****Certain
confidential information contained in this document, marked by
brackets, has been omitted and filed with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
SILAN-ESS COOPERATION IN VCD
AGREEMENT
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Party
A:
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Hangzhou Silan
Microelectronics Joint-Stock Co., Ltd. ( referred to hereinafter as
“Silan”)
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Address:
No. 4 Hang-Zhou Huang Gu Shan Road
Post
Code: 310012
Telephone:
Facsimile:
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Party
B:
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ESS Technology,
Inc. (referred to hereinafter as “ESS”)
Address: 48401 Fremont Blvd., Fremont, California 94538, U.S.A
Telephone:
Facsimile:
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ESS’
matured VCD decoding circuitry [****] has been on sale in the
market for several years, and has [****] in the combined China and
India VCD market;
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ESS owns all
the intellectual property rights [****], and owns the rights to
license or assign those rights in any way to a third party, and ESS
has never licensed, assigned or transferred those rights in any
manner to any third party;
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Silan has
successfully developed a VCD optical servo DSP controller chipset,
[****] (one set consists of two pieces), which can be coupled with
ESS’ [****]circuitry;
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Both of the
parties have cooperated in selling into VCD systems in China and
India over a period of time; and
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Both of the
parties wish to advance a mutually beneficial business relationship
for the purpose of promoting their joint market share in
China’s and India’s VCD market by enhancing the
features and controlling the cost of their joint
products.
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Therefore, in
consideration of the mutual benefits flowing from cooperation in
future VCD products, both parties agree as follows:
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Goals and
Transfers of Responsibility:
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ESS will assign
its [****] distribution contract with FE Global for VCD
applications in China and India to Silan, and Silan will become
responsible for managing both China and India sales and China and
India sales channels with respect to the VCD backend decoding
circuitry comprised ESS’ [****] (the “VCD Backend
Decoding Circuitry”);
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Silan shall pay
[****] to ESS as a product licensing fee (“Product License
Fee”) per sale [****]. For sales made by Silan or its agents
in VCD applications in China or India, Silan may purchase
[****]from ESS at ESS’ Manufacturing Cost (the sum of
ESS’ cost of die, packaging, testing, and overhead) plus the
[****].
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****Confidential Treatment
Requested.
1
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The circuitry
shall be under the Silan’s brand name and trademarks and the
[****] once requested by Silan for new production units only. ESS
shall not remark any finished goods inventory.
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Scope of
License Authorization.
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2.1 Subject
to compliance by Silan of its obligations hereunder and subject to
termination as provided in this Agreement, ESS hereby grants to
Silan the exclusive right to market and sell the VCD Backend
Decoding Circuitry to VCD customers in China and India. For
purposes of clarity, ESS retains the right to sell the [****]in
non-VCD applications in China and India, as well as to sell the
[****] in VCD applications in countries other than China and
India.
2.2 ESS
authorizes Silan to market and sell the VCD Backend Decoding
Circuitry under [****] during the Transition Period defined below
in section 6.2.
2.3 Silan
is hereby licensed to use or refer to ESS’ product
specifications in connection with marketing and sales of the VCD
Backend Decoding Circuitry, to the extent the specifications
accurately represent such circuitry.
2.4 During
the term of this Agreement, ESS will not license, assign, transfer
or otherwise distribute the rights as set forth to any person or
entity other than Silan.
2.5 To
ensure proper processes are used during the production, quality
control and sales of the [****] under this Agreement, ESS shall
provide Silan the following technical documentation:
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Ø
The technology and
quality control documentation related to the circuitry’s
manufacturing, packaging and testing.
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Ø
An illustration of the
test patterns or test vectors related to the circuitry testing and
product testing.
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Ø
VCD firmware and
corresponding software development tools needed by existing VCD
applications and customers.
