<PAGE> 1
As filed with the Securities and Exchange Commission on August 14, 1997.
Registration No. ________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DAYTON GENERAL SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Pennsylvania 7372 31-1551295
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number Identification Number)
</TABLE>
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Address and telephone number
of principal executive offices and principal place of business)
THOMAS C. HAAS
DAYTON GENERAL SYSTEMS, INC.
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Name, address
and telephone number
of agent for service)
COPIES TO:
TIMOTHY E. HOBERG, ESQ. CHARLES F. HERTLEIN, JR., ESQ.
Taft, Stettinius & Hollister Dinsmore & Shohl LLP
1800 Star Bank Center 1900 Chemed Center
425 Walnut Street 255 East Fifth Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(513) 381-2838 (513) 977-8200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
____________________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price per aggregate offering Amount of
to be registered registered unit (1) price (1) registration fee
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<S> <C> <C> <C> <C>
Units, each consisting of two shares of Common 1,035,000 $10.00 $10,350,000 $3,136
Stock, no par value, and one Warrant to
purchase one share of Common Stock (2)
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Common Stock underlying the Warrants (3) 1,035,000 $6.50 $6,727,500 $2,039
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants to purchase Units (4) 103,500 $.0005 $52 ---
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Units issuable upon exercise of the Underwriter's 103,500 $12.50 $1,293,750 $ 392
Warrants (5)
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Common Stock underlying the Warrants included 103,500 $6.50 $672,750 $ 204
in the Underwriter's Warrants (6)
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Total $19,044,052 $5,771
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 135,000 Units which the Underwriter has the right to sell on
behalf of the Company to cover over-allotments, if any, and 36,000
shares of Common Stock to be sold by the Selling Shareholders.
(3) Issuable upon the exercise of Warrants included in the Units to be
offered to the public. Pursuant to Rule 416 under the Securities Act of
1933 (the "Securities Act"), this Registration Statement covers any
additional shares of Common Stock which may become issuable by virtue
of the anti-dilution provisions of such Warrants.
(4) No fee is required pursuant to Rule 457(g) under the Securities Act.
(5) Apart from the purchase price, these Units are identical to the Units
offered to the public. Pursuant to Rule 416 under the Securities Act,
this Registration Statement also covers any additional Units which may
become issuable by virtue of the anti-dilution provision of the
Underwriter's Warrants.
(6) Issuable upon the exercise of the Warrants included in the Units
issuable upon exercise of the Underwriter's Warrants. Pursuant to Rule
416 under the Securities Act, this Registration Statement also covers
any additional shares of Common Stock which may become issuable by
virtue of the anti-dilution provision of the Warrants.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
SUBJECT TO COMPLETION, DATED AUGUST 14, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
DAYTON GENERAL SYSTEMS, INC.
900,000 UNITS
$10.00 per Unit
Each Unit Consisting of
Two Shares of Common Stock
and One Common Stock Purchase Warrant
Dayton General Systems, Inc. (the "Company") is offering for sale a
minimum of 550,000 Units and, together with certain shareholders of the Company
(the "Selling Shareholders"), a maximum of 900,000 Units (the "Offering"). The
per Unit offering price is $10.00. Each Unit consists of two shares of the
Company's common stock, no par value (the "Common Stock"), and a warrant (the
"Warrant") to purchase one share of Common Stock at an exercise price of $6.50
per share. The Common Stock and Warrants will become separately transferable 90
days after the date the subscription purchase funds held in escrow are released
into the Company's account (the "Escrow Release Date"). The Warrants will be
exercisable for a period of five years from the date of this Prospectus.
After the sale of the initial 550,000 Units, an additional 350,000
Units will be offered ratably by the Company, which is offering up to 332,000
additional Units, and the Selling Shareholders, who are offering up to 18,000
Units (the "Selling Shareholders' Units"). See "Selling Shareholders." The
Warrants included in the Selling Shareholders' Units will be issued by the
Company, and the Selling Shareholders will reimburse the Company at the rate of
$0.10 per Warrant sold. The Company will not receive any other proceeds from the
sale of the Selling Shareholders' Units; however, the Company will receive
proceeds from the exercise, if any, of the Warrants included in the Selling
Shareholders' Units. See "Use of Proceeds."
The Offering is being made on a "best efforts" basis through J. V.
Delaney & Associates (the "Underwriter"). Prior to the Offering there has been
no public market for the Company's Units, Common Stock or Warrants. The initial
public offering price of the Units and the exercise price and other terms of the
Warrants have been arbitrarily determined by negotiation between the Company and
the Underwriter and are not necessarily related to or indicative of the
Company's assets, book value, financial condition or any other recognized
criteria of value. Application has been made for quotation of the Units, Common
Stock and Warrants on The Nasdaq SmallCap Market under the proposed symbols DGSU
for the Units, DGSI for the Common Stock and DGSIW for the Warrants. See
"Description of Securities."
________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
________________
<PAGE> 4
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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======================================================================================================================
Underwriting Proceeds to the Proceeds to Selling
Price to Public Commissions(1) Company (2) Shareholders(3)
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<S> <C> <C> <C> <C>
Per Unit $10.00 $1.00 $9.00 $9.00
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Total Minimum $5,500,000 $550,000 $4,950,000 ---
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Total Maximum (4) $9,000,000 $900,000 $7,938,000 $162,000
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</TABLE>
(See Notes on following page)
During the Offering, all subscription amounts will be held in escrow
with The National Bank of Southern California, (the "Escrow Agent"). Unless
extended, the Offering will begin on the date of this Prospectus and end on
__________, 1997, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any such
case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
SUBSCRIPTIONS MAY NOT BE WITHDRAWN OR CANCELLED DURING THE OFFERING.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed. The Offering also
may be cancelled without notice.
J.V. Delaney & Associates
The date of this Prospectus is _________ __, 1997
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<PAGE> 5
Notes
(1) Two points (2%) of the commissions payable to the Underwriter have been
denominated as an investment banking fee. Does not reflect additional
compensation to be received by the Underwriter in the form of the grant of
warrants (the "Underwriter's Warrants"), at a price of $.0005 per Warrant, to
purchase up to 90,000 Units (103,500 Units, if the over-allotment option
described in Note (4) below is exercised in full), at 125% of the initial public
offering price per Unit, exercisable for a period of four years beginning one
year from the date of this Prospectus. Additionally, the Company has agreed to
indemnify the Underwriter against certain liabilities under the Securities Act
of 1933 (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$271,175 and a non-accountable expense allowance of between $165,000 (if the
minimum number of Units is sold) and $264,600 (if the maximum number of Units is
sold) payable to the Underwriter by the Company, of which $58,000 has been
advanced by the Company and before deducting offering expenses payable by the
Selling Shareholders estimated at $500 and a non-accountable expense allowance
of $5,400 (if the maximum number of Units is sold) payable to the Underwriter by
the Selling Shareholders. Excludes proceeds of $0.10 per Warrant, up to a
maximum of $1,800, payable by the Selling Shareholders to the Company.
(3) Before deducting $0.10 per Warrant, up to a maximum of $1,800, payable by
the Selling Shareholders to the Company.
(4) The Company has granted the Underwriter the right, exercisable for 45 days
from the Escrow Release Date, to sell up to 135,000 additional Units at the
initial public offering price per Unit solely to cover over-allotments, if any.
If all of the over-allotment Units are sold, the total Maximum Price to Public,
Underwriting Commissions, Proceeds to the Company and Proceeds to Selling
Shareholders will be $10,350,000, $1,035,000, $9,153,000 and $162,000,
respectively. See "Underwriting."
- -------------------------------
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
This Prospectus makes reference to the trademarks of other companies.
LonWorks(R), LON(R), LonBuilder(R) and Neuron(R) are trademarks of Echelon
Corporation registered in the United States and other countries. Windows(R) and
Windows NT(R) are registered trademarks of Microsoft Corporation. MFC(R) is a
registered trademark of Lis Holdings Limited. QNX(R) is a registered trademark
of Quantum Software Systems, Ltd. UNIX(R) is a registered trademark of Unix
System Laboratories, Inc. VMS(R) is a registered trademark of Digital Equipment
Corporation.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read
in conjunction with the more detailed information and Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus: (i) assumes that no
over-allotment Units will be sold and (ii) has been adjusted to give effect to a
1,000-for-1 split of the Company's Common Stock in connection with the Company's
re-incorporation in the Commonwealth of Pennsylvania on _______________, 1997.
As used in this Prospectus, the term the "Company" or "DGS" means Dayton General
Systems, Inc. unless the context indicates otherwise.
THE COMPANY
The Company has its origins in the Controls Division of the General
Motors Corporation. In March 1993, Mr. Thomas C. Haas, former Treasurer of
Tomkins Corporation, the holding company for the U.S. operations of Tomkins PLC
(Philips Industries, formerly a Fortune 500 company, Smith & Wesson and Murray
Ohio) incorporated DGS, Inc. that purchased the assets which now comprise the
Company. See "History of the Company." DGS's profitable core business has been
designing, building, installing and servicing state-of-the- art computerized
building automation systems. These systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other facility functions. DGS markets a
combination of these products and services to the facilities management
industry. DGS's systems are currently installed in high-rise buildings,
manufacturing facilities, wastewater treatment plants and educational
institutions, including the General Motors Building in New York City and the
entire University of Pennsylvania.
Although DGS plans to continue servicing its installed base of building
automation systems, it has recently changed its focus to becoming a software
technology solution provider to an emerging segment of the control and
automation industry marketplace. Company management has identified a major
technological revolution from closed control systems, where customers were
"locked in" to one vendor's control devices, to open control systems, where
customers decide which mix of vendors' devices they will use in their control or
automation systems.
A driving force in this technology revolution is the development by
Echelon Corporation of its LonWorks control network, forming the foundation of
an open control system. At the heart of this network is the Neuron C computer
chip developed by Echelon. The Neuron C chip includes three dedicated
microprocessors, integrated input and output hardware and drivers and internal
timers for real-time control. It is programmed in high-level (Neuron C)
programming language. Lonworks Network Services ("LNS") architecture provides
the functionality of the LonWorks control network and allows maintenance,
control and multiple non-proprietary device access to the network.
Configuration of the network, however, currently requires knowledge of
the programming language Neuron C. Coding a control application in Neuron C (a
derivative of ANSI C) requires that the configuration engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged. This adds expense and delay.
DGS estimates that a programmer using Neuron C language to develop a building
automation solution or application with LonWorks technology will devote
approximately 25% of the total project time to program coding, 25% to
documentation of the application and as much as 50% to code debugging.
- 4 -
<PAGE> 7
In response, DGS has developed a complementary graphical programming
tool, VisualControl, which can reduce project development time by over 75%.
VisualControl significantly simplifies access to, monitoring and modification
of, the LNS architecture functions.
The commercial value of VisualControl necessarily derives from LNS
architecture. LNS technology was commercially released in April 1997. DGS
believes that, as of August 1997, VisualControl is the only product of its type
to work with LNS.
VisualControl saves time, manpower and money in the implementation of
LonWorks technology by eliminating the need to program. VisualControl provides
control product designers, systems integrators (SIs) and end users a Windows 95
and Windows NT operating environment for configuring the control network.
VisualControl includes standard IEC-1131 device blocks that allow the engineer
to view the control scheme from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable commercialized software product
designed for control network technology product development that (i) functions
as a network/Windows NT graphical user interface, (ii) generates user defined
control strategies or modifications and (iii) functions as a control network
management tool. Although it may be possible to develop software with the
multiple functionality described above, DGS is not aware of any software which
has been created specifically for LonWorks control networks or products in the
precise manner of the VisualControl software.
VisualControl also permits Local Operating Network ("LON")
configuration without knowledge of Neuron C. VisualControl virtually eliminates
the possibility of syntax errors, compiles the network devices, configures the
variable passing routines and self documents the application.
Additionally, DGS believes VisualControl can alleviate the numerous
problems that designers, contractors and end-users can typically encounter in
the development of control network design by materially enhancing the
functionality and reliability of control application products.
DGS believes that VisualControl's features make it a significant add-on
product for use by the control industry. Additionally, DGS believes that
original equipment manufacturers (OEMs), control product developers, value added
resellers (VARs), systems integrators (SIs) and end users of LonWorks systems
can improve the overall functionality of their applications with the
VisualControl technology set. DGS has also developed other new software
products.
DGS believes it can become a major player in the building control and
industrial automation industry by marketing its new product -- VisualControl,
developing other software products and acquiring other companies.
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<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Units Offered by the 550,000 Units if the minimum number of
Company.......................................... Units is sold or 882,000 Units if the
maximum number of Units is
sold. Each Unit consists of
two shares of Common Stock and
one Warrant. The Common Stock
and Warrants are detachable
and separately transferable 90
days from the "Escrow Release
Date." See "Description of
Securities."
Units Offered by the Selling Up to 18,000 Units (to be sold only after
Shareholders..................................... the minimum number of Units is sold). The
Warrants included in these
Units will be issued by the
Company.
Offering Price................................... $10.00 per Unit
Warrants......................................... Each Warrant will be exercisable to purchase
one share of Common Stock, at a price of
$6.50, for a period of five years from the
date of this Prospectus. See "Description of
Securities" and "Risk Factors."
Common Stock Outstanding
Prior to the Offering (1)........................ 1,281,286 shares
Common Stock to be Outstanding
after the Offering if the
Minimum Number of Units is
Sold (1)(2)...................................... 2,381,286 shares
Common Stock to be Outstanding
after the Offering if the
Maximum Number of Units is
Sold (1)(3)...................................... 3,045,286 shares
Warrants to be Outstanding if the
Minimum Number of Units is
Sold (1)(2)...................................... 550,000
Warrants to be Outstanding if the
Maximum Number of Units is
Sold (1)(3)...................................... 900,000
Use of Proceeds.................................. The Company intends to use the net
proceeds of this Offering to establish sales,
marketing and distribution infrastructure for
its software products, for research and
development, to purchase additional
computer hardware and software, for
potential acquisitions and for working capital.
See "Use of Proceeds."
</TABLE>
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<PAGE> 9
<TABLE>
<S> <C>
Risk Factors..................................... An investment in the Units involves a high
degree of risk and immediate substantial
dilution. See "Risk Factors" for a discussion
of certain factors that should be considered
by prospective purchasers of the Units.
Proposed Nasdaq SmallCap Market Units: DGSU
Symbols.......................................... Common Stock: DGSI
Warrants: DGSIW
</TABLE>
(1) Excludes 50,000 shares of Common Stock issuable upon exercise, at a price of
$0.90 per share, of outstanding warrants issued to two shareholders of the
Company (the "1996 Warrants"), 13,229 shares of Common Stock issuable upon
exercise, at a price of $1.75 per share, of outstanding warrants issued to the
Underwriter as compensation for assisting the Company in privately placing
shares of Common Stock (the "Broker's Warrants") and 150,000 shares of Common
Stock issuable upon exercise of outstanding stock options. See "Capitalization."
(2) Excludes 110,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 55,000 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
(3) Excludes 180,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 90,000 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
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<PAGE> 10
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues $799,664 $814,629 $423,528 $390,201
Gross profit $524,929 $545,998 $295,958 $260,976
Operating income (loss) $ 6,635 $ 12,023 $43,572 $(150,741)(1)
Income (loss) before taxes $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net income (loss) $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net loss per common $(0.11)
share
Pro forma net income (2) $ 6,992 $ 11,301 $35,996
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
Weighted average
common shares
outstanding (4) 1,338,535 1,339,848 1,338,535 1,368,281
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------------------------
Pro Forma As Adjusted(5)(6)
---------------------------
BALANCE SHEET DATA: Actual Pro Forma(5) Minimum Maximum
------ ------------ ------- -------
<S> <C> <C> <C> <C>
Working capital $24,794 $254,277 $4,768,277 $7,656,277
Total assets $464,481 $632,964 $5,146,964 $8,034,964
Long term debt --- --- --- ---
Shareholders' equity $114,488 $343,971 $4,857,971 $7,745,971
</TABLE>
- ---------------------------
(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S-
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<PAGE> 11
Corporation does not pay federal or state income taxes since its
shareholders are liable to pay federal and state taxes on their
proportionate shares of the Company's federal and state taxable income
allocable to them. For purposes of this presentation, federal and state
income taxes have been calculated at an effective rate of 20% for the
years ended December 31, 1995 and 1996, and for the six months ended
June 30, 1996, as if the Company was a C-Corporation for these periods.
See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issued shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
(5) Assumes that the sale, subsequent to June 30, 1997, of 146,286 shares
of the Company's Common Stock, at a price of $1.75 per share, occurred
as of June 30, 1997. The sales were made as part of a private placement
offering which commenced in December 1996 and terminated in July 1997
(the "Private Placement"). See Note O to the financial statements.
(6) Adjusted to reflect the Offering and the use of the Company's net
proceeds from the Offering, after deducting underwriting commissions
and other estimated offering expenses payable by the Company including
the Underwriter's expense allowance. See "Use of Proceeds,"
"Capitalization" and Notes E, F and O to the financial statements.
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<PAGE> 12
RISK FACTORS
An investment in the securities offered by this Prospectus involves a
high degree of risk. Accordingly, prospective investors should consider
carefully the following risk factors, in addition to other information
concerning the Company and its business contained in this Prospectus, before
purchasing the Units offered.
RECENT TRANSITION TO NEW LINE OF BUSINESS. Since 1993, the Company has
operated primarily as a manufacturer, designer, installer and servicer of
building automation systems and hardware. In the last quarter of 1995, the
Company made a strategic decision to develop and market software that
facilitates the design and implementation of control networks. The Company is
now in the early stages of introducing its VisualControl product line, a
software application tool designed to ease the use of Echelon Corporation's
LonWorks control platform. The Company's strategy is to increase substantially
the percentage of its revenues derived from this internally developed software
product line. Implementation of the plan will be subject to all the problems,
delays, expenses and risks inherent in establishing a new business enterprise,
and there can be no assurance that the Company will succeed in this strategy.
The market for this product line is new. If the market fails to develop, if it
develops more slowly than expected or becomes saturated with competitors, or if
the Company's product line does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
RECENT LOSS; RISKS OF ASSUMPTIONS. While the Company has operated
profitably in recent years, it incurred a loss of approximately $151,000 during
the first half of 1997 as it focused its marketing efforts on its VisualControl
product line and other new software products. There can be no guarantee that
losses will not continue. The Company has formulated its business plan and
strategies based on assumptions of the gross revenue that can be generated over
a three year period through the unit sales of software into an emerging
marketplace. These assumptions are based on numerous factors, some of the most
important of which are outside the Company's control. There can be no assurance
that these assessments will prove to be correct.
PRODUCT DEVELOPMENT RISKS. The substantial costs incurred to develop
new software products together with the length of time necessary to complete
such products may result in products that are no longer competitive or that no
longer address customer needs. Further, announcement of new Company products may
cause customers to defer purchases of existing Company software products and may
necessitate substantial modifications to other products under development.
Additionally, it is common for complex software programs such as the Company's
to contain undetected errors when first released which are discovered only after
the product has been used over time with different computer systems and in
varying applications and environments. If the Company fails to release
commercially viable versions of its products, if customers experience
significant problems with implementation of these products or are otherwise
dissatisfied with their functionality or performance, or if the products fail to
achieve market acceptance for any other reason, the Company's business,
operating results and financial condition will be materially adversely affected.
DEPENDENCE ON A SINGLE LINE OF PRODUCTS. For the foreseeable future,
the Company will be dependent upon the sales of a single software tool product
line, consisting of various applications, to generate forecasted revenue growth.
The Company currently has no other product line or service which will support
significant growth.
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<PAGE> 13
DEPENDENCE ON ECHELON LONWORKS AND MICROSOFT WINDOWS. The Company's
VisualControl product line is a software application tool for Echelon
Corporation's LonWorks as used on Microsoft Corporation's Windows operating
systems. VisualControl incorporates certain technology which the Company
licenses from Echelon. The Company currently is certified by Echelon Corporation
as a LonWorks Independent Developer. There can be no assurance that this
relationship will continue, that Echelon will continue to license its technology
to the Company, that Echelon will continue to support the LonWorks product lines
or that the Company will have access to any enhancements. In addition, there can
be no assurance that Echelon will not significantly alter its pricing in a
manner adverse to the Company.
The Company's success currently is dependent on the anticipated use and
acceptance of the Echelon Corporation's LonWorks architecture and, derivatively,
the continued widespread acceptance of Microsoft's Windows 95 and Windows NT.
Although the LonWorks control platform has received favorable industry comment,
it has not yet been widely implemented in the control network market segment.
