--------------------------------------------------------------------------------

Exhibit 10.1

SUPPLY AGREEMENT

Dated: April 26, 2006
 

 BETWEEN:          
 (1)
Digital Angel Corporation 490 Villaume Avenue, South St. Paul, MN 55075-2443 USA
(hereinafter called DAC)
     
 (2)
 
Raytheon Microelectronics España, S.A. Parque Tecnológico de Andalucía, Avda.
Juan Lopez de Peñalver, 12 Málaga. (hereinafter called RME)
     
WHEREAS:
  RME and DAC are parties to a Supply Agreement dated June 19, 2003 which
expires on June 30, 2006 (the “2003 Agreement”), and the parties want to
negotiate a new agreement that reflects the changes to the business since the
execution of the 2003 Agreement; and      
WHEREAS:
  The parties desire to assure that the sale of the Products pursuant to this
Agreement includes the right for DAC and the subsequent purchasers and users of
the Products to use for the intended purpose(s) Intellectual Property that may
be owned by RME or its Affiliates that relates exclusively to the design,
manufacture or distribution of the Products.

 

 IT IS AGREED:

 
1.
Definitions

 

 
1.1
“Affiliate” means any person, partnership, joint venture, corporation or other
form of enterprise, domestic or foreign, including but not limited to
subsidiaries, that directly or indirectly, control, are controlled by, or are
under common control with a party.

 

 
1.2
“Confidential Information” means nonpublic information that RME or DAC
(“Disclosing Party”) designates as being confidential at the time of disclosure,
by suitable legend to the party that receives such information (“Receiving
Party”) that has or could have commercial value in the business or prospective
business of Disclosing Party, or which, under the circumstances surrounding
disclosure ought to be treated as confidential by the Receiving Party.
“Confidential Information” includes, without limitation, information in tangible
or intangible form relating to and/or including released or unreleased
Disclosing Party technology, software or hardware products, the marketing or
promotion of any Disclosing Party product, Disclosing Party’s business policies,
financial information, contracts, records, or practices, and information
received from others that Disclosing Party is obligated to treat as
confidential. Except as otherwise indicated in this Agreement, the term
“Disclosing Party” also includes all Affiliates of the Disclosing Party and,
except as otherwise indicated, the term “Receiving Party” also includes all
Affiliates of the Receiving Party. An “Affiliate” means any person, partnership,
joint venture, corporation or other form of enterprise, domestic or foreign,
including but not limited to subsidiaries, that directly or indirectly, control,
are controlled by, or are under common control with a party. Confidential
Information shall not include any information, however designated, that: (i) is
or subsequently becomes publicly available without Receiving Party’s breach of
any obligation owed Disclosing

 

 

Page 1 of 10
 4/26/2006

 
                                                                                                                                                                                                            

--------------------------------------------------------------------------------

 
 
 
 
Party; (ii) became known to Receiving Party prior to Disclosing Party’s
disclosure of such information to Receiving Party pursuant to the terms of this
Agreement; (iii) became known to Receiving Party from a source other than
Disclosing Party other than by the breach of an obligation of confidentiality
owed to Disclosing Party; or (iv) is independently developed by Receiving Party.

 

 
1.3
“Intellectual Property” means any and all intellectual property held by a party
or any Affiliate of a party, including but not limited to patents, licenses of
patented technology, trademarks, exclusively copyrights, trade secrets, and
know-how to the extent that such Intellectual Property relates to the
manufacture or distribution of the Products.

    

 
1.4
“Products” means glass encapsulated, syringe-implantable transponders,
regardless of operating frequency for use in animals, human beings and inanimate
objects carried on or worn by animals and human beings.

 

 
1.5
“Specifications” means all documentation related to the operating performance,
design, manufacture or use of the Products, whether developed by RME or DAC.

         

 
2.
Terms and Conditions of Supply

 
2.1
DAC shall purchase products in accordance with the terms set forth in Clause 3
below and RME shall manufacture and supply the products, in accordance with the
Specifications in existence at the time of the order release. RME shall ensure
that the materials procured by RME and RME’s manufacturing of the Products shall
remain competitive with regard to price, quality and other terms.

