1
ROYALTY AGREEMENT
THIS ROYALTY AGREEMENT ("Agreement") is made this 27th day of October,
1997, by and between ELECTRONIC DESIGNS, INC., a corporation organized and
existing under the laws of the State of Delaware with its principal place of
business at ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇ ("EDI"), and ADVANCED
REFRACTORY TECHNOLOGIES, INC., a corporation organized and existing under the
laws of the State of New York with its principal place of business at ▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ("ART").
WHEREAS EDI and ART are parties to that certain Asset Purchase Agreement,
dated as of October 1, 1997 ("Asset Purchase Agreement"), pursuant to which ART
has purchased from EDI the Purchased Assets (as defined in the Asset Purchase
Agreement);
WHEREAS EDI and ART are also parties to that certain
Confidentiality/Noncompetition Agreement, dated October 27, 1997
("Noncompetition Agreement"); and
WHEREAS, pursuant to Section 3.1 of the Asset Purchase Agreement, ART is
required to pay EDI the Royalty (as hereinafter defined).
NOW, THEREFORE, in consideration of the covenants contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto (individually, a "Party;" collectively,
the "Parties") hereby agree as follows:
1. Definitions. Unless otherwise expressly defined herein, all
capitalized terms used in this Agreement shall have the meanings ascribed to
them in the Asset Purchase Agreement. For purposes hereof, the capitalized
terms set forth below shall have the following meanings:
a. "ART Party" means ART or any ART Affiliate.
b. "Commission" means the Securities and Exchange Commission
or any successor to the functions of such agency.
2
c. "Current Crystallume Product" means those certain products which
are the same as those products comprising the Inventory purchased by ART from
EDI pursuant to the Asset Purchase Agreement.
d. "Initial Public Offering" means the consummation of a primary
bona fide, firm commitment underwritten public offering on behalf of ART,
pursuant to a Registration Statement (as hereinafter defined) filed with and
declared effective by the Commission pursuant to the Securities Act (as
hereinafter defined).
e. "Intellectual Property" means the Purchased Intellectual Property
(as such term is defined in Section 1.1i of the Asset Purchase Agreement) and
the Licensed Intellectual Property (as such term is defined in Section 1.1j of
the Asset Purchase Agreement), collectively.
f. "Licensing Royalty Term" means the Seven (7) year period
commencing on the date hereof and expiring on September 30, 2004.
g. "Net Licensing Revenues" means the aggregate of any and all
consideration actually received by an ART Party (in good funds in the event the
consideration is money), pursuant to any license or sublicense of the
Intellectual Property, in whole or in part (collectively, the "Licenses"),
granted by an ART Party to any Person (other than an ART Party), after deducting
all of the following relating to each License:
(1) any and all domestic and foreign duties, taxes, charges
and other assessments of any kind (including, without
limitation, withholding taxes (net of United States tax
credits actually used by an ART Party), sales taxes, use
taxes and any interest, fines or penalties thereon),
directly or indirectly levied or imposed on an ART Party
by any Government Authority;
(2) any and all fees paid to independent brokers; and
2
3
(3) any and all royalties or other fees or charges of any
kind paid by an ART Party to any Person with respect to
any licensed intellectual property or other rights of
such Person which are licensed or sublicensed in the
respective License.
h. "Net Product Sales Revenues" means the aggregate of any and all
consideration actually received by an ART Party (in good funds in the event the
consideration is money), for any Sales of Products, after deducting all
Qualifying Costs applicable to each Sale; provided, however, in the case of a
Sale of a Product by and between any ART Parties, such a Sale shall not be
considered to constitute Net Product Sales Revenues unless one of the ART
Parties is the end user of the Product. Notwithstanding anything to the contrary
contained herein, in the event of a Sale of a Product that is a part or
component of another product made, produced or manufactured by or for an ART
Party, Net Product Sales Revenues from such Sale shall be calculated on the
basis of the fair market value of the Product part or component, and not on the
price of the entire product.
i. "Products" means any product hereafter made, produced or
manufactured by or for an ART Party and sold by an ART Party to a Person (other
than an ART Party, unless the ART Party is the end user), which product: (1) is
a Current Crystallume Product; (2) contains or consists of Inventory purchased
by ART from EDI pursuant to the Asset Purchase Agreement; or (3) incorporates or
embodies, in whole or in part, a Current Crystallume Product or a product which
is made, produced or manufactured through use of the Intellectual Property, in
whole or in part; provided, however, under no circumstances shall Products be
deemed to include any product made, produced or manufactured by or for an ART
Party prior to the date hereof.