While Windows operating systems are currently widely used, other companies have
developed or are developing other operating systems that compete, or will
compete, with Windows. In the event that LonWorks fails to achieve market
acceptance or any of these alternative operating systems becomes widely
accepted, demand for the Company's products could be adversely affected. In
addition, Echelon or Microsoft could introduce an enhanced control platform or
operating system to replace LonWorks or Windows or could incorporate some or
many of the key features of the Company's design control products in a new
version of their respective platforms and operating systems, thereby eliminating
the need for users to purchase the Company's products. Any of the negative
developments discussed in this section may have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Products."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Over 50% of the estimated
net proceeds from this Offering have been allocated to potential acquisitions,
working capital and general corporate purposes. Accordingly, the Company's
management will have broad discretion as to the application of the proceeds of
the Offering. See "Use of Proceeds."
ANTICIPATED DECLINE IN SOFTWARE PRICES AND GROSS MARGINS. Software
products are subject to price pressures over their life cycles that result in
price declines and reductions in gross profit margins. Reductions in profit
margins for existing and new software products can be expected to occur if the
Company succeeds in increasing its penetration of the control design
marketplace. See "Business--Products."
COMPETITION. The market for software application tool products is
intensely competitive. Competing products can be expected to be introduced by
companies with significantly greater financial, technical, research and
development and marketing resources than the Company and by other software
development companies. These companies may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products, than the Company. The Company cannot assure that it will be able to
compete effectively in this environment. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE. The control design technology systems
market is characterized by rapid technological change, changing customer needs,
frequent new software product introductions and evolving industry standards. The
Company believes that its future success will depend upon its ability to enhance
its current product line and to develop and introduce new software product lines
that keep pace with technological developments and
- 11 -
<PAGE> 14
emerging industry standards. The introduction of competing products embodying
new technologies and the emergence of new industry standards could render the
Company's existing product line obsolete and unmarketable. Accordingly, the
Company anticipates that significant amounts of future revenue will need to be
derived from product enhancements and new products. If the Company is unable to
develop and introduce product enhancements and new products in a timely and
cost-effective manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected.
PRODUCT DEFECTS. The Company's software products are highly complex and
sophisticated and could, from time to time, contain design defects or software
errors that are difficult to detect and correct. In addition, implementation of
the Company's products generally involves a significant amount of
customer-specific customization, as well as integration with systems developed
by third parties. Difficulties relating to the integration of the Company's
products with other hardware or software in the customer's environment may arise
that are unrelated to defects in the Company's products. Any such defects,
errors or difficulties may cause delays in product introductions and shipments,
result in increased costs and diversion of development resources, require design
modifications or impair customer satisfaction with the Company's products.
PRODUCT LIABILITY. The Company's products may be used by its customers
to perform critical functions. As a result, design defects, software errors,
misuse of the Company's products, incorrect data from external sources or other
potential problems within or out of the Company's control could result in
financial or other damages to the Company's customers. The Company does not
maintain product liability insurance. Although the Company's license agreements
with its customers contain provisions designed to limit the Company's exposure
to potential claims as well as any liabilities and costs arising from such
claims, such provisions may not effectively protect the Company. Any such claim
could have a material adverse effect upon the Company's business, operating
results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success and ability
to compete is dependent in part upon its proprietary technology, including its
software source codes. The Company presently has no registered trademarks or
copyrights and no patents, nor does it have any applications pending. The
Company relies on a combination of trade secret and nondisclosure law, which may
afford only limited protection. The Company is aware that unauthorized copying
occurs within the industry. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties,
including customers who receive listings of the source code for the Company's
products pursuant to the terms of their license agreements with the Company, or
former employees of the Company, may attempt to reverse engineer or copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. As a result, there can be no assurance that unauthorized
use of the Company's technology may not occur. See "Business--Patents,
Trademarks & Copyrights."
PROPRIETARY TECHNOLOGY INFRINGEMENT. In the future the Company may
receive notices claiming that it is infringing the proprietary rights of third
parties and may become the subject of infringement claims or legal proceedings
by third parties with respect to current or future products. Any such claim
could be time consuming, result in costly litigation, cause product shipment
delays or force the Company to enter into royalty or license agreements rather
than dispute the merits of such claims and have a material adverse effect on the
Company's
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<PAGE> 15
business, operating results and financial condition. See "Business--Patents,
Trademarks & Copyrights."
DEPENDENCE ON KEY EMPLOYEES. The Company's success is largely dependent
on the continued services of certain key members of management, particularly
Thomas C. Haas, the Company's Chief Executive Officer. The Company does not have
employment agreements with any of its key employees. Although the Company is the
beneficiary of a $1 million insurance policy on the life of Mr. Haas, there can
be no assurance that this insurance will be available in the future or that it
would be adequate to compensate the Company for the loss of his services. The
loss of Mr. Haas could have a material adverse effect on the Company's business,
operating results or financial condition. The loss of several other key
employees simultaneously or within a relatively short period of time also could
have such an effect. See "Management."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The Company is heavily
dependent upon its ability to attract, retain and motivate skilled technical and
managerial personnel, especially highly skilled engineers involved in ongoing
product development and consulting personnel who assist in the license and
implementation of the Company's product line. In particular, the Company's
ability to install, maintain and enhance its software product line is
substantially dependent upon its ability to locate, hire and train qualified
software engineers. The market for such individuals is intensely competitive.
Given the critical role of the Company's product development and consulting
staffs, the inability to recruit successfully or the loss of a significant part
of its product development or consulting staffs would have a material adverse
effect on the Company. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. The Company
may not be able to retain its current personnel, or be able to attract the
personnel necessary to effectuate the Company's business plan.
MANAGEMENT OF GROWTH. If the Company's products are successful, it
expects to experience growth which will impose significant pressure on operating
procedures, financial resources, information systems and employees. The Company
will need to increase its software production capacity and research and
development expenditures, expand its sales initiatives and increase its
workforce. The Company's business, results of operations and financial condition
could be adversely affected if it is unable to plan and manage anticipated
growth effectively. See "Business--Business Strategy."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company's strategy also
is to grow through the acquisition of companies that will complement its
existing operations or provide it with an entry into new markets. Growth through
acquisitions involves substantial risks, including the risk of improper
valuation of the acquired business and the risk of inadequate integration.
Suitable acquisition candidates may not be available, the Company may not be
able to complete desired acquisitions and future acquisitions may not produce
returns that justify the Company's investment.
The Company may finance future acquisitions with cash from operations
or additional equity or debt financings. The issuance of additional Common Stock
to finance acquisitions may result in substantial dilution to existing
shareholders. Any debt financing could significantly increase the Company's
leverage and involve restrictive covenants which limit the Company's operations.
See "Management's Discussion and Analysis or Plan of Operations--Liquidity and
Capital Resources."
- 13 -
<PAGE> 16
If the Company is successful in acquiring additional businesses, the
Company may experience a period of rapid growth which could place significant
additional demands on the Company's management, resources and management
information systems. The Company's failure to manage any such rapid growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company currently anticipates
that the proceeds of the Offering, together with forecasted cash flow from
operations, will be sufficient to finance operations for twenty-four months.
However, the Company may encounter unforeseen expenses or difficulties that
deplete its capital resources more rapidly than anticipated and require the
Company to seek additional financing. There can be no assurance that additional
capital will be available to the Company, either at all or on acceptable terms,
if and when required, or that such additional capital would not result in
substantial dilution of the equity interest of existing shareholders.
UNDERWRITER'S LIMITED UNDERWRITING EXPERIENCE. While the Underwriter
has significant experience in corporate financing and the private placement of
securities, the Underwriter has not previously underwritten any public offering.
Accordingly, the Underwriter's lack of public offering experience may affect the
Offering and the subsequent development of a trading market, if any, in the
securities of the Company. See "Underwriting."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
quarterly results are subject to fluctuations from a wide variety of factors
including, but not limited to, new product introductions, domestic and
international economic conditions, customer budgetary considerations, the timing
of product upgrades and customer support agreement renewal cycles. As a result
of the foregoing factors, the Company's operating results for any quarter are
not necessarily indicative of results for any future period.
ARBITRARY DETERMINATION OF OFFERING PRICE. The price at which the Units
are being offered and the exercise price of the Warrants included in the Units
were arbitrarily determined by negotiation between the Company and the
Underwriter. The initial offering price of the Units and the exercise price of
the Warrants are not necessarily related to or indicative of the Company's
assets, book value, earnings, net worth or any other recognized criteria of
value. The Unit price of this Offering and the exercise price of the Warrants
should not be construed as an indication of any future market price for the
Company's Common Stock.
NO ASSURANCE OF PUBLIC MARKET; VOLATILITY OF PRICE. Prior to this
Offering, there has been no public trading market for the Units, Common Stock or
Warrants. Although it is currently anticipated that the Units, Common Stock and
Warrants will be listed on The Nasdaq SmallCap Market ("Nasdaq"), there can be
no assurance that a regular trading market for these securities will develop
after this Offering or that, if developed, can be sustained. Therefore,
purchasers of the Units may be unable to resell the securities at or near their
original offering price or at any price. Furthermore, it is unlikely that a
lending institution will accept the Company's securities as pledged collateral
for loans even if a regular market develops. The trading price of the Units,
Common Stock and Warrants could be subject to wide fluctuations in response to
quarterly variations in the Company's operating results, announcements by the
Company or others, developments affecting the Company and other events or
factors. Additionally, the small public float will result in high price
sensitivity even on low trading volume. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. In accordance with proposed maintenance criteria (which are
expected to be adopted), continued inclusion on Nasdaq will require the Company
to have a $1,000,000 market value of
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<PAGE> 17
its public float, a minimum bid price of $1.00 per share, two market makers and
either net tangible assets of $2,000,000, net income of $500,000 for two of the
last three years or a market capitalization of at least $35,000,000. Failure to
meet Nasdaq's maintenance criteria may result in the delisting of the Units,
Common Stock and Warrants. Thereafter, trading, if any, in these securities
would be conducted outside Nasdaq in the over-the-counter market. As a result,
an investor might find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the securities. In addition, if the Common
Stock were delisted from trading on Nasdaq and the trading price of the Common
Stock were less than $5.00 per share, trading in the Common Stock would be
subject to certain rules promulgated under the Securities Exchange Act of 1934,
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any equity
security outside Nasdaq that has a market price of less than $5.00 per share).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and its risks, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). In particular, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Common Stock, thereby severely limiting the market liquidity
of the Common Stock and the ability of purchasers in this Offering to sell the
Common Stock in the secondary market.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus under the Securities
Act of 1933 (the "Securities Act") which will permit the purchase and sale of
the Common Stock underlying the Warrants, but the Company may not be able to do
so. Also, although the Company intends to qualify the shares of Common Stock
underlying the Warrants for sale in those states in which the Units are to be
offered, such qualification may not occur. Holders of the Warrants may be
deprived of their value if a prospectus covering the shares issuable upon
Warrant exercise is not kept effective or if such underlying shares are not, or
cannot be, qualified in the applicable states. See "Description of
Securities--Warrants."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of
shares of the Company's Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock.
Upon completion of the Offering, the Company will have a minimum of 2,381,286
shares and a maximum of 3,045,286 shares of Common Stock outstanding (assuming
no sale of the over-allotment Units or exercise of outstanding stock options and
warrants and without giving effect to the exercise of the Warrants included in
the Units or the Underwriter's Warrants). The 1,100,000 (minimum) and the
1,800,000 (maximum) shares of Common Stock included in the Units offered will be
freely tradeable without restriction under the Securities Act. The remaining
shares of outstanding Common Stock (1,281,286 shares if the minimum number of
Units is sold and 1,245,286 shares if the maximum number of Units is sold) are
held by existing shareholders. Of these, 221,286 currently are unrestricted. The
remainder may not be resold unless they are registered under the Securities Act
or sold pursuant to an applicable exemption from registration, including Rule
144 under the Securities Act. Upon completion of this Offering (if 550,000 Units
are sold), 416,286 shares of Common Stock may be sold immediately without regard
to the volume, manner of sale and other restrictions of Rule 144 and an
additional 30,000 shares of Common
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<PAGE> 18
Stock will become eligible for sale 90 days later in compliance with the
restrictions of Rule 144. All of the outstanding shares owned by the Company's
executive officers, directors and shareholders owning more than 5% of the Common
Stock (815,000 shares) are subject to "lock-up" agreements expiring 12 months
after the date of this Prospectus and may be sold during that period only with
the prior written consent of the Underwriter. The Underwriter, in its sole
discretion, and at any time without prior notice, may release all or any portion
of the Common Stock subject to the lock-up agreements. When the lock-up
restrictions lapse 815,000 shares of Common Stock will be eligible for sale in
compliance with the restrictions of Rule 144. The remaining shares outstanding
prior to this Offering will be eligible for sale in compliance with the
restrictions of Rule 144 beginning in early 1998. See "Shares Eligible for
Future Sale."
DILUTION. Purchasers of the Units will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock of between $2.48 and $2.99 based upon an initial public offering price of
$5.00 per share. See "Dilution."
NO DIVIDENDS. The Company currently intends to retain any earnings for
operations and the expansion of its business and does not anticipate paying any
dividends in the foreseeable future.
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET
PRICE OF CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS AND THE
PENNSYLVANIA BUSINESS CORPORATION LAW. Certain provisions of the Company's
Articles of Incorporation and By-Laws and the Pennsylvania Business Corporation
Law (the "PBCL") may discourage certain transactions involving a change in
control of the Company. For example, the Company's Articles of Incorporation
contain provisions which (i) permit the Board to issue "blank check" preferred
stock without shareholder approval and (ii) prohibit the Company from engaging
in certain business combinations with a holder of 20% or more of the Company's
voting securities without super-majority board or shareholder approval. These
provisions and certain provisions of the PBCL could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock. See "Description
of Securities--Provisions Affecting Business Combinations and Changes in
Control."
HISTORY OF THE COMPANY
The Company has its origins in the Controls Division of General Motors
Corporation. Systems Research Laboratories, Inc., an Ohio corporation ("SRL"),
purchased the division from General Motors in 1978. In 1984, SRL sold the
division to certain of its employees who had formed Dayton General Systems,
Inc., an Ohio corporation ("Ohio Dayton General"). In 1992, the assets of Ohio
Dayton General were purchased by Computer Health & Safety, Inc., a Delaware
corporation and a supplier of Sun Microsystems computers and CAD/CAM software.
In March 1993, Mr. Thomas C. Haas formed DGS, Inc., an Ohio corporation, which
purchased substantially all of the assets of the Dayton General Systems division
of Computer Health & Safety, Inc, including the Dayton General Systems name. On
_____________ 1997, in anticipation of the Offering, the Company re-incorporated
in Pennsylvania as Dayton General Systems, Inc.
The Company's executive offices are located at 2492 Technical Drive,
Miamisburg, OH 45342. Its telephone number is (937) 847-7800 and its fax number
is (937) 847-7810. The Company's Worldwide web site is "www.visualcontrol.com"
and its e-mail address is "[email protected]".
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<PAGE> 19
USE OF PROCEEDS
The following table sets forth, in order of priority of use, the
expected application by the Company of its net proceeds from the Offering. After
deducting underwriting commissions and other estimated offering expenses
(including the Underwriter's expense allowance) payable by the Company, the net
proceeds to the Company are estimated to be approximately $4,514,000 from the
sale of 550,000 Units and approximately $7,402,000 from the sale of 882,000
Units (assuming no sale of the over-allotment Units). Other than a fee of $0.10
per Warrant, the Company will not receive any proceeds from the sale of Units by
the Selling Shareholders (although the Company will receive proceeds from any
subsequent exercise of the Warrants included in those Units).
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
Percent of Percent of
---------- ----------
Application of Net Proceeds Amount Net Amount Net Proceeds
- --------------------------- ------ --- ------ ------------
Proceeds
--------
<S> <C> <C> <C> <C>
Sales, marketing & distribution $ 995,000 22% $1,047,000 14%
Research & development $ 619,000 14% $ 974,000 13%
Computer hardware & software acquisition $ 500,000 11% $ 750,000 10%
Potential acquisitions $1,800,000 40% $2,800,000 38%
Working capital and general corporate $ 600,000 13% $1,831,000 25%
purposes
</TABLE>
The allocation of the net proceeds set forth above represents the
Company's estimates based on its current operating plans and on assumptions and
forecasts regarding the sales of its new products. The Company anticipates that
the minimum net proceeds of this Offering, together with forecasted cash flow
generated from operations, will be sufficient to meet anticipated working
capital needs for the next twenty-four months. If the Company's assumptions,
estimates or forecasts prove to be inaccurate, the Company will have to reduce
its operations to a level consistent with available funding. While the Company
does not have any commitments with respect to future acquisitions, the Company
is in the process of evaluating potential acquisition candidates. See "Risk
Factors," "Management's Discussion and Analysis or Plan of Operation" and
"Underwriting."
Pending the uses set forth above, the Company's net proceeds from this
Offering will be invested in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
The Company currently intends to retain all earnings for operations and
expansion of its business and does not anticipate paying any dividends in the
foreseeable future.
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<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 on an actual basis; pro forma as of such date to reflect the sale
of Common Stock, described in Note (1) below, and the reincorporation of the
Company in Pennsylvania; and pro forma as adjusted as of such date to reflect
the sales described in Note (1) and the reincorporation and as adjusted to give
effect to the sale in this Offering of both the minimum and maximum number of
Units and the application of the estimated net proceeds from each, assuming no
exercise of the Warrants, the Broker's Warrants, the Underwriter's Warrants and
no sale of the over-allotment Units. See "Use of Proceeds." This table should be
read in conjunction with the Company's financial statements appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Pro Forma
As Adjusted(2)
---------------------
Actual Pro Minimum Maximum
------ --- ------- -------
Forma(1)
--------
<S> <C> <C> <C> <C>
Short-term debt(3) $ 61,000 $ -- $ -- $ --
========= ========= =========== ===========
Long-term debt $ -- $ -- $ -- $ --
--------- --------- ----------- -----------
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares authorized:
1,135,000 shares outstanding; 1,281,286 shares outstanding
as adjusted for the sale of shares in the Private
Placement Offering; 2,381,286 shares outstanding as
adjusted for the sale of the minimum number of Units and
3,045,286 shares outstanding as adjusted for the sale of
the maximum number of
Units (4) 208,846 438,329 4,952,329 7,840,329
Additional paid-in capital 36,168 36,168 36,168 36,168
Accumulated deficit (130,526) (130,526) (130,526) (130,526)
--------- --------- ----------- -----------
Total shareholders' equity 114,488 343,971 4,857,971 7,745,971
--------- --------- ----------- -----------
Total capitalization $ 175,488 $ 343,971 $ 4,857,971 $ 7,745,971
========= ========= =========== ===========
</TABLE>
(1) Reflects the sale of 146,286 shares of Common Stock after June 30, 1997 from
the Private Placement Offering and the application of the net proceeds of the
Private Placement Offering. See Note O to the financial statements.
(2) Reflects the transactions set forth in Note 1 and the application of the net
proceeds of this Offering.
(3) See Note E to the financial statements.
(4) Excludes 150,000 shares of Common Stock issuable upon exercise of
outstanding options, 50,000 shares of Common Stock issuable upon exercise of the
1996 Warrants and 13,229 shares of Common Stock issuable upon exercise of the
Broker's Warrants.
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<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company as of June 30,
1997, as adjusted to reflect the Private Placement, was approximately $277,000
or $0.22 per share of Common Stock. Net tangible book value per share represents
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding (assuming no exercise of the
Company's outstanding stock options or warrants). Assuming the sale by the
Company of 550,000 Units, or 1,100,000 shares of Common Stock (and deducting
underwriting commissions and other estimated offering expenses payable by the
Company, including the Underwriter's expense allowance), the pro forma as
adjusted net tangible book value of the Company as of June 30, 1997 would have
been approximately $4,791,000, or $2.01 per share. This represents an immediate
increase in net tangible book value of approximately $1.89 per share to existing
shareholders and an immediate dilution of $2.99 per share to new investors
purchasing Units in the Offering. Assuming the sale by the Company of 882,000
Units, or 1,764,000 shares of Common Stock (and deducting underwriting
commissions and other estimated offering expenses payable by the Company,
including the Underwriter's expense allowance), the pro forma as adjusted net
tangible book value of the Company as of June 30, 1997 would have been
approximately $7,679,000, or $2.52 per share. This represents an immediate
increase in net tangible book value of approximately $2.40 per share to existing
shareholders and an immediate dilution of $2.48 per share to new investors
purchasing Units in the Offering. The following table illustrates this per share
dilution in net tangible book value per share to new investors as of June 30,
1997:
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
<S> <C> <C> <C> <C>
Initial public offering price per share (1) $5.00 $5.00
Pro forma net tangible book value per share as of
June 30, 1997 $0.12 $0.12
Increase in net tangible book value per share
attributable to new investors 1.89 2.40
Pro forma as adjusted net tangible book value per
share after the Offering 2.01 2.52
Dilution per share to new investors $2.99 $2.48
===== =====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30,
1997, as adjusted to reflect the Private Placement, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company for those shares and the average price per share paid by the existing
shareholders and by new investors assuming the sale of both the minimum number
and the maximum number of Units, or a total of 1,100,000 and 1,764,000 shares of
Common Stock, respectively, in the Offering (without giving effect to
underwriting commissions or estimated offering expenses payable by the Company,
including the Underwriter's expense allowance):
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<PAGE> 22
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- -------------------
Minimum Units Average Price
- ------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......................... 1,281,286 53.8% $ 476,446 8.0 $0.37
New investors................................. 1,100,000 46.2 5,500,000 92.0 $5.00(1)
--------- ------ --------- ----
Total....................................... 2,381,286 100.0% $5,976,446 100%
========= ====== ========== ====
Maximum Units
Existing shareholders(2)...................... 1,281,286 42.1% $ 476,446 5.1 $0.37
New investors(2).............................. 1,764,000 57.9 8,820,000 94.9 $5.00(1)
--------- ----- --------- ----
Total....................................... 3,045,286 100.0% $9,296,446 100%
========= ====== ========== ====
</TABLE>
(1) Assumes no consideration was paid for the Warrants included in the
Units.