 
2.2
This Agreement shall be effective from April 26, 2006 and except as provided by
clause 17 below, shall continue until June 30th 2010.

 
2.3
Any modification to this Agreement shall be made by written agreement between
DAC and RME.

 
2.4
RME will be DAC’s preferred supplier of the Products for the duration of this
agreement provided RME’s pricing remains market competitive. Notwithstanding the
foregoing, DAC reserves the right to purchase components for the Products from
any supplier/vendor including RME’s suppliers/vendors.

 
2.5
DAC may review and audit the components used by RME and/or its suppliers for
compliance with the terms and conditions of this Agreement. In connection with
any such audit, DAC shall be provided with copies of any documents reasonably
requested by DAC.

 
3.
Orders and Forecast

 
3.1
In the last week of each calendar month, DAC shall send RME a 12 month
non-binding rolling forecast.

 
3.2
DAC will place orders covering at least 90 days horizon.

 
3.3
At the time of receiving the rolling forecast, RME will also order long lead
time parts needed to cover the quantity indicated in the forecast for the fourth
month forward +/- 25%.

 
3.4
DAC is committed to lead times as agreed between the parties and will therefore
bear responsibility for the long lead materials defined in 3.3 above if not
consumed as forecasted.

 
3.5
RME will do its best to manage requested changes in the 90 days horizon to
reflect DAC’s demand changes.

Page 2 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

 
4.
Suppliers

 
4.1
RME and DAC will set a formal vendor approval process with the participation of
both parties.

 
4.2
The vendor approval process shall endeavor to establish that DAC representatives
will have full access to the facilities of RME/DAC approved suppliers.

 
5.
Production

 
5.1
RME shall operate a quality system to the requirements of EN ISO 9001 or agreed
equivalent.

 
5.2
RME shall operate a first in first out policy on all components used in the
Products manufactured for DAC.

 
5.3
RME shall be responsible for implementing the Specification to manufacture the
Products and ensuring the Products comply with the Specification.

 
5.3.1
RME will strive to improve the yield of all of the assembly processes involved
in the manufacturing of DAC products. Any yield improvement below 4% will be
shared equally between RME and DAC.

 
6.
RME support

 
6.1
RME will continue supporting DAC prototype build and new product introduction.

 
6.2
RME will continue supporting and collaborating with DAC Engineering on a daily
basis to improve product performance and design and process development.

 
6.3
A project team including at least a program manager, 2 process engineers, a test
engineer, a quality engineer and a supply chain engineer will be in charge of
the whole program.

 
6.4
The program manager assigned to the project will be in charge of the
coordination, monitoring and daily activities for the operations and in dealing
with suppliers.

 
6.5
RME will provide DAC with bills of materials and general process flow
information for DAC internal use and to be submitted to DAC Head Office at St
Paul MN when required. These documents and its content are covered by the
Confidentiality requirements in article 18 as well as signed off RME-DAC
non-disclosure agreement and cannot be transferred to others.

 
6.6
RME will provide a customer advocate in order to communicate DAC’s desires to
the appropriate RME personnel, as required.

 
7.
Engineering Change Orders “ECOs”

 
7.1
RME will not make any changes to the Specifications without DAC written
authorization.

 
7.2
If DAC issues a written Engineering Change Order (“ECO”) to the Specifications,
RME will apply such ECO to the relevant Products for all subsequent deliveries.

 
7.3
DAC will be responsible to RME for the cost of components specific to DAC
products made obsolete as a consequence of an ECO. If components affected by ECO
are already assembled into product, DAC will accept those products already
manufactured.

 
7.4
RME will use its reasonable endeavours to mitigate such cost. All such costs
shall be agreed prior to implementation of the ECO.

 
7.5
RME may request changes to the Specification (“ECR”). ECRs will be accompanied
by an evaluation of cost impact and all other relevant data. ECRs will not be
binding on DAC until expressly accepted in writing by DAC as an ECO.