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2.6 The
parties agree that all right, title and ownership of the technical
documents provided by ESS under section 2.5 of this Agreement is
held by ESS, and that Silan is licensed to use such materials and
the information they contain only in testing, quality control, and
support of the VCD Backend Decoding Circuitry. The parties further
agree that such materials are confidential and proprietary ESS
information, and that Silan shall exercise no less than reasonable
care to protect the confidentiality of such materials and shall not
disclose or disseminate them to anyone other than Silan employees
bound by confidentiality agreements with a need to know the ESS
information in the performance of their job duties associated with
the VCD Backend Decoding Circuitry. Upon the termination of this
Agreement, Silan shall return all copies of the materials ESS
provided under section 2.5, in any medium, together with any
copies, extracts and derivatives thereof, to ESS.
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VCD
Single-Chip Development
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3.1 Following
execution of the Agreement, Silan and ESS shall actively pursue
integration of Silan’s servo processor system and ESS’
VCD backend decoding system into a single-chip (the
“Single-Chip VCD”). ESS shall provide Silan with all
necessary technical documentation and data for this project.
Further, ESS shall provide email and telephone engineering support
to complete integration. Before merging the ESS IP for the final
layout, ESS shall dispatch an engineer to Silan’s
headquarters to provide on-site assistance for no
****Confidential Treatment
Requested.
2
more than
[****], after receiving a written request from Silan. Overall, ESS
agrees to make good faith and reasonable efforts to provide
support, both in terms of technical documentation and service, to
achieve complete integration of the Silan servo processor and
ESS’ VCD backend decoding system.
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Both parties
agree to adopt the [****] for the Single-Chip VCD.
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ESS shall
provide the [****] process technology.
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ESS shall
license to Silan [****],which will be provided to Silan as soon as
the agreement executed.
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3.5 The
only derivative work from ESS licensed technology that Silan shall
be allowed to create is the Single-Chip VCD.
3.6 Silan
and ESS will retain their own respective intellectual property
rights in the subsystems provided individually to the Single-Chip
VCD.
3.7 The
Single-Chip VCD will be produced, marketed, and sold under
Silan’s brand name, trademarks and a Silan label.
3.8 During
the term of this Agreement, ESS will not license, assign, transfer
the Technology (hereinbefore referred to) to any person or entity
other than Silan.
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Product
License Fee
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Because ESS
will transfer all the sales rights of the VCD Backend Decoder
Circuitry to Silan, Silan shall pay ESS the product license fee in
the amount of [****]— including, but not limited to, product
licensing and usage fee for the brand name, trademarks, labels and
IP, etc.).
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When the
Single-Chip VCD goes into mass production, Silan will share the
unit *Gross Margin [****]. The rationale for this royalty rate
includes the consideration that the Single-Chip VCD contains
ESS’ VCD backend decoding features and the license granted to
Silan of the [****].
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[****]
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[****]
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Silan shall
make payment to ESS for the total Product License Fees, plus any
associated purchase costs as described in section 1.4,
[****].
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Silan shall
also report to ESS on [****] the number of orders, the number of
units distributed, the number of units produced, and the number of
products packaged of the VCD backend Decoding Circuitry and the
Single-Chip VCD.
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FE Global
(referred in section 5 of this Agreement) is authorized to provide
an accounting of Silan’s product sales to ESS. ESS also has
the right to audit Silan’s production and sales quantity of
VCD Backend Decoder Circuitry and Single-Chip VCD not more than
once per quarter, during business hours and upon reasonable notice
to Silan. The cost of the audit shall be borne by ESS unless the
audit shows that Silan has underreported its production, orders, or
distribution by at least 5%, in which case the cost of the audit
shall be borne by Silan.
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If Silan
encounters tremendous pricing pressure during Silan’s
marketing and sales of the VCD Backend Decoder Circuitry (including
the future Single-Chip VCD), both parties agree to meet
and
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****Confidential Treatment
Requested.
3
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negotiate their
joint business, and if both parties agree to do so, to adjust the
Product License Fee or otherwise amend or terminate this
Agreement.
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Sales
Channel Management.
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The current
sales [****] is as follows:
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Ø
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FE
Global now has the exclusive right of sales and distribution of
[****] in the VCD market in China.
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Ø
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FE
Global retains a customer support team, and ESS also retains a VCD
product technical support team.
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Ø
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ESS
has the right to set FE Global’s [****] with each individual
end customer.
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Ø
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FE
Global is responsible for collecting all sums due from the end
customers; the accounting cycle between ESS and FE Global
is
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