(2) Sales by Selling Shareholders in the Offering will reduce the number of
shares of Common Stock held by existing shareholders to 1,245,286
shares or 40.9% (37.6% if the Underwriter's over-allotment option is
exercised in full) of the total number of shares of Common Stock
outstanding after the Offering, and will increase the number of shares
of Common Stock held by new investors to 1,800,000 shares or 59.1%
(62.4% if all of the over-allotment Units are sold) of the total number
of shares of Common Stock outstanding after the Offering. See "Selling
Shareholders."
The foregoing table assumes no sale of the over-allotment Units and no exercise
of the Broker's Warrants, the Underwriter's Warrants, the 1996 Warrants or
outstanding stock options (see "Underwriting," "Capitalization" and "Management
- -- Stock Option Plan"). To the extent that these or future options and warrants
are exercised, there will be additional dilution to new investors.
- 20 -
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended
December 31, 1995 and 1996 have been derived from the audited financial
statements of the Company. The selected historical financial data for the six
months ended June 30, 1996 and 1997 have been derived from the Company's
unaudited financial statements. In the opinion of management, the six-month
financial data reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such data and are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1997. The selected financial data are qualified in their entirety, and
should be read in conjunction with the Company's financial statements and the
Notes thereto and "Management's Discussion and Analysis or Plan of Operation"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------------- ---------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 799,664 $ 814,629 $ 423,528 $ 390,201
Cost of revenues 274,735 268,631 127,570 129,225
---------- ---------- --------- ---------
Gross profit 524,929 545,998 295,958 260,976
Selling, general & administrative 431,533 492,796 231,170 386,475
expenses
Research & development expenses 86,761 41,179 21,216 25,242
---------- ---------- --------- ---------
Operating income (loss) 6,635 12,023 43,572 (150,741)(1)
Interest expense (5,328) (1,702) (95) (595)
Other income 7,685 3,980 1,519 398
---------- ---------- --------- ---------
Income (loss) before taxes 8,992 14,301 44,996 (150,938)(1)
Income taxes --- --- --- ---
---------- ---------- --------- ---------
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)(1)
========== ========== ========= ==========
Net loss per common share $ (0.11)
==========
Pro forma net income (2) $ 6,992 $ 11,301 $ 35,996
========== ========== =========
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
========== ========== =========
Weighted average common shares
outstanding(4) 1,338,535 1,339,848 1,338,535 1,368,281
</TABLE>
- 21 -
<PAGE> 24
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
---------------------- ----------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 76,637 $ 64,984 $ 86,586 $ 24,794
Net property and equipment 25,964 24,701 26,531 22,251
Total assets 317,634 315,854 353,779 464,481
Total liabilities 179,939 170,078 190,308 349,993
Shareholders' equity 137,695 145,776 163,471 114,488
</TABLE>
- ------------------------------
(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S- Corporation does not pay federal or state income
taxes since its shareholders are liable to pay federal and state taxes
on their proportionate shares of the Company's federal and state
taxable income allocable to them. For purposes of this presentation,
federal and state income taxes have been calculated at an effective
rate of 20% for the years ended December 31, 1995 and 1996, and for the
six months ended June 30, 1996, as if the Company was a C-Corporation
for these periods. See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issues shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
In the last quarter of 1995, the Company made a strategic decision to
develop and sell software for microcomputers that enhances the design,
installation and use of control network
- 22 -
<PAGE> 25
technology. The Company intends to sell its software into the corporate
marketplace through the formation of joint ventures with other companies,
strategic alliances with software distributors and direct and indirect marketing
and sales activities.
The Company's new software product, VisualControl, addresses the
control and automation engineering and end-user marketplace that is based on the
LonWorks control network design platform. The Company also intends to leverage
its technical design expertise to enter into strategic alliances and joint
ventures with other companies to develop software products for a more general
and larger share of the control design market. As a result, the Company's future
revenue mix is expected to shift from predominantly designing, installing and
maintaining building automation systems and hardware, its historical business,
to selling a broad array of software add-ons for applications and application
development in the general control market. The Company's historical revenues and
operating results therefore are not necessarily indicative of future operating
results.
RESULTS OF OPERATIONS
The Company's strategic decision to focus its efforts on its
VisualControl product line and other software products has affected the
Company's results of operations. While the Company operated profitably in each
of the two years ended December 31, 1995 and 1996, it reported a loss of
approximately $151,000 during the six months ended June 30, 1997. The 1997
period results were affected by a total of $155,000 of costs associated with the
Company's strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial consulting
expenses and approximately $15,000 in marketing and related costs incurred in
connection with the Company's corporate financing plan, approximately $31,000 of
expenses associated with a new marketing executive and other additional
employees, and $8,000 in amortization of capitalized software costs.
The Company's historic revenues have been project related sales which
can be subject to volatile fluctuations when measured on a period-to-period
basis. The Company has recently commercialized the development of software
products for introduction into the distributed control network marketplace and
has done so primarily from operating cash flows. Management believes that, with
additional paid-in capital, increased production capacity and software
distribution capability, the Company will be in position to implement
successfully its business strategy.
The following table sets forth, for the periods indicated, the items
noted as a percentage of net sales:
- 23 -
<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues 34.4 33.0 30.1 33.1
----- ----- ----- -----
Gross profit 65.6 67.0 69.9 66.9
Selling, general & administrative 54.0 60.5 54.6 99.0
Research & development 10.8 5.0 5.0 6.5
----- ----- ----- -----
Operating income (loss) 0.8 1.5 10.3 (38.6)
Interest expense (0.7) (0.2) (0.1) (0.2)
Other income 1.0 0.5 0.4 0.1
----- ----- ----- -----
Income (loss) before taxes 1.1 1.8 10.6 (38.7)
Income taxes --- --- --- ---
----- ----- ----- -----
Net income (loss) 1.1% 1.8% 10.6% (38.7)%
====== ====== ====== =======
Pro forma net income 0.9% 1.4% 8.5%
==== ==== ====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Total revenues decreased approximately 8% from $423,500 to
$390,200 partially due to a decrease in traditional system and software sales of
approximately $76,000. Revenue from systems and software sales, as opposed to
service contracts, has historically been variable from period to period. In the
six months ended June 30, 1997, sales to one such customer were approximately
$55,400 lower than in the comparable period of 1996. Additionally, during the
first half of 1997, the Company focused its marketing efforts on VisualControl
product line and other new software products, and away from its traditional
product lines. Sales of VisualControl and other new products were approximately
$10,300 and $41,100 for the six months ended June 30, 1996 and 1997,
respectively. Service revenues increased approximately $12,000 for the six
months ended June 30, 1997 over the same period last year.
Gross Profit. Gross profit margin for the six months ended June 30,
1997 of 66.9% decreased slightly from 69.9% for the six months ended June 30,
1996. This is primarily a result of increases in service labor costs without a
corresponding increase in the sales price of service contracts.
Expenses. Selling, general and administrative expenses increased
significantly from $231,200 for the six months ended June 30, 1996 to $386,500
for the six months ended June 30, 1997. This increase was principally due to
legal, audit and financial consulting expenses of approximately $101,000, and
marketing and related costs of approximately $15,000, incurred in 1997 in
connection with the Company's corporate financing plan approved in November,
1996. The plan included a private placement offering as well as an initial
public offering. In addition, approximately $31,000 of additional expenses
associated with a new marketing
- 24 -
<PAGE> 27
executive and other additional employees hired as part of the strategic plan for
the Company's new products contributed to the increase. Amortization of
capitalized software costs of approximately $8,000 was incurred in 1997 due to
the general release of the Company's VisualControl product line to the market in
April 1997.
Income Taxes. No income tax expense was recorded in 1997 as a full
valuation allowance was recorded against the net deferred tax asset arising from
the net operating loss carryforward generated in 1997. Because the Company was
taxed as an S-Corporation prior to 1997, it had no tax provision in 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Total revenues increased 2% from $800,000 to $815,000 due to
a minor increase in service contract revenue which was offset by a nominal
decline in system and software sales.
Expenses. General and administrative expenses increased from $432,000
to $493,000 or 14% primarily due to increases in salaries and employee benefits,
early stage product research costs and market research costs. Product
development costs declined 47% from $87,000 to $41,000 due to new product
completion and transition into the commercialization phase, whereby $51,747 of
software development costs were capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has financed its business primarily with cash
flow from operations. The Company's strategic decision made in late 1995 to
develop and market control network software tools altered its traditional
capital needs. In November 1996 the Company's shareholders approved a corporate
financing plan. Pursuant to that authorization, the Company generated $119,650
in net proceeds from the private placement of 75,000 shares of its Common Stock
during the six months ended June 30, 1997, primarily to finance the costs of the
Offering described herein and its business strategy. During July 1997, the
Company raised an additional $256,000 from the private placement of 146,286
shares of its Common Stock. The Company has a short-term commercial bank line of
credit totaling $75,000. As of June 30, 1997, the Company had $14,000 available
under the line of credit.
As of December 31, 1996 and June 30, 1997, the Company had cash and
cash equivalents of $24,480 and $14,907, respectively, and working capital of
$64,984 and $49,794, respectively. Cash provided by (used in) operating
activities in 1996 and the six months ended June 30, 1997 was $58,040 and
($109,916), respectively. The decrease was primarily due to the 1997 net loss.
Cash used in investing activities in 1996 and the six months ended June 30, 1997
was $60,538 and $23,438, respectively. The 1996 and 1997 investing outlays
include $51,747 and $21,388 for software development costs related to control
network products. Cash used in financing activities was $27,008 in 1996 which
was comprised of distributions to shareholders of $59,220 and stock issuance
costs of $20,788, partially offset by proceeds from sale of Common Stock of
$53,000. Cash provided by financing activities in the six months ended June 30,
1997 was $123,781 which was comprised of gross proceeds from the private
placement of 75,000 shares of Common Stock of $131,250, partially offset by
additional stock issuance costs of $68,469. Additionally, the Company borrowed
$61,000 under its line of credit to help fund its operating activities.
- 25 -
<PAGE> 28
Management believes the net proceeds of the Offering, combined with the
Company's net working capital and anticipated cash flow from operations, will be
sufficient to meet capital and liquidity needs for the next twenty-four months.
- 26 -
<PAGE> 29
BUSINESS
DGS is a high technology company in the automation and control
industry.
INDUSTRY OVERVIEW
The industry is comprised of over 60 publicly traded U.S. and foreign
companies. This group includes conglomerates and utilities which generate an
estimated $47 billion in annual control related sales. DGS estimates there are
more than 4,000 other companies worldwide that generate an additional $10
billion in control and automation related sales annually.
Honeywell and Johnson Controls are leaders in this industry.
The Demand. The control market is now undergoing a major technological
shift resulting from new powerful chip technologies. The Company believes that
this shift is analogous to what has occurred in the computing industry, in which
closed mainframe systems have been supplanted by open networks of interoperative
personal computers. In the control market, the power of new hardware and
software has created a strong user demand for solutions that can use a mix of
various vendors' hardware and software (open) rather than the existing single
vendor (closed) solutions. This shift has created a significant market for new
software and software tools.
The major revenue categories within the control and automation industry
have traditionally been (i) space and aviation technology, (ii) home and
building control and (iii) factory and industrial automation and control. DGS
will concentrate on sales to suppliers of products and systems in the building
control segment, and the industrial automation and control segments, of the
second and third of these categories.
The worldwide demand for products and services in the building control
and industrial control and automation industries increased over 10% in 1996. In
the building control market the increase stems from the demand for performance
contracts (energy savings pay for a system upgrade) and integrated facilities
management services for existing buildings. Of the 6,000,000 buildings in Europe
and the United States only a small percentage currently have building control
systems installations.
Industrial automation and control growth is due primarily to the
increasing multi-industry demand for the installation of smart distributed
systems technology (factory and plant automation solutions that use intelligent
distributed sensors and control). As one example, upgrades of industrial and
municipal waste water treatment control systems comprise a large market.
Currently, over 80% of the 67,000 industrial and municipal waste water treatment
sites in the United States use old technology. Industry sources estimate that
the industrial control and automation demand will generate over $10 billion in
sales over the next five to seven years.
The Old Technology. In selecting a process control or automation
solution, customers had to decide whether they wanted to use a single
proprietary control system such as those provided by Johnson or Honeywell. Once
the vendor was selected, the customer was committed to the single system. The
customer could not change systems, replace components of the existing system
with components from a different vendor or expand the system without incurring
great expense. A vendor's device could only function with other devices from the
same vendor. The customer was at the mercy of the single vendor whom he had
chosen. This is known as a closed (architecture) system.
- 27 -
<PAGE> 30
The New Technology. Today, the same customer could choose an open
system for his project. That customer can now select the appropriate vendors'
devices that provide the most cost effective automation solution. New technology
enables a Honeywell device, for example, to communicate with a Johnson device.
The customers can upgrade to state of the art devices in the future without
losing their initial investment. This is known as an open (architecture) system.
The introduction of open systems represents a major technological
shift. Thousands of limited function, closed systems currently in use in
building control and automation and control systems will be replaced or upgraded
with PC or other powerful and cost effective technologies. This shift has
created an increasing demand for new, user-friendly software tools to capitalize
on the power of technologies.
Additionally, no central controller or computer is required for
communication in an open system. Sensor and control devices, called nodes,
communicate peer-to-peer using a common protocol. The interaction among nodes
enables a control network to perform multiple complex tasks simultaneously.
The "backbone" of open systems is the communication network, or "device
network." The network is dependent on software to provide communication. The
leading industrial device networks are Devicebus, CAN, SDS, ASI and LonWorks.
DGS believes that the introduction of open systems represents a major
technological shift in the industry. As a direct result, thousands of limited
functionality, vendor-defined systems currently used in building control,
industrial automation and process control will be replaced or upgraded by PC
based applications or systems. Open control systems will be integrated into
enterprise-wide, software solutions to meet the continuing demand for increased
business efficiencies. This fundamental shift from vendor-defined stand alone
control solutions to interoperable user-defined solutions offers a substantial
opportunity for DGS to supply specialized PC based, software tools to a wide
variety of industries using the new open systems technology.
LonWorks Control Network. Technology analysts consider the LonWorks
architecture developed by Echelon Corporation (www.echelon.com) to be the most
technologically advanced and flexible control network design platform available.
The LonWorks system is a multi-industry control networking solution that will
port to any processor. Controllers, sensors, devices with other host CPUs, other
networks, PLCs, actuators, switches and operator interfaces from different
vendors each can be an intelligent device in a LonWorks control network.
Echelon has stated that there are currently ten thousand LonWorks
systems installed worldwide. Echelon has estimated further that it has to date
shipped three million Neuron C Chips and expects to ship eight million such
chips in 1997 and 25 million chips per year by 2000. Generally, these shipments
correspond to an equal number of LonWorks control network devices or nodes
currently or to be installed worldwide. Currently, the installed base of
LonWorks systems is divided between the building control industry (35%), the
discrete and hybrid industrial automation marketplace (35%) and transportation
and other industries (30%). A leading consultant has predicted that the LonWorks
system will become the de facto building industry standard. DGS estimates that
the LonWorks control network design platform will underpin 15% to 25% of all
worldwide building control systems installations by the year 2000. Industry
analysts have forecasted that cumulative 1997-2000 period worldwide overall
building
- 28 -
<PAGE> 31
control marketplace revenue, when combined with building protection systems
revenues, will be in excess of $43 billion.
The LonWorks Network Services ("LNS"). LNS architecture, released by
Echelon in April 1997, provides the functionality of the LonWorks network and
allows maintenance, control and multiple device access to the network.
LonWorks technology is a powerful tool. At the heart of LonWorks
technology is the Neuron C computer chip developed by Echelon. The Neuron C chip
includes three dedicated microprocessors, integrated input and output hardware
and drivers, and internal timers for real-time control. It is programmed in
high-level (Neuron C) programming language. Coding a control application in
Neuron C (a derivative of ANSI C) requires that the engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged.
DGS estimates that a programmer using Neuron C language to develop a
building automation application with LonWorks technology will devote 25% of the
total project time to program coding, 25% to application documentation and as
much as 50% to code debugging. To improve the efficiency of such projects, DGS
has developed a graphical programming tool, VisualControl. In DGS's experience,
VisualControl reduces project development time by over 75% resulting in
significant savings in implementation time and engineering costs.
DGS's new software is used to access, monitor and configure the LNS
control network. It is the use and popularity of LNS architecture that the
Company believes will create the market for VisualControl in the control
industry. As of August 1997 DGS believes that VisualControl is the only product
of its type to work with LNS.
VisualControl. VisualControl is a graphical programming tool that
provides control system designers, systems integrators (SIs) or end users with a
powerful link to the Windows 95 and Windows NT operating environment.
VisualControl has standard Windows functions (e.g., tool bars, Multiple Document
Interface, Help files) for ease of configuring the control network. It includes
standard IEC-1131 graphical device blocks that enable the engineer to recognize
the control sequence logic from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable, commercialized software product
designed for control network development that functions as a Windows NT
graphical user interface to the network, generates user defined control
strategies or modifications and functions as a control network management tool.
Although it is possible to develop software with the functionality described
above, DGS is not aware of any software specifically for LonWorks control
networks or products with the features and functions of the VisualControl
software package.
VisualControl also permits LON configuration without knowledge of
Neuron C. VisualControl virtually eliminates the possibility of syntax errors,
compiles the network devices, configures the variable passing routines and self
documents the application. Additionally, DGS believes that VisualControl can
alleviate numerous problems that designers, contractors and end-users encounter
with the development of control network design by shortening development time
and materially enhancing the functionality and reliability of the control
application. In DGS's experience, VisualControl reduces project development time
by over 75% resulting in significant savings in implementation time and
engineering costs.
- 29 -
<PAGE> 32
DGS believes that the VisualControl features and functions make it a
significant add-on product for LonWorks users in the control industry.
Additionally, DGS believes that original equipment manufacturers
(OEMs), control product developers, value added resellers (VARs), systems
integrators (SIs) and end users of existing LonWorks systems can improve the
overall functionality of their applications by using VisualControl technology.
VisualControl provides the control product designer or systems end-user
measurable cost benefits and productivity gains by allowing each to focus on
core professional competencies, rather than learning to be programmers.
VisualControl also improves the operating reliability of the control
system, application or product. The Company has been advised by a building
control system integrator who purchased VisualControl software that, if
VisualControl had been used, such integrator's installation time of a recently
completed project could have been reduced from eight man- months to two
man-months, a major project installation cost savings. DGS believes this
commentary to be highly significant in that industry analysts have estimated
that over 64% of the total expenditures in the building control market are for
the system installation, maintenance and spare parts.
BUSINESS STRATEGY
DGS's business strategy is to establish itself as a leading software
developer that specializes in developing add-ons for Neuron C based distributed
control networks. DGS is committed to the development of other control network
products and the modification of its VisualControl software with a view towards
capitalizing upon important industry trends. Microsoft and Sun Microsystems are
developing ActiveX and Java communication technologies that will allow
industrial control applications to run over the Internet and on corporate
intranets. DGS believes that a modified version of VisualControl will be an
important component within control applications that run on corporate intranets.
In the execution of its business strategy DGS believes that it can
exploit four key advantages: (i) it can fill the role of a knowledge-based
technology provider to the industry group, not a competitor, (ii) DGS's
VisualControl product is the only currently available graphical programming tool
that simplifies the creation of an open control network and is a Windows-control
network interface, (iii) willingness exists by large original equipment
manufacturers (OEMs) and system integrators within the industry to purchase
software enhancements from third party vendors like DGS to improve their own
products, and (iv) DGS's key officers have substantial experience in the
worldwide sales and distribution of software products into the corporate
marketplace.