3
4
j. "Qualifying Costs" means each of the following:
(1) any and all discounts in amounts customary in the
trade for quantity purchases, prompt payments and for
wholesalers and distributors;
(2) any and all credits or refunds, not exceeding the
original invoice amount, for claims or returns;
(3) any and all domestic and foreign duties, taxes, charges
and other assessments of any kind (including, without
limitation, withholding taxes (net of United States tax
credits actually used by an ART Party), sales taxes, use
taxes and any interests, fines or penalties thereon),
directly or indirectly levied or imposed on an ART Party
by any Government Authority;
(4) any and all freight, shipping and any other
transportation expenses and related transportation
insurance; and
(5) any and all sales commissions paid to independent
sales agents or brokers.
k. "Product Royalty Term" means the Five (5) year period commencing
on the date hereof and expiring on September 30, 2002.
l. "Registration Statement" means any registration statement filed
with the Commission in accordance with the Securities Act (as hereinafter
defined).
m. "Sale" means any bona fide transaction anywhere in the world for
which consideration is actually received by an ART Party (in good funds in the
event the consideration is money), from a Person (other than an ART Party,
unless the ART Party is the end user) for the sale of any Product(s) to any
Person (other than an ART Party, unless the ART Party is the end
4
5
user); provided, however, "Sale" shall not be deemed to cover any sale, transfer
or other disposition of a Product, in whole or in part, by and between any ART
Parties, unless an ART Party is the end user. A Sale of a Product shall be
deemed completed at the time the ART Party actually receives consideration (in
good funds in the event the consideration is money), from such a Person for the
Product.
n. "Securities Act" means the Securities Act of 1933, as amended, or
any federal statute which shall be enacted to take the place of such act,
together with all rules and regulations promulgated thereunder.
2. Product Royalty.
a. Calculation - Subject to the terms hereof, ART shall pay EDI a
royalty ("Product Royalty") equal to Two and One-Half Percent (2.5%) of any and
all Net Product Sales Revenues arising from Sales of Products made during the
Product Royalty Term.
b. Payment - Subject to the terms of Section 4, the Product Royalty
shall be calculated for the Twelve-month period ("Year") commencing October 1,
1997 and ending September 30, 1998 and each subsequent Year during the Product
Royalty Term, on the basis of Sales of Products made during such recently
completed Year, and shall be due and payable within Thirty (30) days after the
end of each Year of the Product Royalty Term.
3. Licensing Royalty.
a. Calculation - Subject to the terms hereof, ART shall also pay EDI
a royalty ("Licensing Royalty") equal to Thirty Percent (30%) of any and all Net
Licensing Revenues arising from any and all Licenses consummated during the
Licensing Royalty Term. (The Product Royalty and the Licensing Royalty are
collectively referred to herein as the "Royalty".)
5
6
b. Payment - Subject to the terms of Section 4, the Licensing
Royalty shall be calculated at the end of the first Year and each subsequent
Year during the Licensing Royalty Term, on the basis of Licenses consummated
during such recently completed Year, and shall be due and payable within Thirty
(30) days after the end of each Year of the Licensing Royalty Term.
4. Prepayment.
a. Amount - Subject to the terms of this Section 4, ART shall pay
EDI the following amounts ("Installments") as a prepayment against the
Royalties:
(1) TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) on
October 1, 1998;
(2) On October 1, 1999, an amount equal to: (a) TWO
HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00), less
the excess of
(x) the aggregate of all Royalties earned through
September 30, 1998, over
(y) TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00).
(3) On October 1, 2000, an amount equal to: (a) ONE
HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($125,000.00),
less the excess of
(x) the aggregate of all Royalties earned through
September 30, 1999, over
(y) FIVE HUNDRED THOUSAND DOLLARS ($500,000.00).