 

Page 3 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

 
8.
Materials

 
8.1
DAC shall have the right, at its discretion, to provide components to RME at
cost and invoice RME for such components; in turn RME will invoice DAC at the
same cost plus 5.5% charge as described in paragraph 11.3 , thereby
incorporating the supplied component costs within the total unit cost charged to
DAC. It is acknowledged and agreed that DAC will bear complete responsibility
for the components that it provides and that RME will be excused and compensated
for any non-conformance, including but not limited to delays in delivery, scrap,
yield or quality issues as a result of any components that are provided by DAC,
or which fail to be provided to RME in a timely manner. This situation only
could happen for new products at prototype or new product introduction stages.
This situation will not apply to the current products.

 
8.2
Except to the extent that DAC provides components to RME pursuant to Clause 8.1
above, RME will have full responsibility on the supply of the parts of all the
current transponder Products.

 
9.
DAC Automated equipment and tooling provided to or by RME

 

 
9.1
Schedule 9.1 sets forth the automated equipment and tooling, used in the
production of the Products, that are owned by DAC but located in the RME
facilities (the “DAC-Owned Equipment”). Schedule 9.1 sets forth the automated
equipment and tooling, used in the production of the Products that are owned by
RME (the RME-Owned Equipment”).

 
9.2
The DAC-Owned Equipment shall remain the property of DAC at all times and can be
recovered from RME provided ten day’s notice is given and further provided that
such removal will not impact RME’s current production obligations for the
Products.

 
9.3
RME shall pay DAC the replacement cost of all lost of damaged DAC-Owned
Equipment.

 
9.4
RME shall keep the DAC-Owned Equipment properly maintained and calibrated at
DAC’s cost (such cost to be the direct cost incurred by RME for parts and
supplies and other mutually agreeable items, but excluding labor costs) provided
that RME provide DAC with a written quotation and obtain DAC’s prior written
approval before calibration is carried out. DAC will ensure such calibration is
carried out in a timely manner to ensure production output is not delayed.

 
9.5
DAC-Owned Equipment shall not be removed from RME’s premises without DAC’s
written notice.

 
9.6
DAC-Owned Equipment shall not be used for manufacturing products or
subassemblies for third parties without DAC’s prior written approval.

 
9.7
Upon termination of this Agreement, DAC shall have the right, having given 10
day’s notice in writing to enter RME premises, to remove any DAC-Owned Equipment
not returned to DAC when requested.

 
10.
Outsourcing decisions

RME may outsource the assembly of all Products covered by this agreement with
the exception of Products incorporating the Super 12 technology, provided the
subcontractors are approved by both RME and DAC, and provided such subcontractor
has signed a non compete and confidentiality agreement acceptable to RME and DAC
prior to the performance of any work.
 

Page 4 of 10
 4/26/2006

 
 

--------------------------------------------------------------------------------

 
11.
Price

 
11.1
RME material purchasing cost will be reported to DAC at any time that it is
requested.

 
11.2
RME will strive to continually get the best competitive pricing from all the
suppliers and to develop the highest quality and competitive suppliers.

 
11.3
At the time of taking over responsibility on the supply of all the components of
the bill of material of DAC products including coils and circuits, RME will
include in the price of the finished Product the actual cost to RME of
components for the Products, labor costs incurred by RME plus a fee equal to
5.5% of the actual cost of the components for the Products purchased by DAC.
This 5.5% percentage includes a current 4.5% material scrap cost carried by DAC
and has been set considering material freight cost, material duties, material
inventory cost, material overhead cost and financial cost arising from changes
in the payment terms.

 
11.4
The pricing of each Product shall be set forth in the purchase orders submitted
by DAC based on the prices currently agreed between DAC and RME; provided,
however, that the parties shall from time to time negotiate in good faith any
changes in price for existing Products as a result of agreed changes to the
Products or for future Products, and shall update this Agreement as necessary to
reflect the current price of each Product.

 
12.
Payment

 
12.1
RME shall invoice DAC for Products delivered on or after delivery.

 
12.2
DAC shall pay RME within 30 days after the date of Product is delivered to DAC.

 
12.3
DAC products shall be priced and paid for in US$ currency.

 
13.
Quality Tests

RME is responsible for testing all Products and ensuring they perform in
accordance with the specification and agree not to ship any product not meeting
specification with DAC prior written consent.