The key elements of DGS's business strategy are:
- Expand DGS's software production and customer support capacity
and increase research and development. DGS plans to hire four
programmers immediately, then attract and retain up to six
additional programmers and three systems analysts and acquire
additional computers necessary to support an increased level
of software production capacity, quality control and customer
support.
- Establish DGS's software distribution channels. DGS recently
hired Mr. William C. Kaesche, III. Mr. Kaesche has substantial
experience in sales and marketing from nearly twenty years of
service with Honeywell Inc. DGS is pursuing the control design
software market primarily through strategic alliances and
- 30 -
<PAGE> 33
relationships with software distributors, original equipment
manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software
innovation and existing product interest, DGS intends to hire
two additional Sales and Marketing professionals to contact
the marketplace of LonWorks systems users. In addition to a
direct mail product promotion campaign, the LonWorks Software
print and electronic catalogs and aggressive advertising in
professional trade publications and engineering journals, DGS
is using new communications technology for product promotion,
such as fax on demand.
- Establish the VisualControl brand name as a leader in software
add-ons for the LonWorks based control design platform.
Management intends to establish brand recognition for the
VisualControl software name. As design engineers become
familiar with DGS's software brand name, the Company
anticipates they will purchase later software releases,
upgrades and related tool box products.
- Leverage DGS's intelligent control design knowledge-based
creative capabilities and technical expertise into application
and new product development. Management believes that DGS's
(i) control design experience and history, (ii) controller
hardware manufacturing background, (iii) automated systems
installation experience and (iv) creative understanding of
distributed control technology and its Neuron C programming
capabilities, collectively, represent a major core asset which
will facilitate the rapid development of new software
applications and products. As product designers purchase
VisualControl for application development and solutions, DGS
will offer project consulting services (for a fee) to speed
the completion of customer's application.
- Pursue complementary strategic business and technology
acquisitions. DGS will pursue the acquisition of businesses or
technology that will extend its software distribution
channels, broaden engineering areas of expertise, increase
technology levels or complement its software products. The
control and automation industry remains highly diverse and
fragmented with the majority of participants being small,
localized companies with outdated products or services. DGS
believes that this industry structure and the recent industry
technology transition create substantial acquisition
opportunities. DGS believes that it can exploit these
opportunities by acquiring small companies and improving their
productivity through product technology improvements and
economies of scale.
- Create additional worldwide interest in DGS and its products
through the innovative use of the DGS global web site. The
internet is a powerful marketing tool for technology
companies, and is particularly valuable to DGS in generating
additional awareness of its products and other developments at
DGS. Potential customers are able to download demonstration
versions of the Company's software from the web site for their
evaluation. In May 1997, the Company's web site had over 95
downloads and over 450 visitors from around the world. Many of
the visits expressed interest in becoming a reseller, sales
representative or distributor of the Company's products. DGS
updates the site regularly to encourage repeat visits from
potential clients. The address of DGS's web site is
"www.visualcontrol.com".
DGS believes that the marketplace for control design software and
control products has significantly broadened. The control marketplace is
experiencing demand from participants
- 31 -
<PAGE> 34
such as appliance manufacturers, refining and petrochemical companies, textile
manufacturers, original equipment manufacturers (OEMs) of microprocessors and
consumer electronic equipment, oil and gas producers, automotive companies, data
processing firms, companies within the transportation industry and
telecommunications companies. Virtually all complex telecommunication systems
applications are now developed using some form of open control network
architecture allowing the system wide integration of sensors, circuit boards,
optoelectronics, cable assemblies and wireless components that constitute the
systems signal path. The Company believes it is well positioned to take
advantage of these continuing developments.
PRODUCTS
VisualControl. DGS is marketing a line of VisualControl products and
other LonWorks software enhancements for use with the Windows 95 and Windows NT
operating system with prices that start from $4,495 per base license. The
following table describes DGS's new products:
<TABLE>
<CAPTION>
NEW PRODUCT DESCRIPTION FUNCTION UNIT PRICE
<S> <C> <C> <C>
LVC-FULL VisualControl full product. Graphical programmer and $4495
Network Manager.
LVC-GRA VisualControl software single user license. Graphical programmer. $2995
LVC-NET VisualControl software network manager tool. Management of control networks $1995
(Single user license).
LVC-SITE Basic VisualControl software site license. Multiple user LVC-FULL site Negotiable
license.
LVC-TECH Service option. One year technical support, No additional cost for upgrades 10% of site
upgrades and new releases for VisualControl to VisualControl user. license
package.
LUC-11 Hardware. 11 point controller that can be HVAC, process, electrical - $395
programmed with VisualControl. mechanical or automation
controller.
LTF-1001 Signal path "test box" for network Two node test circuit for $1295
input sources control network.
INTERFACE LNS interface card. PC connection to network. $499
CARD
LVC-DEB* VisualControl software network debugger. Debugging tool for control TBA
network architecture.
LVC-SIM* What-if analysis and simulation software for Real time simulation of complex TBA
control networks. control networks.
</TABLE>
*Under development
The Company permits discounts of up to 50% from the prices set forth
above to large volume purchases. DGS offers a 90 day software warranty.
VisualControl software has high gross profit margins. As DGS's revenue
shifts from building control to software products, expanding overall margins are
expected to accompany any increase in sales. Software products are, however,
subject to price pressures over their life cycle that result in reduced margins.
DGS anticipates that reductions in profit margins for its software products will
occur as technological advances are made and as the market for software
application tools such as VisualControl becomes more established. For this
reason DGS intends to develop new software products and enhancements.
- 32 -
<PAGE> 35
Other DGS Software Products. DGS is developing a portfolio of new
network software enhancements and control application products with new
functionality (including drivers, control libraries, control network management
and control network integration tools) for a broad range of customers who
develop and use LON based systems and products.
DGS recently has developed a 32 bit driver to enable Ci Technologies,
Inc.'s man- machine interface ("MMI") software, CiTect, to interface the
LonWorks network. This driver is designed to take advantage of DGS's Network
Management software, a real-time monitor for LonWorks control networks. DGS
completed the driver on March 28, 1997 and shipped it to distributors and system
integrators for testing and use in industrial and building automation projects.
The driver was developed in response to strong customer demand in installations
combining LonWorks, CiTect software and the VisualControl Network Manager. The
Company intends to develop additional LNS 32 bit drivers to interface with other
MMIs.
Building Control Products. DGS has two established product lines:
computer systems that automate non-residential dwellings and wastewater
treatment plants and related software tools. DGS's facilities management system
is composed of a single unit host computer, optional local computers and DGS
series controllers.
DGS's software programs allow the user to monitor and control thousands
of points and to coordinate multiple systems. All current DGS systems and
software work on multiple operating platforms (Windows 95, Windows NT, VMS and
QNX (UNIX subset)) and enable the facility operator to monitor and control
through a layered graphical interface. DGS currently manufactures these products
at the Miamisburg facility.
As part of any DGS facilities management project, the customer enters
into a service contract that includes remote, real-time diagnostic system
service provided by DGS's systems analysts. The service contract also includes
software updates, maintenance manuals, installation service, debugging
procedures, on-site training and parts inventory. Service contracts are renewed
annually and are a significant source of DGS's current gross revenue.
DGS's current hardware and software products are supported by manuals
and training and installation services. The following table describes DGS's
current building control products and services, all of which DGS intends to
continue to sell and service:
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION FUNCTION UNIT
PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Building Automation Hardware and software system. PC based Non residential energy Per
System software modules allow multiple systems management system. project
coordination and point monitoring.
Mark IV Controller Intelligent DDC controller. Controller for up to 64 $835
points.
Mark V Controller Intelligent DDC multi-function controller. Controller for up to 24 $600
points.
LID LonWorks Software and Hardware design consultant. Control design & Per
Independent Developer development services to project
corporate clients.
</TABLE>
- 33 -
<PAGE> 36
CUSTOMERS
The Company believes that its potential customers are original
equipment manufacturers (OEMs), control product developers, value-added
resellers (VARs), systems integrators (SIs) and end users. The OEMs consist of
large companies which manufacture complete control systems and who would
incorporate the Company's products in their systems. The control product
developers manufacture various hardware items which would be programmed using
the Company's products so that they can be incorporated in control systems.
Value-added resellers create both hardware and software products which would
include the Company's products and which would then be sold to other users.
Systems integrators put together full, or partial, control systems utilizing
software and hardware products generally acquired from other parties, which
would include the Company's products. End users include companies with control
systems, which desire to upgrade or to add new features to existing or future
systems, including those of the Company's products. DGS is initially selling its
VisualControl software products in the LonWorks segment of the control
automation marketplace. DGS has provided over 200 demonstration copies of the
VisualControl product to potential customers.
A major distributor of LonWorks automation products for the system
integrator marketplace stated, "VisualControl is one of the most important tools
available for working with LonWorks technology because it gives the system
integrator a modern, graphical environment to create a custom control sequence.
The product is significant in that it addresses the most important problem
facing control system integrators - how to lower the engineering costs
associated with developing custom control sequences."
The majority of DGS's initial target users are engineers and designers
within corporate multiple-site computing environments. DGS believes that as
engineers and designers become familiar with DGS's new software products, they
will incorporate ("embed") them into numerous control applications with wide
distribution potential in factory automation systems, building and home control
products and process control systems. For example, a manufacturer of waste water
treatment control solutions can license VisualControl technology and include it
as an enhancement, extension or upgrade to its own existing or new product
lines. A building control and automation manufacturer can include VisualControl
software as a "soft wiring" tool that enables the user to accommodate changes to
a facility's occupancy rate without costly physical re-wiring. The binding done
within VisualControl software is the equivalent of connecting physical wires.
DGS has entered into a formal agreement with Weidmuller EuroLon AB for
their exclusive marketing of VisualControl in Scandinavian countries. In
November 1996 DGS received a blanket purchase order for VisualControl from
Barrington Systems, a systems integrator in the United States, to be delivered
over the course of 1997.
A list of companies that have purchased VisualControl software since
mid-1996 includes: ANCO Technologies, Inc., BP Chemicals, Inc., Victory
Controls, Co., Leybold Vacuum Products, Inc., Solutions Direct, Control
Solutions, Inc., Mat. Co. Ltd., Encorp, Inc., Weidmuller EuroLon AB (for use by
Volvo) and EMC Engineers, Inc.
The Company has installed its building control products at over twenty
locations. A representative sample is set forth in the following table:
- 34 -
<PAGE> 37
<TABLE>
<CAPTION>
CLIENT LOCATION DGS PRODUCT OR SERVICE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
University of Pennsylvania Philadelphia, Pennsylvania Facilities Management System
Philadelphia Wastewater Treatment Philadelphia, Pennsylvania Process Control
Delco Moraine Dayton, Ohio Energy Management System
General Motors Building New York, New York Fire & Security Systems
Delco Electronics Kokomo, Indiana Security System
Electromotive LaGrange, Illinois Energy Management System
AC Rochester Grand Rapids, Michigan Energy Resource Accounting
Chevrolet Assembly Plant Moraine, Ohio Energy Management System
GM Group Assembly Plant Oshawa, Ontario Maintenance Monitoring System
Harrison Radiator Moraine, Ohio Security System
Oldsmobile Plant Lansing, Michigan Maintenance Dispatch System
RCA Scranton, Pennsylvania Energy Management System
SmithKline Philadelphia, Pennsylvania Multi-Bldg security & access control
======================================================================================================
</TABLE>
The Company has service contracts with most of the customers listed in
the above table. The Company believes that these companies constitute potential
end users for its VisualControl and other new software products.
The University of Pennsylvania and the City of Philadelphia accounted
for 38% and 14%, respectively, of total revenues during the six months ended
June 30, 1997, and 48% and 12%, respectively, of total revenues during the six
months ended June 30, 1996. These same two customers accounted for 47% and 12%,
respectively, of total revenues during the year ended December 31, 1996, and 39%
and 26%, respectively, of total revenues during the year ended December 31,
1995. One additional customer accounted for 10% of total revenues during the
year ended December 31, 1995.
MARKETING & SALES
DGS is pursuing the control design software market primarily through
strategic alliances and relationships with software distributors, original
equipment manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software innovation and existing
product interest, DGS intends to hire immediately two additional Sales and
Marketing professionals to contact the LonWorks users marketplace. In addition
to a direct mail product promotion campaign, the LonWorks Software print and
electronic catalogs and aggressive advertising in professional trade
publications and engineering journals, DGS is using new communications
technology for product promotion such as fax on demand.
ENGINEERING & DEVELOPMENT
DGS currently employs four full time software engineers and intends to
hire another four programmers immediately. An additional six programmers and
four systems and control engineers will be added to round out the staff. All of
DGS's current software engineering staff are versed in the application languages
used to develop its products (i.e., ActiveX
- 35 -
<PAGE> 38
controls, C++ with MFC, Windows 95 and Windows NT). Equally important, three of
these staff members have extensive backgrounds in controls engineering and
automation coupled with system integration experience in both building and
industrial environments. All of the engineering and development staff is trained
and fluent in the LonWorks hardware and software to which DGS products are
directed.
DGS currently owns hardware resources to conduct its product research
and development and to test and evaluate software products for its target
market. These resources include microcomputers based on Intel P5/P6 Pentium
technology, application software, and CASE tools. DGS also has a complete
electronics shop with hardware design and build capability to support test and
evaluation of its software products. In addition to commercially available
sensors and controllers that DGS uses for testing and evaluating DGS software
products prior to release, the electronics facility permits DGS to construct
proprietary state-of- the-art test boxes and other hardware to further its
advanced software development projects.
Due to the fluidity and speed of change in software development
environments, DGS develops software on two tracks -- enhancement of its current
line of software products and the invention and development of new products
directed at the future control network technology market. Current projects that
will enhance its VisualControl product line include a debugger, a simulator,
drivers for a variety of control system interfaces, and upgrades for its
graphical support tool and network manager. Upgrade activities include using OLE
and ActiveX based 32 bit solutions to integrate "factory floor" input and output
data from DGS network management software to users throughout the enterprise who
use standard office software such as spreadsheets and databases. Certain other
proprietary activities are also underway to penetrate the market.
COMPETITION
To the best of the Company's knowledge, VisualControl is the only
commercialized software product designed for control network technology product
development that (i) functions as a network/Windows NT graphical user interface,
(ii) generates user-defined control strategies or modifications and (iii)
functions as a control network management tool. Additionally, DGS believes that
VisualControl is the only product of its type to work with LNS architecture. DGS
is aware of one possible competitor in the graphical programming area and three
companies that develop network management tools that might become competitors of
the Company.
DGS was one of a few companies that worked closely with Echelon for
over two years as part of the "beta team" developing new 32 bit LNS technology.
This relationship facilitated the Company's development of the VisualControl
software package so that it was available when LNS was introduced in April 1997.
To the Company's knowledge, no other software company took advantage of this
opportunity to create packages specifically for LNS prior to its release.
Companies such as DGS that sell software application tools which
incorporate LonWorks technology must pay royalty fees to Echelon on a per node
basis. Royalty payments to Echelon can be a significant cost to companies
promoting software and hardware for LNS. Recently, Echelon raised its per node
royalty fees. Due, in part, to the Company's beta team role noted above, this
increase will not apply to DGS for at least the next three years. Potential
competitors to DGS, however, will be subject to the new royalty structure which
will raise their costs. The Company believes that this will create a barrier to
those companies wishing to compete with DGS.
- 36 -
<PAGE> 39
While there are companies that offer a 16 bit network manager software
and C++ programming software, only DGS offers a combined 32 bit graphical
programming tool and network manager for LNS. The Company believes that
development costs for such technology, coupled with the burden of the new
royalty structure, will tend to discourage new entrants to this market. Perhaps
in response to such barriers, several potential competitors to DGS have sought
an alliance with the Company permitting them to resell VisualControl and thereby
gain entry to the new LNS market.
Notwithstanding the foregoing, the market for software add-on products
is intensely competitive, and there can be no assurance that competing products
will not be introduced at any time. In general, the competitive factors
affecting the market for software and services include: vendor and product
reputation, availability of products on preferred computer and communications
platforms, scalability, integration with other applications, functionality and
features, ease of use, quality of support, documentation and training, product
quality, product innovation, price and the effectiveness of marketing and sales
efforts. The relative importance of each of these factors depends upon the
market segment. Certain of DGS's competitors and potential competitors have
significantly greater financial, technical, research and development and
marketing resources. As a result, they may be able to devote greater resources
to the development, promotion, sale and support of their products than DGS.
PATENTS, TRADEMARKS & COPYRIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary technology, including its software source codes. The Company
presently has no registered trademarks or copyrights and no patents, nor does it
have any applications pending. The Company relies on a combination of trade
secret and nondisclosure law, which may afford only limited protection. The
Company is aware that unauthorized copying occurs within the industry. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties, including customers who receive
listings of the source code for the Company's products pursuant to the terms of
their license agreements with the Company, or former employees of the Company,
may attempt to reverse engineer or copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. As a result,
there can be no assurance that unauthorized use of the Company's technology may
not occur.
In the future the Company may receive notices claiming that it is
infringing the proprietary rights of third parties and may become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products. Any such claim could be time consuming, result in
costly litigation, cause product shipment delays or force the Company to enter
into royalty or license agreements rather than dispute the merits of such claims
and have a material adverse effect on the Company's business, operating results
and financial condition.
FACILITIES
DGS's corporate offices and manufacturing, research and development
operations are located at 2492 Technical Drive, Miamisburg, Ohio. This 5,000
square foot facility is leased for a term extending through March 31, 1998. The
lease includes a month to month renewal option. DGS believes that its facility
is in good condition, well maintained and suitable for its long-term needs.
- 37 -
<PAGE> 40
EMPLOYEES
DGS had 14 employees as of August 1, 1997. Of these, five are engaged
in software development, three in administration and finance and six in sales,
production, customer support and service.
LEGAL PROCEEDINGS
DGS is a party from time to time to litigation or proceedings incident
to its business. There is no pending or, to the Company's knowledge, threatened
legal proceeding to which DGS is or would be a party.
MANAGEMENT'S PROJECTIONS OF FUTURE OPERATING RESULTS
Assuming the completion of the Offering at the minimum level, the
revenue and income (loss) projections set forth in the table below (the
"Projections") are the Company's unaudited estimates based upon its recently
formulated operating plans and currently available marketplace information. In
the process of estimating future annual revenue and income in the table set
forth below, the Company was unable to consider assumptions and factors such as
the impact of changing industry competitive conditions, unanticipated
technological announcements, changing general economic conditions and the
potential effect of any business combinations or acquisitions. Additionally, the
estimated amount and timing of revenue from VisualControl software sales could
be materially influenced by numerous other micro-economic and specific factors
related to the product. These factors include but are not limited to: (i) the
success or lack thereof of the Company's sales, marketing and distribution
efforts, (ii) an unanticipated increase in the time between initial sales
solicitation of a prospective customer and revenue recognition (the "sales
cycle"), and (iii) unanticipated price discounting for large volume unit sales
("large volume pricing"). See "Risk Factors" and "Business Strategy."
The Projections should not be regarded as a representation by the
Company or any other person (including the Underwriter) that the results set
forth in the Projections will be achieved. The Projections were not prepared
with a view toward compliance with published guidelines of the American
Institute of Certified Public Accountants, or any other regulatory or
professional agency or body of generally accepted accounting principles.
Moreover, Grant Thornton LLP, the Company's independent certified public
accountants, has not compiled or examined the Projections; accordingly, they do
not express an opinion or any other form of assurance with respect to the
Projections and assume no responsibility for and disclaim any association with
the Projections. No other independent expert has reviewed the Projections. In
light of the foregoing, prospective investors in the Offering are cautioned not
to place undue reliance on the Projections.
The Company does not intend to update or otherwise revise the
Projections to reflect events or circumstances existing or arising after the
date of this Prospectus or to reflect the occurrence of unanticipated events.