6
7
The Installments (collectively, the "Prepayment") shall be deemed to be a
prepayment against which Royalties earned pursuant to this Agreement shall be
applied.
b. Interest - ART shall pay EDI interest at the rate of Nine and
One-Half Percent (9.5%) per year, noncompounded, simple interest, on each
respective Installment, on the respective Installment due dates provided in
Section 4a.
c. Credit Against Prepayment - Each Product Royalty and Licensing
Royalty due and payable hereunder shall be calculated at the end of the first
Year and each subsequent Year during the Product Royalty Term and the Licensing
Royalty Term, as the case may be, and shall be credited and applied against the
sum of all Installments and all interest paid by ART. In the event the sum of
the Product Royalty and the Licensing Royalty due and payable as to any Year
exceeds the sum of all Installments and all interest paid by ART, then ART shall
pay to EDI such excess no later than Thirty (30) days after the end of the
respective Year in which such excess occurs.
d. Limitation - The Prepayment shall be subject to the terms of
Section 1b of the Noncompetition Agreement, which terms are incorporated herein
by reference.
e. Security - ART's obligation to pay the Royalty shall be secured
by a security interest in the Intellectual Property, as set forth in that
certain security agreement by and between EDI and ART, dated October 27, 1997.
f. Initial Public Offering - In the event ART completes an Initial
Public Offering resulting in at least Ten Million Dollars ($10,000,000.00) in
gross proceeds, any unpaid Installments (of the Prepayment) shall be paid by ART
within Thirty (30) days of the successful completion of such Initial Public
Offering ("Early Payment Date"). ART shall also pay EDI interest at the rate of
Nine and One-Half Percent (9.5%) per annum through the Early Payment Date on all
such unpaid Installments.
7
8
g. Nonrefundable - Except as provided in Section 12.4 of the Asset
Purchase Agreement, or Sections 4d or Section 7 of this Agreement, the
Prepayment shall be nonrefundable.
5. Royalty Report. Each Product Royalty and Licensing Royalty payment by
ART hereunder shall be accompanied by a report certified by an ART officer,
describing each Product Sale and each License taken into account in calculating
the Product Royalty and the Licensing Royalty, respectively, and describing the
method and manner in which the Product Royalty and the Licensing Royalty were
calculated ("Royalty Report"). ART shall also maintain accurate and complete
books and records with respect to all material information used by ART in
calculating the amount of the Product Royalty and the Licensing Royalty payable
hereunder. All such books and records shall be retained by ART for a period of
not less than Four (4) years from the date of the Royalty Report to which such
books and records relate.
6. Audit. EDI shall have the right, for the period of Four (4) years from
the date of any Royalty Report, to verify the accuracy of information contained
therein and to utilize the services of its accountants and attorneys for such
purpose. ART agrees to reasonably cooperate with such verification activities
and to provide EDI and its representatives with reasonable access to the
relevant books and records of ART during normal business hours. In the event any
such inspection reveals an additional Product Royalty and/or Licensing Royalty
to be due and payable hereunder, EDI shall provide ART with notice of such
deficiency and ART shall promptly pay EDI such deficiency, with interest as
provided in Section 10. In the event that any such inspection reveals that the
Product Royalty or the Licensing Royalty has been underpaid by ART by an amount
in excess of Five Percent (5%) of the amount actually due and payable, ART shall
also reimburse EDI for all reasonable professional costs and expenses incurred
in connection with carrying out such inspection.