 
14.
Other products and rest of the transponder value chain

 
14.1
DAC and RME will work together to develop and evaluate the feasibility of a
win-win proposal in order for RME be in charge of the whole transponder value
chain including custom packaging for different DAC customers.

 
14.2
DAC will provide RME with the information needed to quote other electronic
products, including current price and target price to be successful so RME could
get their suppliers involved to develop a win-win proposal.

 
15.
Warranty

RME warrants that for 12 months from the delivery date, Products supplied will
conform to the applicable Specifications and be free from defects in material
and workmanship. DAC will provide a monthly report to RME of all warranty claims
for the Products within the prior month. Within 30 days of receipt of the above
information, which must include itemized serial numbers,
 

Page 5 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

product identification, description of failure, and cost of warranty, RME shall
credit DAC 100% of the purchase cost of the original product where the serial
number identifies the age of the product to be equal to or less than 12 months
from delivery date and RME reasonably determines that the Products are
defective, based on product failures identified through standard manufacturing
testes performed by RME, within ten (10) business days after receipt of the
Products. If no determination is made within such ten (10) business day period,
then the Products shall be deemed defective and covered by the warranty.

 
16.
Liability

 
16.1
The liability of either party to the other, if any, and the sole and exclusive
remedy for damages for any claim of any kind whatsoever made by one party
against the other with respect to the supply of products under this Agreement or
default in respect of such supply shall be limited to an amount equal to the
value of purchases made by DAC from RME in the immediately preceding twelve
months. Under no circumstances will either party be liable to the other for any
indirect, special, incidental, or consequential damages arising out of any
breach of this agreement whether such damages are labeled in tort, contract, or
indemnity, even if the relevant party has been advised of the possibility of
such damage.

 
17.
Termination

 
17.1
Either party shall be entitled to terminate this agreement immediately if the
other:

 
(i)
commits any breach of this Agreement which cannot be remedied within 30 days
after notification;

 
(ii)
commits a breach which can be remedied but which is not remedied within 30 days
of receipt of written notice requiring the breach to be remedied;

 
(iii)
ceases or threatens to cease trading, becomes insolvent or has a receiver,
administrative receiver appointed over the whole or any part of its assets, or
enters into composition with is creditors or has a resolution passed or order
made for it to be wound up (other than for purpose of a solvent amalgamation or
reconstruction);

 
17.2
Termination shall not affect any rights which have accrued in favour of either
party prior to the date of termination.

 
18.
Confidentiality

 

 
18.1
Receiving Party shall:

 
(i)
Refrain from disclosing any Confidential Information of the Disclosing Party to
third parties for three (three) years following the date that Disclosing Party
first discloses such Confidential Information to Receiving Party, except as
expressly provided in Sections 2(b) and 2(c) of this Agreement;

     

 
(ii)
Take reasonable security precautions, at least as great as the precautions it
takes to protect its own Confidential Information, but no less than reasonable
care, to keep confidential the Confidential Information of the Disclosing Party;

 
 

Page 6 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

 

 
(iii)
Refrain from disclosing, reproducing, summarizing and/or distributing
Confidential Information of the Disclosing Party except in pursuance of
Receiving Party’s business relationship with Disclosing Party, and only as
otherwise provided hereunder; and

 

 
(iv)
Refrain from reverse engineering, decompiling or disassembling any software code
and/or hardware devices disclosed by Disclosing Party to Receiving Party under
the terms of this Agreement, except as expressly permitted by applicable law.

 

 
18.2
Receiving Party may disclose Confidential Information of Disclosing Party in
accordance with a judicial or other governmental order, provided that Receiving
Party either (i) gives the undersigned Disclosing Party reasonable notice prior
to such disclosure to allow Disclosing Party a reasonable opportunity to seek a
protective order or equivalent, or (ii) obtains written assurance from the
applicable judicial or governmental entity that it will afford the Confidential
Information the highest level of protection afforded under applicable law or
regulation. Notwithstanding the foregoing, the Receiving Party shall not
disclose any computer source code that contains Confidential Information of the
Disclosing Party in accordance with a judicial or other governmental order
unless it complies with the requirement set forth in sub-section (i) of this
Section 2(b).