Management's forecasted operating results in the three years following
the completion of the Offering are as follows:
- 38 -
<PAGE> 41
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3
------ ------ ------
<S> <C> <C> <C>
REVENUES
Service Contracts $805,000 $815,000 $825,000
Hardware Sales 92,000 98,000 105,000
Software Sales 1,381,200 3,987,500 8,965,900
--------- --------- ---------
Net Revenues 2,278,200 4,900,500 9,895,900
Cost of Revenues (853,000) (938,000) (1,793,000)
--------- --------- -----------
Gross Margin 1,425,200 3,962,500 8,102,900
OPERATING EXPENSES
General & Administrative (923,000) (982,900) (1,529,000)
Research & Development (619,000) (974,000) (1,685,000)
Sales & Marketing (895,000) (1,047,000) (1,450,000)
--------- ----------- -----------
Total Operating Expenses (2,437,000) (3,003,900) (4,664,000)
----------- ----------- -----------
Income (Loss) from Operations (1,011,800) 958,600 3,438,900
Other Income 156,540 165,000 205,000
---------- ---------- ----------
Income (Loss) Before Taxes ($855,260) $1,123,600 $3,643,900
========== ========== ==========
</TABLE>
The Projections are primarily based on a combination of the following
factors and assumptions:
(I) AN ESTIMATED GROWTH RATE IN THE CURRENT INSTALLED LONWORKS ORIGINAL
EQUIPMENT MANUFACTURER (OEM) BASE of 11.96% per year. Currently there are
approximately 3,500 OEMs that use LonWorks to develop control products. Echelon
Corporation estimates this number will increase to approximately 5,500 at the
end of the year 2000.
(II) AN ESTIMATED GROWTH RATE IN THE NUMBER OF EXISTING DISTRIBUTED
CONTROL NETWORK DEVICES of 77.31% per annum. Currently there are 2,000,000
LonWorks control network devices or chips installed. Motorola Inc., a major
manufacturer and distributor of Neuron C chips, has estimated that 20,000,000
devices or chips will be installed in LonWorks networks by the end of the year
2000.
(III) ESTIMATES OF THE COMPANY'S PERCENTAGE OF MARKET SHARE IN THE
VISIBLE SEGMENTS OF THE MARKETPLACE. The Company's estimated percentage shares
of the identifiable marketplace segments are 1.25% of the OEM segment, .025% of
the building control segment, 2.5% of the SI market segment, 2.5% of the
industrial automation segment and 2.5% of the process control segment. For the
purposes of forecasting VisualControl product sales, the Company's weighted
percentage share of identifiable marketplace total revenue was estimated to be
approximately 0.7%.
AND (IV) ESTIMATED COSTS AND EXPENSES TO ACHIEVE THE COMPANY'S BUSINESS
PLAN. These estimates are derived from the budgeted cost of sales, sales and
marketing, R & D and operating expense categories. As sales of VisualControl
software products, with much higher gross profit margin relative to the existing
business, become the major component of total sales, overall margins are
effected accordingly (as is evidenced greatly in moving from year 1 to year 2).
The largest expense increases are in sales and marketing and R & D. This relates
to establishing new departments and the associated staffing, promotions, and
product development costs.
The estimates underlying the Projections are based on forecasting
models developed by the Company using both public and proprietary information
available to the Company. No
- 39 -
<PAGE> 42
assurance can be given that the Company's revenue and income (loss) estimates
will materialize or that, if revenue and income occur at all, the Projections
will prove to be correct.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and significant employees of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas C. Haas 53 Chairman of the Board, President and Chief
Executive Officer
Edward T. Hurd 59 Director
William R. Winkler 49 Director
William C. Kaesche III 55 Executive Vice President of Sales and Marketing
Jay G. Pollack, Ph.D. 49 Executive Vice President of Research and
Development
Daniel B. Lackey* 40 Senior Software Manager
Vernon F. Brannon* 57 Chief Engineer
Mahmoud Saleh* 28 Senior Software Engineer
Frank Capuano* 27 Systems Engineer
</TABLE>
*significant employee
Thomas C. Haas has been Chairman of the Board of Directors and Chief Executive
Officer of DGS since its inception in 1993 and has been President since 1996.
From 1991 until 1993, he was self employed reviewing acquisition opportunities
and managing his assets. Mr. Haas served as Treasurer of Philips Industries,
Inc., a Fortune 500 diversified manufacturer of products for the construction,
transportation and material handling industries ("Philips"), from 1984 until
1989 and of Tomkins Corporation, the holding company for the U.S. operations of
Tomkins PLC (Philips, Smith & Wesson and Murray Ohio) from 1989 to 1991. From
1968 until 1984 he had held various financial management and analysis positions
with Philips. In addition to his responsibilities for cash management, budgeting
and strategic planning, Mr. Haas provided financial analytical support for the
acquisitions of over twenty-five companies. During his career, Philips grew from
$100 million to over $930 million in annual sales prior to being acquired by
Tomkins. He received his B.B.A. from Ohio University.
Edward T. Hurd has over 35 years of experience in global automation markets.
He became a director of DGS in July 1997. From 1962 to 1996 Mr. Hurd held many
positions with Honeywell Inc. ("Honeywell"). From 1990 to 1996, Mr. Hurd was
President of the Industrial Business Division of Honeywell and Executive Vice
President of Honeywell from 1995 to 1996. From 1962 to 1990, Mr. Hurd held
positions of increasing responsibility within Honeywell including Director of
Engineering, Vice President of Operations, General Manager and Group Vice
President of the Industrial Automation and Control Division and Worldwide
Industrial Group. He is currently an independent consultant. Mr. Hurd serves as
the Chairman of the Board of Directors of Moore Products Co. and is a director
of Total Control Products, Inc.
- 40 -
<PAGE> 43
and Iconics Inc., all of which are in the process control industry. He received
his B.S.E.E. from Drexel University and his M.S.E.E. from the University of
Pennsylvania.
William R. Winkler became a director of DGS in June 1997. He is a Certified
Public Accountant and has been President of Winkler Enterprises, a tax,
accounting and specialty retail business, since 1996. From 1977 to 1996 he was
employed by Philips Industries, Inc. ("Philips"), serving as Corporate
Controller from 1990 to 1996. From 1991 to 1996 he also served as Corporate
Controller of Tomkins Corporation, the holding company for the U.S. operations
of Tomkins PLC (Philips, Smith & Wesson and Murray Ohio). As Corporate
Controller for Philips, Mr. Winkler was part of that company's mergers and
acquisitions team and in that capacity participated in the due diligence effort
on many acquisitions. From 1970 until 1977, he was employed as a Certified
Public Accountant with Deloitte & Touche and was involved primarily in the
audits of large publicly-held clients. He received his B.S. from Drexel
University.
William C. Kaesche, III joined DGS as Executive Vice President of Sales and
Marketing in June 1997. He has had over nineteen years experience with Honeywell
Inc.'s ("Honeywell's") Industrial Automation and Control ("IAC") Division, a
global provider of industrial process control systems, software and services.
During 1996 and early 1997, he served as a consultant to several companies in
the technology industry. From 1987 until 1996, Mr. Kaesche was employed by
Honeywell's IAC Division, in the following capacities: Manager of Business
Development (1994-1996); Director of Marketing and Sales for ICOTRON, a
subsidiary of Honeywell specializing in advanced process control software and
services (1991-1994); Western Regional Sales Manager (1989-1991); and Chicago
Branch Sales Manager (1987-1989). From 1983 to 1987, Mr. Kaesche served as Vice
President Marketing and Sales for August Systems Inc., a manufacturer of fault
tolerant computer systems. He received his B.S.M.E. from Brigham Young
University and his M.B.A. from Keller Graduate School of Management.
Jay G. Pollack, Ph.D. joined DGS as Executive Vice President of Research and
Development in July 1997. Prior to joining DGS, Dr. Pollack was President and
Chief Scientist of Joshua Technology Corporation, a product development
consultancy. From 1987 to 1995, he was a Senior Manager at the University of
Dayton Research Institute. Under his direction, the Institute grew to national
stature and produced several patents and over two hundred technical papers in
support of commercial and governmental sponsors. Dr. Pollack received his Naval
wings in 1978 and spent ten years in increasingly responsible positions in Navy
research and development commands. He received his M.S. and Ph.D. in
Neuroscience from the University of Miami and his B.S. from Colorado State
University.
Daniel B. Lackey is the Senior Software Manager for DGS. He also served as DGS's
Controller from 1993 to 1997. From 1984 to 1993, Mr. Lackey was the software
manager for the various predecessors of Company. From 1978 to 1984, Mr. Lackey
was a systems research analyst with the controls division of SRL, a predecessor
of DGS. He received his B.Sc. in Computer Science from Wright State University.
Vernon F. Brannon is a Chief Engineer with DGS. From 1993 until 1996, he was the
President of DGS. From 1984 until 1993, Mr. Brannon served in various capacities
with predecessors of DGS. From 1977 to 1984 he was a computer systems engineer
with the controls division of SRL, DGS's predecessor. In 1984, he and other key
employees acquired the controls division of SRL, forming Ohio Dayton General. He
received his B.Sc. in Computer Science from Wright State University.
- 41 -
<PAGE> 44
Mahmoud Saleh has been a Senior Software Engineer for DGS since December 1996.
Mr. Saleh joined DGS in 1994 and co-developed DGS's VisualControl software
product series. Mr. Saleh received his B.Sc. in Computer Engineering at Wright
State University and is in the process of completing his M.Sc. in Computer
Science at the University of Dayton.
Frank Capuano has been a Systems Engineer for DGS since December 1996 when he
joined DGS. Prior to joining DGS, Mr. Capuano was a control systems engineer at
the University of Pennsylvania. During this period, Mr. Capuano initiated a
major project that successfully upgraded and expanded the campus facility
automation network from 7,000 points of host based control to 30,000 points of
distributed control. The upgrade resulted in measurable improvements in control
efficiency and costs. Mr. Capuano received his B.Sc. in Aerospace Engineering at
Pennsylvania State University.
Directors of the Company are elected annually. Officers of the Company are
elected annually and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the Offering, the Board of Directors will establish
an Audit Committee, initially to be composed of Messrs. Winkler (Chairman), Hurd
and Haas. The Audit Committee will be responsible for reviewing the Company's
financial statements, audit reports, internal financial controls and the
services performed by the Company's certified independent public accountants and
for making recommendations with respect to those matters to the Board of
Directors. The Board of Directors may establish other committees in the future.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive an annual fee of $2,500 as compensation for his or her
services as a member of the Board of Directors. Non-employee directors also will
receive fees of $500 for each Board and Board committee meeting attended in
person and $250 for each telephonic meeting in which the director participates.
A separate committee meeting fee will not be paid if the committee meeting
occurs on the same day as a Board meeting. All directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors and its committees and for other expenses incurred in their
capacities as directors of the Company. All directors own securities of the
Company. Including shares of Common Stock issuable upon exercise of outstanding
stock options which are currently exercisable or are exercisable within 60 days
of August 1, 1997, the directors of the Company as a group will own 35.8% of the
outstanding shares of Common Stock of the Company, assuming the sale of the
minimum number of Units, or 28.2%, assuming the sale of the maximum number of
Units. See "Holdings of Management and Principal Shareholders."
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
paid by the Company in respect of fiscal year 1996, for services in all
capacities, to Mr. Haas, the Company's Chief Executive Officer. No executive
officer earned over $100,000 in salary and bonus for fiscal year 1996.
- 42 -
<PAGE> 45
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------------- ------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
------------------ ------ ------------ ---------- ------------
Position Year Salary Bonus Compensation Options (#) ($)
-------- ---- ------ ----- ------------ ----------- ----
($) ($) (1) ($)
--- --- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Haas,
President, Chief
Executive Officer 1996 $82,136 --- --- --- ---
</TABLE>
(1) None, other than perquisites which did not exceed the lesser of $50,000
or 10% of salary and bonus.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") provides for the
grant, to the Company's employees, directors and advisors, of options to
purchase up to 300,000 shares of the Company's Common Stock. As of August 1,
1997, options for 150,000 shares of Common Stock, having an exercise price of
between $1.75 and $1.93 per share, had been granted under the Plan including
options to directors and executive officers as follows: Mr. Haas, 50,000 shares;
Mr. Hurd, 25,000 shares; and Mr. Kaesche, 25,000 shares. In addition, upon
completion of the Offering, the Company will grant options to purchase 25,000
shares of Common Stock, at the initial public offering price, to each of Mr.
Hurd and Mr. Kaesche. The Company will grant Mr. Hurd options for 25,000
additional shares, at the then current market price, a year after the completion
of the Offering.
CERTAIN TRANSACTIONS
The Company has a line of credit with a bank in the aggregate amount of
$75,000, all of which was available to the Company on August 1, 1997. The line
of credit is personally guaranteed by Mr. Haas. In October 1994, the Company
loaned Mr. Haas $18,000, secured by a promissory note, which was originally due
in November 1995 and which bears interest at 8% per annum. Repayment of the
indebtedness subsequently was extended to October 31, 1997. As of August 1,
1997, $19,116, including accrued interest, was due the Company under the note.
Mr. Haas expects to repay the note by its due date.
HOLDINGS OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock on August 1, 1997, on an
actual basis and as adjusted to reflect the sale of both the minimum and maximum
number of Units offered by this Prospectus, by (i) each beneficial owner of more
than five percent of the Common Stock immediately prior to the Offering, (ii)
Mr. Haas and each director and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated, all shares are owned directly
and the indicated owner has sole voting and dispositive power over the shares.
- 43 -
<PAGE> 46
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Prior to Offering Shares Beneficially Owned
----------------- -------------------------
After Offering
-------------------------
Minimum Maximum
------- -------
Name Number (Percent) Number (Percent) Number (Percent)
---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Thomas C. Haas(1)(2) 804,000 (60.4%) 804,000 (33.1%) 804,000 (26.0%)
Edward T. Hurd(2) 25,000 ( 1.9%) 25,000 ( 1.0%) 25,000 ( 0.8%)
William R. Winkler 50,000 ( 3.9%) 50,000 ( 2.1%) 50,000 ( 1.6%)
All directors and executive 915,000 (66.2%) 915,000 (36.9%) 915,000 (29.1%)
officers as a group (five
persons)(2)
Vernon F. Brannon(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
James E. Cogan(2) 71,000 ( 5.4%) 71,000 ( 3.0%) 63,000 ( 2.1%) (3)
Daniel B. Lackey(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
</TABLE>
- -------------------------
(1) The address for Messrs. Haas, Brannon and Lackey is 2492 Technical
Drive, Miamisburg, Ohio 45342. Mr. Cogan's address is 502 South
Koenigheim, Suite 2F, San Angelo, Texas 76903.
(2) Includes shares of Common Stock issuable upon exercise of outstanding
stock options and warrants which are currently exercisable or are
exercisable within 60 days of August 1, 1997 as follows: Mr. Haas,
50,000 shares; Mr. Hurd, 25,000 shares; all directors and executive
officers as a group, 100,000 shares; and Mr. Cogan, 24,000 shares.
(3) Gives effect to the sale of 8,000 shares as a Selling Shareholder if
the maximum number of Units are sold. See "Selling Shareholders."
SELLING SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership, by the persons listed below as Selling Shareholders (the
"Selling Shareholders"), of the Company's Common Stock on August 1, 1997 and as
adjusted to reflect the sale of the maximum number of Units offered by this
Prospectus.
- 44 -
<PAGE> 47
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Shares to Owned After
to Offering Be Offered Offering
----------- ---------- --------
Selling Shareholder Number Number Number Percent
- ------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
H.H. Croghan 50,000 20,000 30,000 1.0%
James E. Cogan (1) 71,000 8,000 63,000 2.1%
Church Street Financial 52,000 8,000 44,000 1.4%
Corp.(2)
TOTAL 173,000 36,000 137,000 4.5%
</TABLE>
(1) Includes 24,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant. Mr. Cogan is a shareholder and
employee of Church Street Financial Corporation.
(2) Includes 26,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant.
Church Street Financial Corporation is an investment research firm that
has provided analytical and advisory services aggregating $75,000 to the Company
during 1997, including corporate financing services in connection with the
Private Placement and the Offering.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, without par value, and 100,000 shares of undesignated preferred
stock, without par value. As of the date of this Prospectus, the Company's
outstanding securities consist of 1,281,286 shares of Common Stock. No shares of
preferred stock have been issued. The following description of certain matters
relating to the capital stock of the Company is a summary and is qualified in
its entirety by the provisions of the Company's Articles of Incorporation and
By-Laws and by the Pennsylvania Business Corporation Law (the "PBCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. Subject to preferences which may be granted to
holders of any outstanding preferred stock, holders of Common Stock are entitled
to receive dividends when, as, and if declared by the Board of Directors out of
legally available funds. In the event of liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and after the provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption privileges applicable to the
Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock issued in this Offering will be, fully paid and nonassessable. The
vote of holders of a majority of all outstanding shares of Common Stock is
required to amend the Articles of Incorporation and to approve mergers,
reorganizations and similar transactions.
- 45 -
<PAGE> 48
PREFERRED STOCK
Up to 100,000 shares of preferred stock may be issued from time to time
in series having such designations, preferences and rights, qualifications, and
limitations as the Board of Directors may determine without any approval of
shareholders. Preferred stock could be given rights, including voting and/or
conversion rights, which would adversely affect the voting power and equity of
holders of Common Stock and could have preferences to Common Stock with respect
to dividend and liquidation rights. Issuance of preferred stock could have the
effect of acting as an anti-takeover device to prevent a change in control of
the Company.
WARRANTS
The shares of Common Stock and Warrants offered as Units hereby are
detachable and separately transferable 90 days from the Escrow Release Date.
Each Warrant entitles its holder to purchase one share of Common Stock, at a
price of $6.50. Warrants are exercisable at any time until their expiration at
5:00 p.m., New York City time, five years following the date of this Prospectus.
The exercise price of the Warrants is subject to adjustment under certain
circumstances, including but not limited to, the Company selling shares of
Common Stock for a price per share less than the prevailing fair market price of
shares of Common Stock, issuing any shares of Common Stock as a dividend or
subdividing or combining the outstanding shares of Common Stock into a greater
or lesser number of shares. Warrants may be exercised by completing and signing
the notice of exercise forms attached to the Warrants and mailing or delivering
them (together with the Warrants) to ___________ (the "Warrant Agent") in time
to reach the Warrant Agent prior to their expiration, accompanied by payment in
full of the warrant exercise price. Payment of the warrant exercise price must
be made in United States currency by check, cash or bank draft payable to the
order of the Company. A certificate representing the shares of Common Stock
issuable upon exercise of the Warrants will be issued as soon as practicable
after receipt of the holder's request, exercise notice and payment. Copies of
the Warrant Agreement are available for inspection upon request to the Company.
The Company has reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants, and such shares, when issued, will be
fully paid and nonassessable.
Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus which will permit
the purchase and sale of the Common Stock underlying the Warrants, but there can
be no assurance that the Company will be able to do so. Although the Company
intends to qualify the shares of Common Stock underlying the Warrants for sale
in those states in which the Units are to be offered, no assurance can be given
that such qualification will occur. Holders of the Warrants may be deprived of
their value if a prospectus covering the shares issuable upon Warrant exercise
is not kept effective or if such underlying shares are not, or cannot be,
registered in the applicable states.
Holders of the Warrants may be able to sell the Warrants if a market
develops rather than exercise them. Although application has been made to list
the Warrants on The Nasdaq SmallCap Market, there can be no assurance that
trading market for the Warrants will develop or, if developed, can be sustained.
- 46 -
<PAGE> 49
A holder of Warrants is not entitled to vote, receive dividends or
exercise any rights as a shareholder in respect of the shares of Common Stock
underlying the Warrants until the Warrants have been duly exercised and payment
of the exercise price has been made.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Provisions of the Company's Articles of Incorporation, By-Laws and the
PBCL may have the effect of delaying, deferring or preventing a change in
control of the Company as a result of an extraordinary corporate transaction,
such as a merger, reorganization, tender offer, sale or transfer of
substantially all of its assets or liquidation. These provisions might
discourage a potentially interested purchaser from attempting a unilateral
takeover bid for the Company on terms which some shareholders might favor. Set
forth below is a discussion of certain of these provisions.
Special Shareholder Meetings. The PBCL provides that unless
specifically permitted in a corporation's articles, shareholders are not
entitled to call a special meeting of shareholders. The Company's Articles do
not so permit. Therefore, the shareholders of the Company are not entitled to
call a special meeting.
Advance Notice of Nominees for the Board. The By-Laws restrict the
ability of a shareholder to nominate individuals for election as directors. A
shareholder nomination must be made by written notice, containing specified
information, to the Secretary of the Company at least 60 days in advance of the
meeting of the shareholders at which such election is to be held (or if less
than 60 days' notice of the date of such annual meeting is given, not later than
10 days after the date of mailing of such notice). This requirement is intended
to provide the Company with time to assess the qualifications of any person
proposed for election to the Board and to institute litigation or take other
steps to prevent the nominee from being elected or serving, if such prevention
is thought to be necessary or desirable for any reason. Such provisions also may
inhibit shareholders who do not have any intention of controlling the Company or
the Board from participating in the nomination process.