8
9
7. Right of Offset. Notwithstanding any provision hereof to the
contrary, any and all of the following: (a) Indemnifiable Damages of Buyer
(subject to Section 12.1 of Asset Purchase Agreement); and (b) any other
Claim incurred or suffered by Buyer, directly or indirectly, arising out of
or relating to:
(1) any breach of or default in the observance or performance of
any agreement made by Seller in this Agreement or any other
Covered Agreement (other than the Asset Purchase Agreement),
or Seller's failure to fulfill any other obligation which it
is required to perform or observed in this Agreement or any
other Covered Agreement (other than the Asset Purchase
Agreement);
(2) any inaccuracy in any, breach of any, or false or fraudulent,
representation or warranty made by Seller in this Agreement or
any other Covered Agreement (other than the Asset Purchase
Agreement); or
(3) the investigation or defense of any Claim which is made or
brought against Buyer relating to any (1) or (2) above;
may, at the election of ART, be applied as an offset against (and in reduction
of) any Installment or any Royalty payable hereunder. Prior to exercising such
right of offset, ART shall give EDI written notice of the circumstances giving
rise to such right of offset, which notice shall include copies of all pertinent
documentation relating thereto.
8. Acknowledgment. EDI acknowledges that each ART Party may use its
reasonable business judgment and complete discretion in deciding the manner and
extent to which it shall enter into any License or make, produce or manufacture
(or have made, produced or manufactured) Products, and/or make Sales of
Products, and no ART Party shall be subject to any duty of best efforts (or
otherwise) with respect thereto.
9
10
9. Currency. All Royalty payments hereunder shall be made in United States
Dollars by check payable to EDI. Royalties on Net Product Sales Revenues and Net
Licensing Revenues denominated in a currency other than United States Dollars
shall be payable based on the currency exchange rate in effect on the last
business day of the applicable Year, as reported in the Wall Street Journal.
10. Late Fee. Any Royalty payment not paid when due hereunder shall be
subject to a late payment charge equal to One Percent (1%) per month. In the
event that said late payment charge exceeds the maximum interest rate allowed by
Applicable Law, then said payment charge shall be deemed to be reduced to equal
the maximum interest rate allowed by Applicable Law.
11. Entire Agreement. This Agreement constitutes the entire agreement by
and between the Parties regarding the subject matter contained herein and
supersedes all prior and contemporaneous undertakings and agreements by and
between the Parties, whether written or oral, with respect to such subject
matter.
12. Amendment. This Agreement shall not be amended except by a writing
executed by both Parties.
13. Parties Bound. This Agreement shall be binding upon and shall
inure to the benefit of the Parties and their respective successors and
permitted assigns, subject to the restrictions against assignment provided in
Section 14.
14. Assignment. This Agreement shall not be assignable by either Party
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld or delayed; provided, however, ART shall have the right,
without obtaining EDI's prior written consent, upon prior notice to EDI, to
assign its rights under this Agreement to any ART Affiliate; provided, further,
that EDI shall have the right, without obtaining ART's prior written consent but
upon prior written notice to ART, to assign all of its rights, duties and
obligations under this
10
11
Agreement to a Surviving Entity (as hereinafter defined), if: (a) through an
acquisition or merger (a "Corporate Event"), EDI is acquired by, or is merged
with and into, an entity ("Surviving Entity") which after such Corporate Event
will have revenues, net income and net assets at least equal to those of EDI at
the time of such Corporate Event; and (b) the Surviving Entity assumes all of
EDI's duties and obligations under each of the Covered Agreements.
Notwithstanding anything to the contrary contained herein, no assignment of any
rights, duties or obligations under this Agreement relieves the assigning Party
of primary liability for its duties and obligations under this Agreement, and as
between the Parties, the assigning Party shall continue to be liable for all of
its duties and obligations under this Agreement as though no assignment has been
made.
15. Counterparts. This Agreement may be executed simultaneously in Two (2)
or more counterparts, any of which shall be deemed an original, and all of which
together shall constitute one and the same instrument, notwithstanding that both
Parties are not a signatory to the original or the same counterpart.
16. Headings. The headings used herein are inserted for convenience only
and are in no way intended to describe, interpret, define or limit the scope,
extent or intent of this Agreement.
17. Waiver. Failure by either Party to insist upon strict performance of
any provision herein by the other Party shall not be deemed a waiver by such
Party of its rights or remedies or a waiver by it of any subsequent default by
the other Party and no waiver shall be effective unless it is in writing and
duly executed by the Party entitled to enforce the provision being waived.
