or DSFIT. 21.2 Filing. Subject to the terms of this Agreement, FEV and/or DSPT ------ will file an initial patent application on a [*] to which it elects to retain title within six (6) months after election of title or, if earlier, prior to the end of any statutory period wherein valid patent protection can be obtained in the United States or any other nation or patent authority after a publication, on sale, or public use. Subject to the terms of this Agreement, FEV and/or DSPT will file patent applications in additional countries or international patent offices within ten (10) months of the corresponding initial patent application. 21.3 Cooperation. Each Party agrees to cooperate with the other Party and ----------- to provide the information each Party needs to comply with the obligations under the terms of Paragraph 21 ("Invention Disclosure and Filing of Patent Application by FEV and DSPT") of this Agreement. 21.4 Decisions. Each Party agrees to notify the other of any decisions --------- not to continue the prosecution of a patent application, (ii) pay maintenance fees, or (iii) defend in a reexamination or opposition proceeding on a patent, in any country, not less than sixty (60) days before the expiration of the response period required by the relevant patent office. In the case of [*] the Parties will be considered to have been notified with respect to (i), (ii) or (iii) above on the basis of the decisions made in the quarterly Status Meetings or as otherwise mutually agreed by the Parties. 22. Limited Right to Use Trademarks. ------------------------------- 22.1 Any use of a Party's trademarks shall be in accordance with applicable trademark law. Each Party agrees not to attach additional trademarks, logos or trade designations to Products, Enhanced Products or PreExisting Products except as mutually agreed to in writing in the applicable Product Appendix. Each Party agrees that whenever the trademarks owned by the other Party as of the Effective Date (the "Trademarks") are used in advertising or in any other manner, they shall clearly indicate the other Party as the trademark owner. Each Party agrees not to do or cause to be done any act or anything contesting or in any way impairing or reducing the trademark owner's right, title, and interest in the Trademarks of the other Party. Each Party understands and agrees that use of the Trademarks of the other Party in connection with the Products, Enhanced Products or PreExisting Products shall not create any right, title, or interest, in or to the use of the Trademarks of the other Party and that all such uses and goodwill associated with such Trademarks will inure to the benefit of the other Party. Each Party agrees that the nature and quality of any products or services supplied in connection with such Trademarks of the other Party shall conform to the standards set by the other Party. Each Party agrees to cooperate with the other Party in facilitating the monitoring and control of the nature and quality of such products and services, and to supply the other Party with specimens of use of the Trademarks of the other Party upon request, including, without limitation, during inspections pursuant to Paragraph 12.1.1 ("Technology Exchange"). The owner of the Trademark shall have the sole right and discretion to bring legal or administrative proceedings to its rights in the [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 26 Trademark including actions for trademark infringement or unfair competition proceedings involving its Trademarks. Each Party, at the request and expense of the other Party, shall provide the other Party with any specimens, execute all applications for trademark registrations, trademark assignments or similar documents for the other Party's Trademarks, and shall perform any other similar act reasonably necessary (i) for such Party to secure or maintain any and all trademark rights in any country, provided that the Parties are marketing the New Products or Enhancements in association with such other Party's Trademarks in such country or (ii) to effectuate the lawful right to use product names, designations or Trademarks owned by the other Party as reasonably required by the other Party. 22.2 As of the Effective Date, the Parties own the Trademarks set forth on Exhibit B. The use of such Trademarks by the non-owning Party in --------- connection with any PreExisting Product, Product, Free Product or Enhanced Product requires the prior written consent of the other Party. The non-owning Party shall cease any use of the other Party's Trademarks upon termination of this Agreement. Neither Party shall at any time attempt to register the Trademarks owned by the other Party or any trademark confusingly similar to such Trademarks, nor shall either Party use any such confusingly similar trademarks on its own products. This obligation shall survive the termination of the non- owning Party's right to distribute such PreExisting Product, Product, Free Product or Enhanced Product under this Agreement. 