PBCL Anti-Takeover Provisions. The PBCL contains a number of statutory
"anti-takeover" provisions, including Subchapters E, F, G, H, I and J of Chapter
25 and Section 2538, which will apply automatically to the Company upon
consummation of the Offering. The following descriptions are qualified in their
entirety by reference to the respective provisions of the PBCL:
Subchapter E provides that, if any person or group acquires 20% or more
of the voting power of a covered corporation (a "Control-Share Acquisition") the
remaining shareholders may object to the acquisition and put their shares to
such person or group in exchange for the fair value of their shares, including a
proportionate amount of any control premium. Subchapter F generally delays for
five years and restricts "business combinations" between an "interested
shareholder" and the corporation. The term "business combination" is defined
broadly to include various transactions between a corporation and an interested
shareholder including mergers, sales or leases of specified amounts of assets,
liquidations, reclassifications and issuances of specified amounts of additional
shares of stock of the corporation. An "interested shareholder" is defined
generally as the beneficial owner of at least 20% of a corporation's voting
shares.
Subchapter G prevents a person or group who has acquired 20% or more of
the voting power of a covered corporation from voting its shares without the
approval of the
- 47 -
<PAGE> 50
"disinterested" shareholders. Failure to obtain such approval exposes the owner
to the risk of a forced redemption of that owner's control shares by the issuer
as provided by the statute.
Subchapter H applies in the event that any person or group publicly
discloses that the person or group may acquire control of the corporation or a
person or group effects (or publicly discloses an offer or intent to effect) a
Control-Share Acquisition and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation by
the person or the group during the 18-month period must be remitted to the
corporation if the securities that were sold were acquired during the 18-month
period or within the preceding 24 months.
Subchapter I provides for minimum severance payments to certain
employees terminated within two years of a Control-Share Acquisition. Subchapter
J prohibits the abrogation of certain labor contracts prior to their stated date
of expiration through any business combination. Section 2538 of the PBCL
generally establishes certain shareholder approval requirements with respect to
specified transactions with "interested shareholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Company's
Units, Common Stock and Warrants is _______________________________.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,381,286 shares of Common Stock if 550,000 Units are sold and 3,045,286 shares
of Common Stock if 900,000 Units are sold (assuming no sale of the
over-allotment Units or exercise of outstanding stock options and warrants and
without giving effect to the exercise of the Warrants included in the Units or
the Underwriter's Warrants). The 1,100,000 (minimum) and the 1,800,000 (maximum)
shares of Common Stock included in the Units offered by this Prospectus, as well
as up to 270,000 shares included in the Units subject to the Underwriter's
over-allotment right, will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. Also, a minimum of 550,000 and a maximum of 900,000 shares of
Common Stock will be issuable upon exercise of the Warrants included in the
Units and an additional 310,500 shares of Common Stock will be issuable upon
exercise of the Underwriter's Warrants and the Warrants contained therein, all
of which are expected to be freely tradeable upon issuance. The remaining
1,281,286 shares if 550,000 Units are sold and 1,245,286 shares if 900,000 Units
are sold will be held by the Company's current shareholders. Of these 221,286
currently are unrestricted. The remainder may not be sold unless they are
registered under the Act or sold pursuant to an applicable exemption from
registration, including an exemption pursuant to Rule 144.
Rule 144 governs the public sale in ordinary trading transactions of
restricted securities and of securities owned by affiliates of a company and
imposes volume and manner of sale restrictions, as well as other requirements,
on the sale of restricted securities held for less than two years by
non-affiliates and on all securities held by affiliates. The Company anticipates
that 416,286 shares of Common Stock (if 550,000 Units are sold) will be eligible
for sale immediately after the Offering without regard to the restrictions of
Rule 144 and an additional 30,000 shares of Common Stock will be eligible for
sale 90 days after the Offering pursuant to the restrictions of Rule 144. The
Company's executive officers, directors and shareholders owning more than 5% of
the Common Stock (815,000 shares) have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of 12 months from the date of
- 48 -
<PAGE> 51
this Prospectus, without the prior written consent of the Underwriter. After the
expiration of 12 months and assuming 550,000 Units are sold, 815,000 shares of
Common Stock may be sold pursuant to the restrictions of Rule 144. The remaining
shares outstanding prior to this Offering will be eligible for sale in
compliance with the restrictions of Rule 144 beginning in early 1998.
The Company has reserved up to 300,000 shares of its Common Stock for
issuance under its 1997 Stock Option Plan. Upon the completion of the Offering
there will be options for 200,000 shares of Common Stock outstanding under the
Plan. The Company currently intends to register the shares of Common Stock
issuable under the Plan. Subject to the expiration of the 12 month lock-up
period, and subject to compliance with Rule 144 by affiliates of the Company and
to Section 16 of the Securities Exchange Act of 1934 by directors, officers and
10% beneficial owners, any shares issued upon exercise of options granted under
the Plan will become freely tradeable at the effective date of the registration
statement for the Plan shares.
The Company has issued warrants to two of its shareholders, the 1996
Warrants, to purchase a total of 50,000 shares at $0.90 per share expiring on
November 15, 2003. The Company has no plans to register either the 1996 Warrants
or the shares issuable upon their exercise. Therefore, if and when issued, these
shares will be Restricted Shares and cannot be sold without compliance with Rule
144. The Company has also issued the Broker's Warrants to the Underwriter, to
purchase 13,229 shares at $1.75 per share expiring on July 25, 2002. The Company
has agreed to register the shares issuable upon exercise of the Broker's
Warrants. Therefore, if and when issued and assuming their registration as
agreed to by the Company, such shares will be freely tradeable.
Prior to the Offering, there has been no public market for the
Company's Units, Common Stock or Warrants, and no prediction can be made as to
the effect, if any, that market sales of such securities or the availability of
such securities for sale will have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of such securities in the
public market could adversely affect prevailing market prices and the Company's
ability to raise capital at favorable prices. The Company has submitted an
application to list the Units, Common Stock and Warrants on The Nasdaq SmallCap
Market under the symbols "DGSU", "DGSI" and "DGSIW," respectively.
UNDERWRITING
J. V. Delaney & Associates (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the underwriting agreement by and among
the Company, the Selling Shareholders and the Underwriter (the "Underwriting
Agreement"), to use its best efforts to sell a minimum of 550,000 Units and a
maximum of 900,000 Units to the public. The Underwriter has made no commitment
to purchase any of the Units offered.
During the Offering, all subscription amounts will be held in escrow
with The National Bank of Southern California, as Escrow Agent. The Offering
will begin on the date of this Prospectus and, unless extended, end on
__________, 1997, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
Subscriptions will be deposited with the Escrow Agent by noon of the
next business day following receipt and approval by the Underwriter. All funds
held in escrow will be invested by the Escrow Agent; escrowed amounts will not
be subject to claims of the Company's
- 49 -
<PAGE> 52
creditors or to deduction for expenses of the Offering. During the period of
escrow, subscribers will not be entitled to withdraw or cancel their
subscriptions and will have no rights as shareholders of the Company.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any such
case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
The Company has granted the Underwriter the right, exercisable for 45
days after the Escrow Release Date, to sell up to a maximum of 135,000 Units at
the initial public offering price per Unit, less the Underwriting commissions,
set forth on the cover of this Prospectus. The Underwriter may exercise this
right only to cover over-allotments made in connection with the sale of the
Units hereby.
The Underwriter has informed the Company that it will not confirm sales
to any accounts over which it exercises discretionary authority.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to three percent of the aggregate price of all Units
sold, including those Units offered by the Selling Shareholders. As of the date
of this Prospectus, $58,000 of this fee had been advanced by the Company. Upon
completion of this Offering, the Company has also agreed to sell to the
Underwriter, as additional compensation, warrants (the "Underwriter's Warrants")
to purchase that amount of Units equal to 10% of the total amount of Units sold
to the public. Each Underwriter's Warrant is exercisable to purchase one Unit at
a price of $12.50 per Unit beginning on the first anniversary and continuing
until the fifth anniversary of the date of this Prospectus. The price of the
Underwriter's Warrants is $.0005 per Warrant.
The Underwriter's Warrants contain provisions which require, under
certain circumstances, the Company to register the securities underlying such
Warrants for sale to the public. The Underwriter's Warrants are nontransferable
for a period of one year except to officers of the Underwriter. The exercise
price and number of Units covered by the Warrants are subject to adjustment to
protect the holders thereof against dilution in certain events.
From June 20, 1997 through July 25, 1997 the Underwriter assisted the
Company in privately placing $231,500 (132,286 shares) of Common Stock. For
these services, the Underwriter received $23,150 in commission and the Broker's
Warrants, exercisable through July 25, 2002, to purchase 13,229 shares of Common
Stock at a price of $1.75 per share. The Company has agreed to register the
shares issuable upon exercise of the Broker's Warrants. In
- 50 -
<PAGE> 53
addition, the Company reimbursed the Underwriter's legal expenses in connection
with the private placement.
The Company has granted to the Underwriter the right to designate two
members of the Company's Board of Directors for a period of three years from the
date of this Prospectus or, in the alternative, to designate two persons to
serve as advisors to the Board (subject to approval by the Board). To date, the
Underwriter has not designated any members of the Company's Board of Directors
or designated any persons to serve as advisors to the Board.
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. Consequently, the offering price of the Units and the
exercise price of the Warrants have been arbitrarily determined by negotiation
between the Company and the Underwriter. The initial offering price of the Units
and the exercise price of the Warrants are not necessarily related to or
indicative of the Company's assets, book value, earnings, net worth or any other
recognized criteria of value.
While the Underwriter has significant experience in corporate financing
and the private placement of securities, the Underwriter has not previously
underwritten any public offering. The Underwriter's lack of public offering
experience may affect the Offering and the subsequent development of a trading
market, if any, in the securities of the Company.
As indicated under "Use of Proceeds," over 50% of the Company's net
proceeds from the Offering are allocated to potential acquisitions, working
capital and general corporate purposes. Although it could have elected to make a
smaller offering, the Company believes that the current Offering size ultimately
will be to the advantage of investors. The Offering size should enable the
Units, Common Stock and Warrants to quality for listing on The Nasdaq SmallCap
Market, thus improving the liquidity of the investment, and should decrease the
risk that the Company will need to access the capital markets in the near
future. There can be no assurance, however, that the Company can maintain a
Nasdaq listing or that the Company's estimates and assumptions concerning its
future needs for working capital will prove correct. See "Risk Factors."
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the securities offered and certain legal matters
relating to the Offering hereby will be passed upon for the Company by Taft,
Stettinius & Hollister. Dinsmore & Shohl LLP has acted as counsel for the
Underwriter in connection with this Offering.
EXPERTS
The financial statements of the Company for the years December 31, 1995
and 1996 included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, whose report has been included in
reliance upon the authority of such accounting firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
Prior to the Offering the Company was not a reporting company. The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration
- 51 -
<PAGE> 54
Statement under the Securities Act with respect to the securities offered by
this Prospectus. The Prospectus does not contain all of the information set
forth in the Registration Statement. For further information with respect to the
Company and such securities, reference is made to the Registration Statement.
The Registration Statement can be obtained from and inspected and copied, at
prescribed rates, at the public reference facilities of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the Commission's Regional Offices at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048. The Commission also maintains an Internet web site at
http://www.sec.gov that contains documents filed electronically by issuers,
including the Registration Statement.
- 52 -
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 1995 and 1996 and
at June 30, 1997 (unaudited) F-3
Statements of Operations for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-4
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-5
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-6
Notes to Financial Statements F-7
F-1
<PAGE> 56
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Dayton General Systems, Inc.
We have audited the accompanying balance sheets of Dayton General Systems, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. 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 audits 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 financial position of Dayton General Systems, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Cincinnati, Ohio
March 14, 1997 (except for Notes L, O, and P, as to
which the date is July 25, 1997)
- --------------------------------------------------------------------------------
The foregoing report of independent certified public accountants is in the form
which will be signed upon consummation of the transactions described in Note P
to the financial statements.
GRANT THORNTON LLP
Cincinnati, Ohio
August 14, 1997
F-2
<PAGE> 57
Dayton General Systems, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1996 1997
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 53,986 $ 24,480 $ 14,907
Accounts receivable 108,455 57,383 71,414
Note receivable - shareholder -- 18,000 18,000
Inventories 93,487 112,659 111,496
Prepaid expenses 648 1,752 8,552
Deferred stock issuance costs -- 20,788 150,418
-------- -------- ---------
Total current assets 256,576 235,062 374,787
PROPERTY AND EQUIPMENT - NET 25,964 24,701 22,251
OTHER ASSETS
Note receivable - shareholder 18,000 -- --
Capitalized software costs -- 51,747 65,324
Noncompete covenant 14,600 2,100 --
Goodwill 1,896 1,646 1,521
Deposits 598 598 598
-------- -------- ---------
Total other assets 35,094 56,091 67,443
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ -- $ 61,000
Accounts payable 21,630 13,621 172,548
Accrued expenses 36,332 33,629 29,947
Unearned revenue 106,925 108,327 71,997
Other current liabilities 15,052 14,501 14,501
-------- -------- ---------
Total current liabilities 179,939 170,078 349,993
COMMITMENTS -- -- --
SHAREHOLDERS' EQUITY
Common stock at aggregate cost, no par value;
10,000,000 shares authorized; 1,000,000 shares issued
at December 31, 1995, 1,060,000 at December 31, 1996
and 1,135,000 at June 30, 1997 36,196 89,196 208,846
Preferred stock, 100,000 shares authorized,
no shares issued or outstanding -- -- --
Additional paid-in capital -- 36,168 36,168
Retained earnings (deficit) 101,499 20,412 (130,526)
-------- -------- ---------
Total shareholders' equity 137,695 145,776 114,488
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 58
Dayton General Systems, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Systems and related software sales $ 283,943 $ 269,214 $ 152,106 $ 107,088
Service revenue 515,721 545,415 271,422 283,113
----------- ----------- ----------- ---------
799,664 814,629 423,528 390,201
Cost of revenues 274,735 268,631 127,570 129,225
----------- ----------- ----------- ---------
Gross margin 524,929 545,998 295,958 260,976
Operating expenses:
Selling, general and administrative 431,533 492,796 231,170 386,475
Research and development 86,761 41,179 21,216 25,242
----------- ----------- ----------- ---------
518,294 533,975 252,386 411,717
Income (loss) from operations 6,635 12,023 43,572 (150,741)
Other income (expense):
Interest income 3,549 2,853 818 201
Miscellaneous income 4,136 1,127 701 197
Interest expense (5,328) (1,702) (95) (595)
----------- ----------- ----------- ---------
2,357 2,278 1,424 (197)
----------- ----------- ----------- ---------
Income (loss) before income taxes 8,992 14,301 44,996 (150,938)
Income taxes -- -- -- --
----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 8,992 $ 14,301 $ 44,996 $(150,938)
=========== =========== =========== =========
Weighted average common shares
outstanding 1,368,281
=========
Net loss per common share $ (.11)
=========
Pro forma:
Historical income before income taxes $ 8,992 $ 14,301 $ 44,996
Pro forma income taxes 2,000 3,000 9,000
----------- ----------- -----------
Pro forma net income $ 6,992 $ 11,301 $ 35,996
=========== =========== ===========
Weighted average common shares
outstanding 1,338,535 1,339,848 1,338,535
=========== =========== ===========
Pro forma net income per common share $ .01 $ .01 $ .03
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 59
Dayton General Systems, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Additional Retained Total
Common paid-in earnings shareholders'
stock capital (deficit) equity
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 36,196 $ -- $ 132,507 $ 168,703
Net income -- -- 8,992 8,992
S-Corporation cash distributions -- -- (40,000) (40,000)
-------- ------- --------- ---------
Balance at December 31, 1995 36,196 -- 101,499 137,695
Issuance of common stock 53,000 -- -- 53,000
Net income -- -- 14,301 14,301
S-Corporation cash distributions -- -- (59,220) (59,220)
Constructive distribution and contribution
of undistributed S-Corporation earnings -- 36,168 (36,168) --
-------- ------- --------- ---------
Balance at December 31, 1996 89,196 36,168 20,412 145,776
Issuance of common stock, net of
offering costs (unaudited) 119,650 -- -- 119,650
Net loss (unaudited) -- -- (150,938) (150,938)
-------- ------- --------- ---------
Balance at June 30, 1997 (unaudited) $208,846 $36,168 $(130,526) $ 114,488
======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 60
DAYTON GENERAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation on property and equipment 10,843 9,849 4,332 4,500
Amortization of intangible assets 12,750 12,750 6,375 10,036
Loss on disposition of property and equipment 205 205 -
Changes in assets and liabilities:
Accounts receivable 125,908 51,072 (27,194) (14,031)
Inventories (8,054) (19,172) (37,855) 1,163
Prepaid expenses (648) (1,104) - (6,800)
Accounts payable (18,771) (8,009) (7,248) 86,166
Accrued expenses 2,102 (2,703) (4,255) (3,682)
Unearned revenue 15,750 1,402 (31,628) (36,330)
Other current liabilities - (551) - -
--------- -------- -------- ---------
Net cash provided by (used in) operating activities 149,077 58,040 (52,477) (109,916)
Cash flows from investing activities:
Purchases of property and equipment (4,771) (8,791) (4,899) (2,050)
Capitalization of software development expenditures - (51,747) (21,635) (21,388)
--------- -------- -------- ---------
Net cash used in investing activities (4,771) (60,538) (26,534) (23,438)
Cash flows from financing activities:
Net borrowings under line of credit - - 53,500 61,000
Payments on long-term debt (65,000) - - -
Proceeds from issuance of common stock - 53,000 - 131,250
Stock issuance costs - (20,788) (1,712) (68,469)
Distributions (40,000) (59,220) (19,220) -
--------- -------- -------- ---------
Net cash provided by (used in) financing activities (105,000) (27,008) 32,568 123,781
Net increase (decrease) in cash and cash equivalents 39,306 (29,506) (46,443) (9,573)
Cash and cash equivalents at beginning of period 14,680 53,986 53,986 24,480
--------- -------- -------- ---------
Cash and cash equivalents at end of period $ 53,986 $ 24,480 $ 7,543 $ 14,907
========= ======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,328 $1,702 $ 60 $ 595
========= ======== ======== =========
Local income taxes $ 1,600 $1,104 $ - $ -
========= ======== ======== =========
Supplemental disclosure of non-cash financing activities:
Stock issuance costs included in accounts payable $ - $ - $ - $ 72,761
========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 61
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
1. Business
Dayton General Systems, Inc. (the "Company") was formed on March 5, 1993,
and has been primarily in the business of designing, building, installing
and servicing computerized building automation systems for use in
non-residential buildings, wastewater treatment plants and educational
institutions. The Company's systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other electrical/mechanical functions.
Although the Company plans to continue servicing its in-place building
automation systems, it has recently changed its business focus to becoming a
software technology solution provider to the building control and automation
industry marketplace through recently commercialized software products that
simplify, enhance and accelerate the design of intelligent open control
networks. The Company's administrative and main production facilities are
located near Dayton, Ohio.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company's
exposure to credit risk for accounts receivable is impacted by the economic
climate affecting its industry and its customer base, which is primarily in
Ohio and Pennsylvania. The Company manages this risk by performing ongoing
credit evaluations of its customers. The Company has not experienced
significant credit losses and no reserve for its accounts receivables is
considered necessary.
4. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. Inventories
The Company values its inventories at the lower of cost (determined using
the first-in, first-out method) or market.
F-7
<PAGE> 62
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated service lives of the assets,
which are principally five years.
7. Capitalized Software Costs
Software development costs are expensed as research and development until
technological feasibility of the software product has been established.
After technological feasibility has been established, the Company
capitalizes all costs incurred for software development in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs are amortized on a product-by-product basis using
the straight-line method over the estimated product life and amortization
begins when the software product is available for general release to
customers. Amortization expense was $0 for the year ended December 31, 1996,
and $7,811 for the six months ended June 30, 1997.
8. Noncompete Covenant and Goodwill
The noncompete covenant and goodwill result from the acquisition of assets
which began the Company on March 5, 1993. The noncompete covenant is being
amortized on a straight-line basis over the term of the covenant, which is
four years. The goodwill is being amortized on a straight-line basis over
ten years.
Amortization expense for these assets was $12,750 for each of the years
ended December 31, 1995 and 1996. Amortization expense was $6,375 and $2,225
for the six months ended June 30, 1996 and 1997, respectively. Accumulated
amortization as of December 31, 1995 and 1996 for the noncompete covenant
was $35,400 and $47,900, respectively, and $700 and $950, respectively, for
goodwill. Accumulated amortization as of June 30, 1997 was $50,000 for the
noncompete covenant and $1,075 for goodwill.
9. Revenue Recognition and Cost of Revenues
The Company recognizes revenue for systems and related software sales upon
product shipment.
The Company recognizes service revenue when the service is completed or, for
annual service contracts, the revenue is recognized ratably over the period
of the contract. Cash payments received in advance of revenue recognition
are recorded as unearned revenue.