 

 
18.3
The undersigned Receiving Party may disclose Confidential Information only to
Receiving Party’s employees and consultants on a need-to-know basis. The
undersigned Receiving Party will have executed or shall execute appropriate
written agreements with third parties sufficient to enable Receiving Party to
enforce all the provisions of this Agreement.

 

 
18.4
Receiving Party shall notify the undersigned Disclosing Party immediately upon
discovery of any unauthorized use or disclosure of Confidential Information or
any other breach of this Agreement by Receiving Party and its employees and
consultants, and will cooperate with Disclosing Party in every reasonable way to
help Disclosing Party regain possession of the Confidential Information and
prevent its further unauthorized use or disclosure.

 

 
18.5
Receiving Party shall, at Disclosing Party’s request, return all originals,
copies, reproductions and summaries of Confidential Information and all other
tangible materials and devices provided to the Receiving Party as Confidential
Information, or at Disclosing Party’s option, certify destruction of the same.

 

 
18.6
Remedies. The parties acknowledge that monetary damages may not be a sufficient
remedy for unauthorized disclosure of Confidential Information and that
Disclosing Party shall be entitled, without waiving any other rights or
remedies, to such injunctive or equitable relief as may be deemed proper by a
court of competent jurisdiction.

 

 
18.7
Miscellaneous 

 

 
 
    (a) All Confidential Information is and shall remain the property of
Disclosing Party. By disclosing Confidential Information to Receiving Party,
Disclosing Party does not grant any express or implied right to Receiving Party
to or under any patents, copyrights, trademarks, or trade secret information
except as otherwise provided herein. Disclosing Party reserves without

 

Page 7 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

 

 
 
prejudice the ability to protect its rights under any such patents, copyrights,
trademarks, or trade secrets except as otherwise provided herein.

 

 
 
    (b) The terms of confidentiality under this Agreement shall not be construed
to limit either the Disclosing Party or the Receiving Party’s right to
independently develop or acquire products without use of the other party’s
Confidential Information. However, this sub-paragraph shall not be deemed to
grant to the Receiving Party a license under the Disclosing Party’s copyrights
or patents.

 

 
19.
Waiver

The failure of either party at any time or times to enforce any provisions
within this Agreement shall not affect its right to enforce such provision at a
later date.

 
20.
Law

This Agreement shall be governed by the laws of the state of Minnesota, USA.

 
21.
Assignment or Transfer. RME will not, without prior consent in writing, assign,
transfer or sub-contract, or in any way make over its obligations of this
agreement without DAC’s consent.

 
22.
Amendments, Assignment, and Entire Agreement. This Agreement may not be
modified, amended, or supplemented except by an agreement in writing signed by
both parties. This Agreement and the rights and obligations hereunder shall not
be assignable without the express written consent of the nonassigning party.
Subject to the restrictions against transfer or assignment as herein set forth,
the provisions of this Agreement shall inure to the benefit of, and shall be
binding on, the permitted successors and assigns of each of the parties hereto.
This Agreement shall constitute the entire agreement between the parties hereto
with respect to the transactions contemplated hereby and shall supersede all
prior or contemporaneous discussions, negotiations, understandings and
agreements. There are no representations, agreements, arrangements, or
understandings, oral or written, between or among the parties hereto relating to
the subject matter of this Agreement that are not fully expressed herein.

 
23.
Counterparts. This Agreement may be executed in various counterparts or copies,
all of which, when taken together, shall constitute the entire agreement.

 
24.
Waiver. The failure of any party to insist, in any one or more instances, upon
performance of any of the terms, covenants, or conditions of this Agreement
shall not be construed as a waiver or a relinquishment of any right or claim
granted or arising hereunder or of the future performance of any such term,
covenant, or condition, and such failure shall in no way affect the validity of
this Agreement or the rights and obligations of the parties hereto. No waiver of
any provision or condition of this Agreement shall be valid unless executed in
writing and signed by the party to be bound thereby, and then only to the extent
specified in such waiver. No waiver of any provision or condition of this
Agreement shall be construed as a waiver of any other provision or condition of
this Agreement, and no present waiver of any provision or condition of this
Agreement shall be construed as a future waiver of such provision or condition.