23. General Terms and Conditions. ---------------------------- 23.1 Notices. All notices shall be addressed to the Parties at the ------- address first described above and given in writing either by personal delivery to the Party to whom notice is given, or by confirmed facsimile, or by certified mail. The date upon which any such notice is so personally delivered, or the date of confirmation of facsimile or date of delivery of certified mail, shall be deemed to be the date of such notice, irrespective of the date appearing therein. 23.2 Export Control. Both Parties acknowledge that the export -------------- control laws and regulations of the United States, Germany and other nations may restrict the export and re-export of certain commodities and technical data, possibly including [*]. Both Parties agree to comply with all export controls imposed on Restricted Technology by any country or organization or nations within whose jurisdiction(s) such Party does business. Both Parties agree that they will not export or re-export [*] in any form without complying with the export control laws of the relevant jurisdiction(s). 23.3 Force Majeure. Either Party shall be excused from any delay or ------------- failure in performance hereunder caused by any occurrence or contingency beyond its reasonable control, including, but not limited to, an act of God, earthquake, labor disputes, shortages of materials or supplies, riots, and transportation difficulties. The obligations and rights of the Party so excused shall be extended on a day-to-day basis for the time period equal to the period of such excusable delay. In order to obtain a suspension under this subsection, the Party delayed shall send written notice of the delay and the reason therefor to the other Party within seven (7) calendar days from the time the Party delayed knew of the delay in question. 23.4 Waiver. Any waiver of any right or remedy under this Agreement ------ must be in writing and signed by the Party to be bound to be effective. No delay or omission in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a waiver of any right or remedy on any future occasion. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 27 23.5 Assignment. This Agreement may not be assigned, in whole or in ---------- part, by either Party without the prior written consent of the other Party hereto, except that without securing such prior consent and subject to Paragraph 13.3.4.2, either Party hereto shall have the right to assign this Agreement to any successor to such Party by way of merger or consolidation or the acquisition of substantially all of the entire business and assets of DSPT or FEV, providing that such successor shall expressly assume all of the obligations and liabilities of such Party under this Agreement. Such consent shall not be unreasonably withheld. Any assignment prohibited hereunder shall be null and void and shall constitute a material breach of this Agreement. 23.6 Headings. All Paragraph captions are for reference only and -------- shall not be considered in construing this Agreement. 23.7 Severability. If any provision of this Agreement is held ------------ invalid by any law, rule, order or regulation of any government, or by the final determination of a court of last resort, or a court whose decision was not appealed with the appropriate time limit, such invalidity shall not affect (a) the other provisions of this Agreement, (b) the application of such provision to any other circumstance other than that with respect to which this Agreement was found to be unenforceable; or (c) the validity or enforceability of this Agreement as a whole. 23.8 Governing Law, Arbitration. -------------------------- 23.8.1 This Agreement (including its exhibits) and all amendments thereto, and all arrangements made hereunder among the Parties (including but not limited to the transfer of ownership and the Product Appendices) shall be governed by [*] substantive law. However, this clause is not intended to override the principle of territoriality in respect to intellectual and industrial property rights as expressed in [*]. [*] shall not apply to this Agreement. 23.8.2 Arbitration. Any dispute arising out of or in connection ----------- with this Agreement (including its exhibits) and all amendments thereto, and all arrangements made hereunder among the Parties, including disputes on its conclusion, binding effect, amendment and termination, shall be resolved, to the exclusion of the ordinary courts, by a [*]. If there are not more than two parties involved in the procedure, each Party nominates an arbitrator. The proceedings shall be held in [*] unless the Parties shall mutually agree otherwise in writing. The proceedings shall be conducted in [*] language, and any award shall be written in [*] language. The Parties shall be entitled to resort to any competent state court in any jurisdiction for provisional, preliminary or interlocutory relief, which court shall apply [*] substantive law insofar as specific laws of the competent state court are not mandatorily applicable. In the event that the requesting Party obtains provisional, preliminary or interlocutor relief, such party shall institute the arbitration within the time limit set by the rules of the