Cost of revenues includes the direct material, labor and overhead costs
necessary to generate the revenues. Indirect costs are recorded as general
and administrative expenses.
F-8
<PAGE> 63
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Income Taxes
Upon inception, the Company with the consent of its shareholders, elected
under the Internal Revenue Code to be taxed as an S-Corporation. Effective
December 20, 1996, the Company terminated its S-Corporation election and
became a C-Corporation for income tax purposes. Accordingly, prior to
December 20, 1996, federal and state income taxes on the income of the
Company were paid by the shareholders and, therefore, no provision for such
taxes has been made in the accompanying financial statements during 1995 or
1996. Federal and state income taxes for the period from December 20, 1996
to December 31, 1996 were not material. Local income taxes are recorded as
administrative expenses.
Had the Company been subject to tax at the corporate level, the federal and
state income tax provision would have been approximately $2,000 and $3,000
for the years ended December 31, 1995 and 1996, respectively, and $9,000 for
the six months ended June 30, 1996.
The net deferred tax liability arising from the Company's conversion from an
S-Corporation to a C-Corporation on December 20, 1996 was not material at
December 31, 1996. Deferred income taxes are provided for temporary
differences between the tax basis and reported amount of assets and
liabilities.
11. Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates fair
value.
12. Earnings Per Share
Pro forma earnings (loss) per share are based on the weighted average number
of common shares outstanding for the periods presented. Weighted average
number of common shares is computed giving retroactive recognition for the
stock split in November 1996 (Note F) and the reincorporation and merger
(Note P), and includes adjustments for the effect of recently issued shares
of common stock for consideration below the anticipated initial public
offering (IPO) price and for outstanding options and warrants with exercise
prices below the anticipated IPO price using the treasury stock method. The
share effect for these issuances is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Shares of common stock outstanding,
as adjusted for stock splits 1,000,000 1,006,795 1,000,000 1,114,702
Effect of issuances below
IPO price 338,535 333,053 338,535 253,579
---------- ---------- ---------- ----------
Weighted average common shares 1,338,535 1,339,848 1,338,535 1,368,281
========= ========= ========= =========
</TABLE>
F-9
<PAGE> 64
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Earnings Per Share (continued)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 requires the presentation of basic earnings per share and diluted
earnings per share, instead of primary and fully diluted earnings per share.
The Company will implement this statement in the fourth quarter 1997. The
effect of adopting SFAS No. 128 has not been determined.
13. Stock-Based Compensation
The provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" are
effective for the Company in 1997. This recent standard requires that
employee stock-based compensation either continue to be determined under
Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock
Issued to Employees" or in accordance with the provisions of SFAS No. 123,
whereby compensation expense is recognized based on the fair value of
stock-based awards on the grant date. The Company accounts for such awards
under the provisions of APB No. 25 and, accordingly, no compensation cost
has been recognized for the stock awards. The Company has made the required
additional disclosures under SFAS No. 123 for 1997 (Note L).
14. Segment Reporting
The Company operates in a single business segment. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 requires
public enterprises to report certain information about operating segments,
products and services, customers and geographic areas in which they operate.
SFAS No. 131 supersedes existing pronouncements requiring segment reporting.
The Company has not yet determined whether this statement will have any
impact on its financial reporting requirements.
15. Interim Financial Statements
The financial statements as of June 30, 1997, and for the six months ended
June 30, 1996 and 1997 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations have
been made. The results of operations for the six months ended June 30, 1996
and 1997 are not necessarily indicative of annualized results which may be
expected for an entire fiscal year.
F-10
<PAGE> 65
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE B - NOTE RECEIVABLE - SHAREHOLDER
The Company has an $18,000 note receivable from its majority shareholder
due October 31, 1997. Interest accrues at 8% and is payable monthly. The
note is unsecured.
NOTE C - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
Parts and components $44,458 $54,716 $ 66,477
Finished parts 25,727 31,600 27,157
Projects in progress 23,302 26,343 17,862
------ -------- --------
$93,487 $112,659 $111,496
====== ======= =======
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
Computer and office equipment $48,809 $56,571 $58,669
Vehicles 1,928 1,928 -
------- ------- -------
50,737 58,499 58,669
Less accumulated depreciation 24,773 33,798 36,418
------ ------ ------
Net property, plant and equipment $25,964 $24,701 $22,251
====== ====== ======
</TABLE>
NOTE E - LINE OF CREDIT
The Company maintains a line of credit with a bank of $75,000. The line of
credit bears interest at the bank's prime rate plus .75%. Borrowings
outstanding under the line were $61,000 at June 30, 1997. There were no
borrowings under this line at December 31, 1995 or 1996. Amounts borrowed
on the line of credit are due on demand and are guaranteed by the majority
shareholder. The line of credit is secured by cash, accounts receivable,
inventories and equipment.
F-11
<PAGE> 66
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE F - COMMON STOCK
During November 1996, the board of directors and shareholders authorized an
amendment of the Company's articles of incorporation to increase the number
of authorized shares of common stock to enable the Company to implement its
plan of recapitalization. This plan has four components.
- - The Company split its stock 10-to-1 effective November 11, 1996.
- - The shareholders authorized the Company to reserve 1,600,000 of the newly
authorized shares for future use in a stock option plan (Note L) and for
common stock warrants for certain individuals and investors.
- - The Company will make a private placement offering of up to 285,000 shares
of common stock at $1.75 per share.
- - The Company expects to offer additional shares to the general public in an
initial public offering (Note P).
On November 15, 1996, the Company, under its stock warrant program, issued
common stock warrants to two existing shareholders. No consideration was
paid for the warrants since the exercise price exceeded the fair value of
the underlying stock on the date of grant. The warrants give the two
shareholders the right to purchase 50,000 shares of the Company's common
stock at a price of $.90 per share at any time prior to November 15, 2003.
As of December 31, 1996 and June 30, 1997, the Company has deferred $20,788
and $150,418, respectively, in costs related to the private offering and
the IPO. During the six months ended June 30, 1997, the Company raised
$131,250 from the private offering through the sale of 75,000 shares of
common stock, of which $11,600 in offering costs were offset against these
proceeds. Of the $150,418 of deferred stock issuance costs recorded at June
30, 1997, $123,901 relates to the IPO. If the IPO is successful, these
costs will be offset against the IPO proceeds. If the IPO is not
successful, these costs will be immediately expensed. The remaining $26,517
of deferred stock issuance costs at June 30, 1997 relate to the private
offering which generated additional proceeds in July 1997 (Note O).
NOTE G - RETAINED EARNINGS
As discussed in Note A-10, the Company terminated its S-Corporation
election effective December 20, 1996. Undistributed taxable earnings as of
that date have been included in the financial statements as additional
paid-in capital. This assumes a constructive distribution to the owners
followed by a contribution to the capital of the Company. Earnings for the
period from December 20, 1996 to December 31, 1996 were not material.
F-12
<PAGE> 67
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE H - INCOME TAXES
The following is a reconciliation between the statutory federal income tax
rate and the amount recognized in the financial statements for the six
months ended June 30, 1997.
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Computed credit for federal income
taxes at the statutory rate $(22,641)
Valuation allowance 22,563
Permanent differences 78
---------
Total $ -
=========
</TABLE>
At June 30, 1997, the net deferred tax components consisted of the
following:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax depreciation over book depreciation $ 2,100
Capitalized software costs 9,800
-------
11,900
-------
Deferred tax assets:
Inventory 1,200
Intangible assets 5,382
Net operating loss carryforward 27,881
-------
34,463
Valuation allowance (22,563)
-------
11,900
-------
Net deferred tax components $ -
=======
</TABLE>
The federal tax net operating loss carryforward of approximately $185,000
expires in 2012. The valuation allowance is required due to the uncertainty
of realizing the net deferred tax asset through future operations.
F-13
<PAGE> 68
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE I - PROFIT-SHARING PLAN
The Company maintains a profit-sharing plan covering all employees. Company
contributions to the Plan are made at the discretion of the Board of
Directors. No contributions were made for the years ended December 31, 1995
or 1996, or for the six months ended June 30, 1996 and 1997.
NOTE J - MAJOR CUSTOMERS
Two customers accounted for 39% and 26% of total revenues during the year
ended December 31, 1995, and 47% and 12% of total revenues during the year
ended December 31, 1996. The same two customers accounted for 38% and 14%
of total revenues during the six months ended June 30, 1997, and 48% and
12% of total revenues during the six months ended June 30, 1996. One
additional customer accounted for 10% of total revenues for the year ended
December 31, 1995.
NOTE K - COMMITMENTS
Leases
The Company has noncancelable operating lease agreements for certain
equipment and its office facilities. Certain of the leases have renewal
options for varying lengths of time. The Company incurred $59,708 and
$58,347 in rent expense under operating lease agreements for the years
ended December 31, 1995 and 1996, respectively. The Company incurred
$30,669 and $25,025 in rent expense for the six months ended June 30, 1996
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $50,000 in 1997, $16,000 in 1998 and $5,000 in 1999.
F-14
<PAGE> 69
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE K - COMMITMENTS (continued)
License Agreement
In January 1994, the Company entered into an agreement to license certain
computer software programs from Echelon Corporation. Under the terms of the
agreement, the Company pays one-time license fees for each of the software
programs it licenses. In 1994, the Company incurred a license fee of $9,450
which was added to the payments under an operating lease for certain
equipment leased from Echelon Corporation and is being expensed over a
three-year period. During 1996, the Company licensed two additional
software programs totaling $6,745 which are being used in product
development and are included in capitalized software costs.
The license agreement also requires the Company to pay royalties to Echelon
Corporation for each copy of an executable file of the software that is
distributed by the Company. The royalties range from $18 to $800 per
executable file distributed. Royalty expense under the agreement was $0 and
$5,720 for the years ended December 31, 1995 and 1996, respectively.
Royalty expense for the six months ended June 30, 1996 and 1997 was $2,400
and $6,206, respectively.
Consulting Agreement
In November 1996, the Company entered into an agreement with a consulting
firm which provided for six monthly payments of $5,000 beginning December
1996 for corporate development services, including capital formation
services and commerce development. In the event that an equity transaction
occurs within twenty-four months of the date of the agreement with a party
introduced by this firm, the Company is required to pay a fee ranging from
3% to 5% of the total value of the transaction. In the event a commercial
sales transaction attributable to the consulting firm's efforts occurs
within twenty-four months of the date of the agreement, the Company is
required to pay a commission of 10% of the gross revenues resulting from
the commercial sales transaction for a two year period from the date of the
transaction. No such fees or commissions were incurred under this agreement
as of June 30, 1997.
F-15
<PAGE> 70
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE L - STOCK OPTION PLAN
Effective June 1, 1997, the Company adopted a stock option plan covering
certain employees, directors and advisors. The number of shares issuable
under the plan is 300,000. Stock options granted under the plan enable the
holder to purchase common stock at an exercise price not less than the
market value on the date of grant in the case of an incentive stock option,
and not less than 85% of the market value on the date of the grant in the
case of a non-qualified option. To the extent not exercised, options will
expire not more than ten years after the date of grant. The applicable
options vest immediately or ratably over a three year period. A summary of
the changes in the options outstanding during 1997 is set forth below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1996 - -
Granted 125,000 $1.82
------- -----
Outstanding at June 30, 1997 125,000 $1.82
======= ====
Exercisable (vested) options at June 30, 1997 85,000 $1.86
======== ====
</TABLE>
The following summarizes options outstanding and exercisable at June 30,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$1.75 to $1.93 125,000 7.92 $1.82 85,000 $1.86
</TABLE>
The weighted average fair value at date of grant for options granted during
1997 was $0.13. The fair value of options at the date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
Expected life (years) 2
Interest rate 6%
Volatility 1%
Dividend yield 0%
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and loss per
share for the six months ended June 30, 1997 would have been increased by
approximately $9,000 and $.01, respectively. The initial application of
SFAS No. 123 for pro forma disclosure may not be representative of the
future effects of applying this statement.
Subsequent to June 30, 1997, options to purchase an additional 25,000
shares were granted under the plan to a director. Additionally, options for
a total of 75,000 shares will be granted to an officer and a director upon
or after the completion of the IPO.
F-16
<PAGE> 71
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE M - RELATED PARTY TRANSACTIONS
During 1997, the Company was provided financial advisory services in the
amount of $75,000 from a corporate shareholder of the Company. The Company
expensed $50,000 of this amount during the six months ended June 30, 1997
and deferred $25,000 as stock issuance costs. The entire amount is included
in accounts payable at June 30, 1997.
NOTE N - PRO FORMA DATA (UNAUDITED)
As discussed in Note A-10, the Company was an S-Corporation prior to
December 20, 1996. Accordingly, federal and state income taxes prior to
this date have not been reflected in the accompanying financial statements.
Effective December 20, 1996, the Company terminated its S-Corporation
election and became a regular C-Corporation for income tax purposes.
Therefore, pro forma amounts have been provided for federal and state
income taxes at an effective rate of approximately 20%.
NOTE O - SUBSEQUENT EVENTS
In July 1997, the Company raised an additional $256,000 from its private
placement of 146,286 shares of common stock. Deferred stock issuance costs
of $26,517 at June 30, 1997 were offset against these proceeds.
Additionally, the Company paid the underwriter it is using for its proposed
initial public offering a commission of $23,150 for selling 132,286 shares
of this common stock. The underwriter was also awarded warrants to purchase
13,229 shares of the Company's common stock at $1.75 per share at any time
prior to July 25, 2002.
NOTE P - PROPOSED INITIAL PUBLIC OFFERING, REORGANIZATION AND MERGER
The Company intends to file a Registration Statement on Form SB-2 with the
Securities and Exchange Commission for an offering of its common stock. The
Company was incorporated in Pennsylvania in July 1997 by DGS, Inc. ("Ohio
Dayton General"), an Ohio Corporation. The Company has authorized
10,000,000 common shares with no par value.
Prior to the completion of the offering, Ohio Dayton General will be merged
with and into the Company and the Company will be the surviving company.
Each outstanding share of Ohio Dayton General will be converted into ten
shares of common stock of the Company.
The Board of Directors is authorized to issue one or more series of
preferred stock. The Board, without shareholder approval, may determine
voting, conversion and other rights. Under the certificate of
incorporation, the Board of Directors has authorized 100,000 shares of
preferred stock.
The financial statements have been restated to reflect the reincorporation
and merger.
F-17
<PAGE> 72
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, ON BEHALF OF THE COMPANY OR THE SELLING SHAREHOLDERS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE HEREBY,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO
ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
________________
TABLE OF CONTENTS
Page
Prospectus Summary..................................... 4
Risk Factors........................................... 10
History of the Company................................. 16
Use of Proceeds........................................ 17
Dividend Policy........................................ 17
Capitalization......................................... 18
Dilution............................................... 19
Selected Financial Data................................ 21
Management's Discussion and Analysis or
Plan of Operation............................... 22
Business............................................... 27
Management............................................. 40
Certain Transactions................................... 43
Holdings of Management and
Principal Shareholders.......................... 43
Selling Shareholders................................... 44
Description of Securities.............................. 45
Shares Eligible for Future Sale........................ 48
Underwriting........................................... 49
Legal Matters.......................................... 51
Experts................................................ 51
Available Information.................................. 51
Index to Financial Statements.......................... F-1
____________________
UNTIL __________, 1997 (____ DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
900,000 Units
DAYTON
GENERAL
SYSTEMS, INC.
PROSPECTUS
, 1997
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Articles of Incorporation authorize the registrant to
indemnify the directors of the registrant to the fullest extent permitted by
Pennsylvania Business Corporation Law (the PBCL). The registrant's By-Laws limit
the liability of directors of the registrant to the registrant or its
shareholders to the fullest extent permitted by PBCL. Pursuant to terms of the
PBCL presently in effect, the registrant's directors are not liable to the
registrant or its shareholders for monetary damages for any action unless: (i)
the director has breached or failed to perform the duties of his office under
the PBCL, and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The registrant's By-Laws also provide that the registrant shall
indemnify each of its directors and officers from liability arising from acting
as an authorized representative of the registrant, so long as such person acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the registrant. Such indemnification may be made
only upon a determination by the Board of Directors, or a court of competent
jurisdiction, that indemnification is proper in the circumstances because the
person indemnified has met the applicable standard of conduct to permit
indemnification under the law.
The registrant intends to maintain director and officer liability
insurance which provides coverage against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable by the registrant (other than underwriting
commissions and a non-accountable expense allowance of between $165,000
(minimum) and $264,600 (maximum) to be paid to the Underwriter by the
registrant, and $5,400 (maximum) to be paid to the Underwriter by the Selling
Shareholders) are estimated to be as follows:
<TABLE>
<S> <C>
SEC registration fee................................................... $5,771
NASD fee................................................................ 2,404
Nasdaq Stock Market listing fee........................................ 9,000
Printing costs.......................................................... 36,000
Legal fees.............................................................. 70,000
Accounting fees......................................................... 50,000
Financial advisory fees................................................. 10,000
Transfer agent fees..................................................... 2,000
Blue sky fees and expenses............................................. 25,000
Premium on directors and officers liability insurance................... 21,000
Miscellaneous........................................................... 40,000
------
$271,175
========
</TABLE>
Of the foregoing expenses, the Selling Shareholders will bear their
proportionate share, estimated to be $500, of the SEC, NASD and "blue sky" fees
and expenses. All of the amounts listed are estimates except the SEC and NASD
fees.
II-1
<PAGE> 74
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1994, the registrant has made the following sales of
unregistered securities (all share amounts give effect to the 1000:1 split of
the registrant's Common Stock resulting from the registrant's re-incorporation
in Pennsylvania):
On March 15, 1996, for nominal consideration, the registrant issued a
warrant to Church Street Financial Corporation to purchase 20,000 shares of
Common Stock for $.65 per share. On December 19, 1996 the warrant was exercised
and the registrant issued 20,000 shares of Common Stock to Church Street
Financial Corporation in exchange for $13,000. Both issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipient acquired the securities for its own account
and not with a view to distribution.
On November 5, 1996 the registrant issued 40,000 shares of Common Stock
to Sterling Trust Company (for the benefit of William Winkler) in exchange for
$40,000. The issuance was exempt pursuant to Section 4(2) of the Securities Act
as a transaction not involving a public offering, as the recipient acquired the
securities for its own account and not with a view to distribution.
On November 15, 1996, for nominal consideration, the registrant issued
warrants, exercisable until November 15, 2003, to Church Street Financial
Corporation and James E. Cogan to purchase 26,000 and 24,000 shares of Common
Stock, respectively, for $.90 per share. Both such issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipients acquired the securities for their own
accounts and not with a view to distribution.
Between January 23, 1997 and July 18, 1997, the registrant issued an
aggregate of 221,286 shares of Common Stock to twenty-two different persons in
exchange for an aggregate of $387,250 (the "Private Placement"). The Underwriter
assisted the Company in placing a portion of these shares for which it received
a commission of $23,150 and a warrant, exercisable through July 25, 2002, to
purchase 13,229 shares of Common Stock for $1.75 per share. Shares issued in
connection with the Private Placement were exempt pursuant to Rule 504 of
Regulation D of the Securities Act.
ITEM 27. EXHIBITS.
The list of exhibits is set forth beginning on page E-1 of this
registration statement and is incorporated herein by reference. Exhibit Numbers
correspond to those of Regulation S-B, Item 601.
ITEM 28. UNDERTAKINGS.
*(a) The small business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement. Notwithstanding the
foregoing, any increase or
II-2
<PAGE> 75
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
*(d) The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
*(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
*(f) The small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that the offering of the securities at that time as the initial bona fide
offering of those securities.
- --------------
*Paragraph references correspond to those of Regulation S-B, Item 512.
II-3
<PAGE> 76
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Dayton,
State of Ohio, as of the 13th day of August, 1997.
DAYTON GENERAL SYSTEMS, INC.
By: /s/ Thomas C. Haas
-------------------------------------
Thomas C. Haas
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of the 13th day of August, 1997.
Signatures Title
---------- -----
/s/ Thomas C. Haas Chairman of the Board, President and Chief
- ---------------------- Executive Officer (Principal Executive, Accounting
Thomas C. Haas Financial Officer)
/s/ Edward T. Hurd Director
- ----------------------
Edward T. Hurd
/s/ William R. Winkler Director
- ----------------------
William R. Winkler
II-4
<PAGE> 77
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
3.1 Articles of Incorporation
3.2 By-Laws
4 Form of Warrant issuable as part of Units sold in Offering*
5 Opinion of Taft, Stettinius & Hollister*
10.1 OEM License Agreement between Echelon Corporation and the
Registrant dated May 26, 1995
10.2 Software License Agreement between Echelon Corporation and the
Registrant dated December 27, 1993
10.3 Sales Agreement between Echelon Corporation and the Registrant
dated November 30, 1993
10.4 Master Lease Agreement between Echelon Corporation and the
Registrant dated November 30, 1993
10.5 1997 Stock Option Plan
23.1 Consent of Taft, Stettinius & Hollister (contained in Exhibit
5)*
23.2 Consent of Grant Thornton LLP
27.1 Financial Data Schedule**
27.2 Financial Data Schedule**
27.3 Financial Data Schedule**
27.4 Financial Data Schedule**
99.1 Escrow Agreement dated ___________, 1997 between the
registrant and _______, as Escrow Agent*
99.2 Warrant Agreement between the registrant and _______________,
as Warrant Agent*
* To be filed by amendment.