18. Notices. All notices required or permitted hereunder shall be in
writing and shall be: (a) sent by telex or facsimile transmission (to be
effective when receipt is acknowledged unless sent after 5:00 p.m. on any
business day, in which event notice shall be deemed received
11
12
on the next business day); (b) personally delivered; (c) sent by certified mail,
return receipt requested; or (d) sent by a nationally recognized, commercial
overnight delivery service with provisions for a receipts, postage or delivery
charges prepaid, and, except as otherwise provided in Section 18(a), shall be
deemed given when personally delivered or when placed in the possession of such
mail or delivery service, and addressed to the Parties, as follows:
To EDI: Electronic Designs, Inc.
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn.: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Senior Vice President
Facsimile no.: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to: ▇▇▇▇▇▇▇, Procter & ▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn.: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, P.C.
Facsimile no.: (▇▇▇) ▇▇▇-▇▇▇▇
To ART: Advanced Refractory Technologies, Inc.
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn.: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
Facsimile no.: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to: Damon & ▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn.: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Facsimile no.: (▇▇▇) ▇▇▇-▇▇▇▇
Notice of change of address shall be given in accordance with the terms of this
Section 18 and shall be effective only upon receipt.
19. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York without giving effect to the
principles of conflicts of laws.
12
13
20. Severability. If any provision of this Agreement is determined by a
court of competent jurisdiction to be illegal or unenforceable, such provision
shall be automatically reformed and construed so as to be valid, operative and
enforceable to the maximum extent permitted by law or equity while preserving
its original intent. The invalidity of any part of this Agreement shall not
render invalid the remainder of this Agreement. The Parties acknowledge that use
of the defined term "Royalty" herein to define the payments hereunder is not
intended to affect the enforceability of this Agreement.
21. Cooperation. If at any time either Party reasonably requests that any
further agreement or assurance is reasonably necessary or desirable to fully
carry out the provisions of this Agreement and the transactions contemplated in
this Agreement, then the other Party shall execute and deliver, or cause to be
executed and delivered, any and all reasonably necessary agreements and
assurances, and do or cause to be done all things reasonably necessary or
desirable to fully carry out the provisions of this Agreement and the
transactions contemplated herein.
22. Survivability. Notwithstanding anything contained herein to the
contrary, all representations, warranties and agreements contained herein shall
survive and continue to bind the Parties after the execution and delivery of
this Agreement, the expiration or earlier termination of this Agreement, and any
investigation conducted by either Party, to the extent and for as long as may be
necessary to give effect to the rights, duties and obligations of the Parties
pursuant to this Agreement, subject to any applicable statute of limitations.
23. Disputes. Each Party agrees that any dispute or controversy arising
between the Parties hereunder shall be settled in an action commenced and
maintained in the United States District Court for the Southern District of New
York, or if said Court lacks subject matter jurisdiction, then in the New York
Supreme Court, County of New York, and each Party
13
14
consents to personal jurisdiction in such courts. EDI hereby designates ▇▇▇▇▇▇▇,
Procter & ▇▇▇▇ LLP, ▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ as its
authorized agent for service of process within the State of New York.
24. Term. The term of this Agreement shall be the Product Royalty Term, as
to the Product Royalty, and shall be the Licensing Royalty Term, as to the
Licensing Royalty, unless earlier terminated as provided in Section 1b of the
Noncompetition Agreement.
25. Dedication. ART agrees to dedicate the services of One (1) member of
its senior management to the commercial exploitation of the Sale of Products and
the marketing of Licenses, as ART shall determine, in its sole reasonable
business judgment.
26. Disclaimer. Except as otherwise provided in this Agreement, the Asset
Purchase Agreement or any other Covered Agreement: (a) with respect to the
Intellectual Property, EDI makes no other representation or warranty, either
express or implied, including, without limitation, any representation or
warranty as to merchantability or fitness for a particular purpose; and (b) EDI
shall have no liability to ART for any indirect, special, incidental, or
consequential damages arising out of ART's use of the Intellectual Property.
IN WITNESS WHEREOF, the Parties have executed this Royalty Agreement by
their duly authorized officers on the day and year first above written.
ELECTRONIC DESIGNS, INC.
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Senior Vice President
ADVANCED REFRACTORY TECHNOLOGIES, INC.
By:/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
14