 
 

Page 8 of 10
 4/26/2006

 
 

--------------------------------------------------------------------------------

 

 

 
25.
Invalidity

If any provision of this agreement is held by any court or other competent
authority to be void or unenforceable in whole or in part, the other provisions
of this agreement and the remainder of the affected provisions shall continue to
be valid.
 

 
26.
Intellectual Property.

 

 
26.1
License grants from DAC to RME. During the term of this Agreement, DAC hereby
grants to RME a non-exclusive, royalty free license to use DAC’s Intellectual
Property in connection with the manufacture of the Products, which license
specifically excludes any right to distribute the Products to third parties or
to create any derivative works from the Products. Except as provided in Clause
10 herein, RME shall have no right to grant sublicenses to any of DAC’s
Intellectual Property to third parties.

 

 
26.2
License grant from RME to DAC. In consideration of the sale of the Products to
DAC, whether such Products are manufactured by RME or by a third party pursuant
to the provisions of Clause 10 herein, DAC and any person acquiring title to any
Product through DAC shall be deemed to have been granted a non-exclusive,
royalty free license to any and all Intellectual Property held by RME or its
Affiliates related to the manufacture, distribution or use of the Products;
provided, however, that such license shall be considered as part of each Product
and shall not be licensed, sublicensed or conveyed separately from the Product
to which such license relates. RME represents and warrants that prior to the
effective date of this Agreement, neither RME nor its Affiliates (i) have used
the Intellectual Property to commercialize syringe-implantable transponders for
use in humans or animals other than through DAC or (ii) assigned or otherwise
granted any rights in the Intellectual Property to any third parties.

 

 
26.3
Exclusivity. So long as DAC purchases not less than the aggregate quantity of
Products purchased by DAC in calendar year 2005 from RME (the “Annual Minimum
Purchase Amount”), RME shall not, without the prior written consent of DAC in
each instance, (i) manufacture or sell any Products (or Products competitive
with the Products) to third parties or (ii) knowingly license any Intellectual
Property of RME or its Affiliates to any third party for use in manufacture or
distribution of the Products or products competitive to the Products. In the
event that RME is unable or unwilling to manufacture the quantities of any
Product requested by DAC and does not acquire such Products from third parties
pursuant to Clause 10 herein, DAC shall have the right to purchase Products from
third parties, and (i) such purchases shall be treated as having been purchased
from RME for the purpose of calculating the Annual Minimum Purchase Amount, and
(ii) the license of Intellectual Property of RME and its Affiliates referred to
in subparagraph (c) above shall be deemed to extend to all such Products
manufactured by third parties. RME shall have the right, on not less than 90
days prior notice, to advise DAC of its willingness to again produce the
quantities of Product requested by DAC, and upon delivery of such Products, DAC
shall not have the right to treat purchases from third parties against the
Annual Minimum Purchase Amount.

 

 
26.4
No other interest in Intellectual Property. Except as expressly provided herein,
the parties acknowledge that neither party has, nor shall such party acquire,
any interest in the other party’s Intellectual Property.

 
 

Page 9 of 10
 4/26/2006

 

--------------------------------------------------------------------------------

 

 
27.
Force Majeure. Any delay or failure of RME to perform its obligations hereunder
shall be excused to the extent that it is caused by an event or occurrence
beyond its reasonable control such as, by the way of example and not by way of
limitation, acts of god, actions by any governmental authority (whether valid or
invalid), fires, floods, windstorms, explosions, riots, natural disasters, wars,
sabotage, labor problems (including lockouts, strikes, and slowdowns) at RME’s
facility, its source plant or suppliers, inability to obtain power, material,
labor, equipment, or transportation, or court injunction or order.

 
 
The parties or their duly authorized representatives have executed this
Agreement on the date shown at its head.’
 

 
Signed for and on behalf of
Digital Angel Corporation
Signed for and on behalf of
Raytheon Microelectronics España, S.A.
    /s/ James Santelli /s/Ignacio Galnares     Sr. Vice President James Santelli
Managing Director Ignacio Galnares     Dated: April 26, 2006 Dated: April 26,
2006

      
 
 
 

Page 10 of 10
 4/26/2006