state court, but not later that sixty (60) days after the entry into force of the order of such state court granting such relief. [*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMMITED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 28 23.9 No Joint Venture. Except as to any joint venture distribution ---------------- arrangements established pursuant to Paragraph 11.1.1 ("Product Distribution"), each Party hereto shall act as an independent contractor and nothing in this Agreement is intended to or shall be construed as creating any partnership, joint venture or other similar relationship between the Parties hereto. No relationship, other than that created by and set forth in this Agreement, shall be established by any reference to the Parties operating as "allies" and "partners". 23.10 Publicly and News Releases. Any news release, public -------------------------- announcement, or advertisement or publicity proposed to be released by either Party concerning the existence of this Agreement, its terms or conditions or the activities of either Party in connection with this Agreement shall be subject to the written approval of the other Party prior to release and such approval will not be unreasonably withheld. 23.11 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be an original, and all of which together shall constitute one instrument. 23.12 Rules and Regulations of the Parties. The employees of FEV and ------------------------------------ DSPT shall obey all pertinent rules and regulations of the other Party while on the premises of the other Party during any activities pursuant to this Agreement. 23.13 Transactions. Nothing contained herein shall restrict either ------------ DSPT or FEV from quoting, offering to sell, or selling to others any products, items or services which it regularly offers for sale, which are not covered by this Agreement. 23.14 Survival. As applicable, the obligations of this Agreement in -------- Paragraphs 8 ("Costs"); 9 ("Loan Equipment, Capital Equipment and Supplies"); 10 ("Manufacturing"); 12.4, 12.5 ("Technology Exchange"); 13.3.4.4(v) and (vi) ("Term and Termination"); 14 ("Termination Effect"); 15 ("Continuing Manufacturing Obligation"); 16 ("Limitation of Liability"); 17 ("Disclaimers"); 18 ("Representations and Warranties"); 19, except for 19.5 and 19.6 ("Proprietary Rights"); 20.1.2, 20.2, 20.3 ("Infringement Claims"); 21.4 ("Invention Disclosure and Filing of Patent Application by FEV and DSFIT"); 22 ("Limited Right to Use Trademark"); and 23 ("General Terms and Conditions") of this Agreement shall survive any termination or expiration hereof. 23.15 Integration. This Agreement and all exhibits thereto (which ----------- are hereby incorporated herein by reference as fully as if set forth in the body of this Agreement) constitute the entire agreement between the Parties with respect to the subject matter hereof, superseding any prior or contemporaneous oral or written agreements or understandings. 23.16 Modifications. No subsequent alterations, amendments or ------------- additions hereto shall be binding and valid unless reduced to writing and signed by an authorized representative of each Party. 23.17 Attorneys' Fees. Except for mediation where all costs shall be --------------- shared equally, the prevailing Party in any dispute arising out of or in connection with this Agreement, including appeals, shall be awarded their reasonable attorneys' fees, costs and expenses, including experts' fees. 29 23.18 Third Party Obligations. Where this Agreement refers to duties ----------------------- of parties who are not Parties to this Agreement (the "Third Parties"), the Party which is closest to the relevant Third Party shall procure an undertaking of such Third Party that such Third Party will comply with the relevant duties and obligations contained in this Agreement. IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Agreement as of the Effective Date: FEV: DSPT: FEV Motorentechnik GmbH & Co. KG DSPT Technology Inc. By: /s/ Professor Franz F. Pischinger By: /s/ F. Gil Troutman --------------------------------- ----------------------------------- Typed Name: Professor Franz F. Pischinger Typed Name: F. Gil Troutman Title: Geschaftsfuhrender Gesellschafter Title: President and CEO 30 EX-10.10 3 INDEMNITY AGREEMENT EXHIBIT 10.10 INDEMNITY AGREEMENT This Indemnity Agreement, dated as of ___________________, 199___, is made by and between DSP Technology, Inc., a Delaware corporation (the "Company"), and ________________________________________ (the "Indemnitee"). RECITALS -------- A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT --------- NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. ----------- (a) Agent. For the purposes of this Agreement, "agent" of the ----- Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) Expenses. For purposes of this Agreement, "expenses" include -------- all out-of-pocket costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" ---------- means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, or investigative. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means ---------- any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to ------------------ serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the By-Laws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing; provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 3. Liability Insurance. ------------------- (a) Maintenance of D&O Insurance. The Company hereby covenants and ---------------------------- agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) Rights and Benefits. In all policies of D&O Insurance, the ------------------- Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. (c) Limitation on Required Maintenance of D&O Insurance. --------------------------------------------------- Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. Mandatory Indemnification. Subject to Section 9 below, the Company ------------------------- shall indemnify the Indemnitee as follows: (a) Successful Defense. To the extent the Indemnitee has been ------------------ successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) Third Party Actions. If the Indemnitee is a person who was or ------------------- is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (c) Derivative Actions. If the Indemnitee is a person who was or is ------------------ a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under this subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. (d) Actions where Indemnitee is Deceased. If the Indemnitee is a ------------------------------------ person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) for which payment is actually made to or on behalf of Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 5. Partial Indemnification. If the Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the --------------------------------- Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. ------------------------------------------- (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance ------------------------------ expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. (b) Lack of Good Faith. To indemnify the Indemnitee for any ------------------ expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under ------------------------ this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 9. Non-exclusivity. The provisions for indemnification and advancement --------------- of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Certificate of Incorporation or By-Laws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 10. Enforcement. Any right to indemnification or advances granted by this ----------- Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 11. Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 12. Survival of Rights. ------------------ (a) All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 13. Interpretation of Agreement. It is understood that the parties hereto --------------------------- intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 14. Severability. If any provision or provisions of this Agreement shall ------------ be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 13 hereof. 15. Modification and Waiver. No supplement, modification or amendment of ----------------------- this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice. All notices, requests, demands and other communications under ------ this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. Governing Law. This Agreement shall be governed exclusively by and ------------- construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. THE COMPANY: DSP TECHNOLOGY, INC. By ______________________________________ Title ___________________________________ Address: _______________________________ _______________________________ INDEMNITEE: [Indemnitee's Printed Name] Address: _______________________________ _______________________________ EX-23.1 4 CONSENT OF PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated March 6, 1998 accompanying the consolidated financial statements and schedule included in the annual report of DSP Technology Inc. and subsidiaries on Form 10-K for the year ended January 31, 1998. We hereby consent to the incorporation by reference of said reports in the Registration Statements of DSP Technology Inc. and subsidiaries on Forms S- 8, (File No. 33-6994, effective July 13, 1990, File No. 33-43163 and File No. 33-43164, effective October 4, 1991, and File No. 33-85554 and File No. 33- 85540, effective October 24, 1994). GRANT THORNTON LLP San Jose, California April 20, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR 12-MOS JAN-31-1998 JAN-31-1997 JAN-31-1996 FEB-01-1997 FEB-01-1996 FEB-01-1995 JAN-31-1998 JAN-31-1997 JAN-01-1996 4,701 1,323 1,816 0 0 190 5,731 4,834 3,352 150 50 50 2,682 2,015 2,195 13,757 8,580 7,924 4,911 4,504 3,489 3,570 2,964 2,445 16,730 11,799 10,294 5,584 2,854 2,452 0 0 0 0 0 0 0 0 0 3,301 2,988 2,920 7,356 5,699 4,778 16,730 11,799 10,294 22,038 17,987 15,538 22,038 17,987 15,538 10,227 7,842 6,187 10,227 7,842 6,187 9,268 8,911 7,395 0 0 0 0 0 0 2,768 1,357 2,092 1,122 443 815 1,646 914 1,277 0 0 0 0 0 0 0 0 0 1,646 914 1,277 .74 .42 .60 .68 .40 .55
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