** EDGAR filing only.
E-1
<PAGE> 1
EXHIBIT 1
900,000 Units
DAYTON GENERAL SYSTEMS, INC.
UNDERWRITING AGREEMENT
J.V. Delaney & Associates
17 Muir Beach Circle
Corona del Mar, California 92625
Dear Sirs:
Dayton General Systems, Inc., a Pennsylvania corporation ("DGS" or the
"Company"), together with certain of its shareholders executing this Agreement
(the "Selling Shareholders"), propose to publicly offer and sell through J.V.
Delaney & Associates (the "Underwriter"), certain units (the "Units") at a
public offering price of $10.00 per Unit, with each Unit consisting of (i) two
shares of the Company's common stock, no par value ("Common Stock") and (ii) a
warrant to purchase one share of Common Stock from the Company at an exercise
price of $6.50 per share ("Offering Warrants"). The offering will consist of (a)
an initial 550,000 Units (the "Initial Units") to be provided by the Company and
to be offered for sale on a $5,500,000 minimum proceeds, "best efforts,
all-or-none" basis and (b) up to an additional 350,000 Units (the "Additional
Units") including up to 320,000 Units to be provided by the Company and up to
30,000 Units consisting of Common Stock to be provided by the Selling
Shareholders (in the individual amounts listed beside their names on the
signature pages hereto) and Offering Warrants to be provided by the Company,
which shall be offered for sale ratably by the Company and the Selling
Shareholders on a "best efforts" basis. In addition, the Company proposes to
grant the Underwriter an option to purchase up to an additional 150,000 Units to
cover over-allotments, if any (the "Optional Units").
The Company and the Selling Shareholders wish to confirm as follows
their respective agreements with you in connection with the offering of Units
through the Underwriter:
1. OFFERING AND SALE OF THE UNITS.
1.1 AGENCY. The Company and the Selling Shareholders hereby
appoint the Underwriter as their exclusive agent for a period (the "Offering
Period") of 90 days from the Effective Date (as such term is defined in Section
3 below), which period may be extended for not more than an additional 90 days
upon the mutual written agreement of the Underwriter and the Company, to sell
the Initial Units on a "best efforts, all-or-none" basis and to sell the
Additional Units on a "best efforts" basis at an offering price of $10.00 per
Unit and the terms hereinafter set forth.
1.2 OPTIONAL UNITS. On the basis of the representations,
warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement, the
<PAGE> 2
Company hereby grants to the Underwriter an option to sell on behalf of the
Company all or any part of the Optional Units at the same price per Unit set
forth in Section 1.1 (the "over-allotment option"). The over-allotment option
may be exercised in whole or in part at any time or times on or before 12:00
noon, Eastern Time, on the day before the Initial Closing Date (as defined in
Section 2 below), and only once at any time after that date and within 45 days
after the Initial Closing Date (or, if such 45th day shall be a Saturday or
Sunday or a holiday, on the next business day thereafter when the New York Stock
Exchange is open for trading), in each case upon written or telecopier notice,
or verbal or telephonic notice confirmed by written or telecopier notice, by the
Underwriter to the Company no later than 12:00 noon, Eastern Time, on the day
before the Initial Closing Date or at least three days before the Optional Units
Closing Date (as defined in Section 2 below), as the case may be, setting forth
the number of Optional Units to be purchased and the time and date (if other
than the Initial Closing Date) of such purchase.
1.3 UNDERWRITER'S COMPENSATION.
1.3.1 Investment Banking Fee. The Underwriter shall
be entitled to an investment banking fee equal to 2% of the public offering
price, or $.20 per Unit, payable on the relevant Closing Date(s).
1.3.2 Commission. The Underwriter shall be entitled
to a commission equal to 8% of the public offering price, or $.80 per Unit,
payable at the relevant Closing Date(s).
1.3.3 Expense Allowance. The Company shall pay the
Underwriter as a nonaccountable expense allowance an amount equal to 3% of the
gross offering proceeds of the Initial Units and the Additional Units, if any,
payable on the Initial Closing Date less a credit of $___________ representing
advances previously paid by the Company, and, if applicable, 3% of the gross
offering proceeds of the Optional Units on the Optional Units Closing Date.
1.3.4 Warrant. The Company shall issue and deliver to
the Underwriter a warrant (the "Warrant") to purchase Units in an amount equal
to 10% of the number of Initial Units and Additional Units, if any, placed by
the Underwriter hereunder, such Warrant to be dated as of the Effective Date and
to be in the form appended hereto as Annex A. The Company represents and
warrants that the Warrant has been duly authorized and, when issued and
delivered in accordance with the terms hereof, will be a valid, binding and
enforceable obligation of the Company.
2. DELIVERY AND PAYMENT.
2.1 ESCROW PROCEDURES. The Underwriter and the Company shall
enter into an escrow agreement (the "Escrow Agreement") in substantially the
form appended hereto as Annex B with ______________ (the "Escrow Agent")
pursuant to which the Underwriter will deposit subscription funds it receives on
behalf of the Company for Units prior to the Initial
2
<PAGE> 3
Closing Date with the Escrow Agent, to be released by the Escrow Agent only if
and when the collected proceeds equal or exceed the $5,500,000 minimum during
the Offering Period.
2.2 INITIAL CLOSING DATE. Delivery by the Company and the
Selling Shareholders, if applicable, of the Initial Units and the Additional
Units, if any, to the Underwriter, and payment of the purchase price by
certified or official bank check payable in next day funds to the Company shall
take place at the offices of the Underwriter's counsel, Dinsmore & Shohl LLP,
1900 Chemed Center, Cincinnati, Ohio 45202, at 10:00 am. Eastern Time, on the
third full business day following the date on which the Underwriter and the
Company notify the Escrow Agent to release the offering proceeds held by the
Escrow Agent, provided that the conditions to release specified in the Escrow
Agreement have then been satisfied.
2.3 OPTIONAL UNITS; OPTIONAL UNITS CLOSING DATE. To the extent
the over-allotment option with respect to the Optional Units is exercised,
delivery by the Company of the Optional Units, and payment of the purchase price
by certified or official bank check payable in next day funds to the Company,
shall take place at the offices of the Underwriter's counsel specified in
Section 2.1 above at the time and on the date (which may be the Initial Closing
Date) specified in the notice referred to in Section 1.2 (such time and date of
delivery and payment are called the "Optional Units Closing Date"). The Initial
Closing Date and the Optional Units Closing Date are called, individually, a
"Closing Date" and, collectively, the "Closing Dates".
2.4 REGISTRATION AND AVAILABILITY OF CERTIFICATES.
Certificates representing the Units shall be registered in such names and shall
be in such denominations as the Underwriter shall request at least three full
business days before the Initial Closing Date or, in the case of the Optional
Units, on the day of notice of exercise of the option as described in Section
1.2 and shall be made available to the Underwriter at least one full business
day before the Initial Closing Date in the case of the Initial Units and
Additional Units or on the Optional Units Closing Date in the case of Optional
Units.
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING.
3.1 REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared in conformity with the requirements of the Securities Act of 1933 (the
"Securities Act"), and the published rules and regulations adopted by the
Securities and Exchange Commission (the "Commission") thereunder (the "Rules"),
a registration statement on Form SB-2 (No. 333-_____), including a prospectus
subject to completion relating to the Units, and has filed with the Commission
the registration statement and such amendments thereof as have been required to
the date of this Agreement. Copies of such registration statement (including all
amendments thereof) and of the related prospectus subject to completion relating
to the Units have heretofore been delivered by the Company to you. The term
"Registration Statement" as used in this Agreement means such registration
statement (including all financial schedules and exhibits), as amended or
supplemented at the time it becomes effective, or, if it becomes effective prior
to the execution of this Agreement, as supplemented or amended prior to the
execution of this
3
<PAGE> 4
Agreement. If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the Registration Statement will be filed and must be
declared effective before the offering of the Units may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by such post-effective amendment. The term "Effective Date"
as used in this Agreement means the time and date upon which the Commission
shall declare the Registration Statement to be effective. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in the
Registration Statement or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Rules and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) of the Rules, the term "Prospectus" means the prospectus in the form
included in the Registration Statement as supplemented by the addition of the
Rule 430A information contained in the prospectus filed with the Commission
pursuant to Rule 424(b). The term "Preliminary Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included in the
registration statement at the time of the initial filing of the registration
statement with the Commission and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus. The Company will not file
any amendment of the Registration Statement or supplement to the Prospectus to
which you shall reasonably object in writing after being furnished with a copy
thereof.
3.2 PUBLIC OFFERING. The Company understands that the
Underwriter proposes to make a public offering of the Units, as set forth in and
pursuant to the Prospectus, as soon after the Effective Date as the Underwriter
and the Company deem advisable. The Company hereby confirms that the Underwriter
has been authorized to distribute or cause to be distributed each Preliminary
Prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments thereof or
supplements thereto to the Underwriter).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Underwriter as follows:
4.1 COMPLIANCE OF PRELIMINARY PROSPECTUS, REGISTRATION
STATEMENT, AND PROSPECTUS. Each Preliminary Prospectus, at the time of filing
thereof, contained all material statements which were required to be stated
therein in accordance with the Securities Act and the Rules, and conformed in
all material respects with the requirements of the Securities Act and the Rules,
and did not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Commission has not issued any order suspending or preventing the
use of any Preliminary Prospectus. When the Registration Statement shall become
effective, when the Prospectus is first filed pursuant to Rule 424 (b) of the
Rules, when any post-effective amendment of the Registration Statement shall
become effective, when any supplement to or preeffective amendment of the
Prospectus is filed with the Commission and at each Closing Date, the
Registration Statement and the Prospectus (and any amendment thereof or
supplement thereto) will comply with the applicable provisions of the
4
<PAGE> 5
Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act"), and
the respective rules and regulations of the Commission thereunder, and neither
the Registration Statement nor the Prospectus, nor any amendment thereof or
supplement thereto, will contain any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representation or warranty as to the information contained in or omitted from
the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto in reliance upon and in conformity with information furnished
in writing to the Company by or on behalf of and with respect to the
Underwriter, specifically for use in connection with the preparation thereof.
4.2 DESCRIPTIONS IN AND EXHIBITS TO REGISTRATION STATEMENT AND
PROSPECTUS. All contracts and other documents required to be described in or
filed as exhibits to the Prospectus or the Registration Statement have been
described in or filed with the Commission as exhibits to the Prospectus or the
Registration Statement in accordance with the Securities Act and the Rules.
4.3 FINANCIAL INFORMATION. The financial statements of the
Company (including all notes and schedules thereto) included in the Registration
Statement and the Prospectus fairly present, respectively, the financial
position, the results of operations, the changes in financial position and the
changes in shareholders' equity of the Company at the respective dates and for
the respective periods to which they apply; such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all adjustments
necessary for a fair presentation of the results for such periods have been
made; and the other financial and statistical information and data included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
4.4 INDEPENDENT ACCOUNTANTS. To the best knowledge of the
Company, Grant Thornton LLP, whose certified reports are filed with the
Commission as part of the Registration Statement, are, and during the periods
covered by their respective reports were, independent public accountants as
required by the Securities Act and the Rules.
4.5 ORGANIZATION AND AUTHORITY OF COMPANY. The Company has
been duly organized and is validly existing as a corporation in good standing
under the laws of the Commonwealth of Pennsylvania. The Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction,
including Ohio, in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary and where such failure to be qualified would have a
Material Adverse Effect (as hereinafter defined). Except as described in the
Prospectus, the Company has no subsidiaries. Except as described in the
Prospectus, the Company does not own, lease or license any material property or
conduct any material business outside the United States of America. Except as
described in the Prospectus, the Company has all requisite power and authority,
and
5
<PAGE> 6
all necessary material authorizations, approvals, consents, orders, licenses,
certificates and permits of and from all federal, state and foreign governmental
or regulatory officials, bodies and tribunals, to own, lease, license and
operate its properties and conduct its business as now being conducted and as
described in the Prospectus; the Company has fulfilled and performed all of its
material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights of
the holder of any such permit; no such authorization, approval, consent, order,
license, certificate or permit contains a materially burdensome restriction
other than as disclosed in the Prospectus; and the Company has all such power,
authority, authorizations, approvals, consents, orders, licenses, certificates
and permits (except such as may be necessary to make the Registration Statement
effective and to qualify the Shares for public offering by the Underwriter under
state securities or "Blue Sky" laws) to enter into, deliver and perform this
Agreement and to issue and sell the Units.
4.6 INTANGIBLES. Except as described in the Prospectus, the
Company owns, or possesses adequate and enforceable rights to use, all patents,
patent applications, trademarks, trademark applications, service marks,
copyrights, copyright applications, licenses, inventions, trade secrets and
other similar rights (collectively, "Intangibles") necessary for the conduct of
the material aspects of its business in the United States as described in the
Prospectus and has not to the knowledge of the Company infringed, is not to the
knowledge of the Company infringing, or has not received any notice of
infringement of, any Intangibles of any other person which is reasonably likely
to have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company or on
the transactions contemplated hereby (a "Material Adverse Effect"), and the
Company does not know of any basis therefor.
4.7 PROPERTY. The Company has good and marketable title to all
of the items of real property and good title to all of the items of personal
property which are reflected in the financial statements referred to in Section
4.3 or are referred to in the Prospectus as being owned by it and valid and
enforceable leasehold estates in each of the items of real and personal property
which are referred to in the Prospectus as being leased by it, in each case free
and clear of all liens, encumbrances, claims, security interests and defects,
other than those properly described in the Prospectus and those which do not and
will not have a Material Adverse Effect.
4.8 PROCEEDINGS AND INVESTIGATIONS. Except as described in the
Prospectus, there are no material legal or governmental or other proceedings or
investigations pending before any court or before or by any public body or board
or, to the Company's knowledge, threatened (or any reasonable basis therefor)
against, or involving the properties or business of, the Company.
4.9 TAXES. The Company has filed all federal, state, local and
foreign tax returns required to be filed by it, which returns are complete and
correct in all material respects, and has paid all taxes shown due on such
returns as well as all other taxes, assessments and governmental charges which
have become due; no deficiency with respect to any such return has
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been assessed or proposed; except in each case where the failure to file,
failure to pay or deficiency would not be reasonably likely to have a Material
Adverse Effect.
4.10 MATERIAL CHANGES. Subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, the Company has not (i) issued any securities, (ii) incurred any
liability or obligation, direct or contingent, or entered into any transaction,
not in the ordinary course of business, or (iii) declared or paid any dividend
or made any distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares
of its stock. In addition, subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in or contemplated by the Registration Statement and the Prospectus,
there has not been any change in the capital stock and there has not been any
material adverse change, or any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), earnings, business, properties, net worth, results of
operations or prospects of the Company, whether or not arising from transactions
in the ordinary course of business.
4.11 NO DEFAULT: AGREEMENTS. No default exists, and no event
has occurred which with notice or lapse of time, or both, would constitute a
default in the due performance and observance of any material term, covenant or
condition, by the Company, or, to the best of the Company's knowledge, any other
party, of any indenture, mortgage, deed of trust, note or any other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses may be bound or affected and where such default would
be reasonably likely to have a Material Adverse Effect.
4.12 NO DEFAULT: ARTICLES AND BYLAWS; PERMITS, JUDGMENTS, AND
REGULATIONS. The Company is not in violation of any term or provision of its
Articles of Incorporation or Bylaws. The Company is not in violation of, nor is
it required to take any action to avoid any violation of, any franchise,
license, permit, judgment, decree, order, statute, rule or regulation, where the
consequences of such violation or prospective violation is reasonably likely to
have a Material Adverse Effect.
4.13 NO DEFAULT: EXECUTION AND PERFORMANCE OF THIS AGREEMENT.
Except for instances which do not and will not have a Material Adverse Effect,
neither the execution, delivery and performance of this Agreement by the
Company, nor the consummation of the transactions contemplated hereby
(including, without limitation, the issuance and sale by the Company of the
Units), will give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an, event which with notice or lapse
of time, or both, would constitute a default) under, or require any consent
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to the terms
of, any indenture, mortgage, deed of trust, note or other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses is bound or any
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franchise, license, permit, judgment, decree, order, statute, rule or regulation
or violate any provision of the Articles of Incorporation or Bylaws of the
Company.
4.14 CAPITAL STOCK; SHARES. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and none of them was issued in violation of any preemptive or
other right. The issuance, sale and delivery of the Units have been duly
authorized by all necessary corporate action by the Company and, when issued,
sold and delivered against payment therefor pursuant to this Agreement, will be
duly and validly issued, fully paid and nonassessable and none of them will have
been issued in violation of any preemptive or other right. Except as disclosed
in the Prospectus, there is no outstanding option, warrant or other right
calling for the issuance of, and no commitment, plan or arrangement to issue,
any share of stock of the Company or any security convertible into or
exchangeable for stock of the Company. The capital stock of the Company conforms
in all material respects to all statements in relation thereto contained in the
Registration Statement and the Prospectus.
4.15 EXCHANGE ACT; NASDAQ. The Company has filed a Form 8-A
registration statement under the Exchange Act and the Common Stock will be
registered with the Commission pursuant to Section 12 of the Exchange Act as of
the Effective Date. The Company has applied to have both the Common Stock and
the Offering Warrants designated for trading on the National Association of
Securities Dealers, Inc. Nasdaq SmallCap Market, which application will be
effective on the Effective Date.
4.16 REGISTRATION RIGHTS. No holder of any security of the
Company has the right or, because of the filing of the Registration Statement or
the consummation of the transactions contemplated in this Agreement, will have
the right, which right has not been waived, to (i) have any security owned by
such holder included in the Registration Statement or (ii) require any other
registration statement to be filed in connection with any capital stock of the
Company within 180 days from the date of the Prospectus.
4.17 AUTHORIZATION; ENFORCEABILITY. This Agreement and the
performance by the Company of its obligations under this Agreement, has been
duly and validly authorized, executed and delivered by the Company and is the
legal, valid and binding agreement and obligation of the Company, enforceable
against the Company in accordance with its terms, except as (i) the
enforceability hereof may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium, or other laws relating to creditors,
rights generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and to the
discretion of the courts before which the proceeding may be brought, and (iii)
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy.
4.18 PROHIBITED ACTIVITIES. Neither the Company nor, to the
Company's knowledge, any director, officer, agent, employee or other person
authorized to act on behalf of the Company has (i) used any funds of the Company
for any unlawful contribution, gift,
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entertainment or other unlawful expense relating to political activity, (ii)
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from funds of the Company, (iii) violated or is
in violation of any provision of the Foreign Corrupt Practices Act of 1977 in
respect of the Company, or (iv) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment in respect of the Company.
4.19 BOOKS AND RECORDS. The Company makes and keeps accurate
books and records reflecting its assets and maintains internal accounting
controls which provide reasonable assurance that (i) transactions are executed
with management's authorization, (ii) transactions are recorded as necessary to
permit preparation of the Company's consolidated financial statements and to
maintain accountability for the assets of the Company, (iii) access to the
assets of the Company is permitted only in accordance with management's
authorization, and (iv) the reported accountability of the assets of the Company
is compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
4.20 STABILIZATION AND MANIPULATION. Neither the Company nor,
to the Company's knowledge, any affiliate of the Company has taken, and the
Company will not take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of the
Common Stock in order to facilitate the sale or resale of any of the Shares.
4.21 AFFILIATED TRANSACTIONS. No transaction has occurred
between or among the Company and any of its officers or directors or any of the
shareholders holding 10% or more of the outstanding shares of any class of the
Company's stock or any affiliate or affiliates of any such officer, director or
shareholder, that is required to be described in and is not described in the
Prospectus.
4.22 INVESTMENT COMPANY. The Company is not now, and after the
sale of the Shares to be sold by it hereunder and application of the net
proceeds from such sale as described in the Prospectus under the caption "Use of
Proceeds" will not be, an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
4.23 GOVERNMENTAL AUTHORITIES AND REGULATIONS. Except as set
forth in the Registration Statement and the Prospectus, to the Company's
knowledge (i) the Company is not in violation of any order of any governmental
authority directing the Company to make any material change in the method of
conducting its business, (ii) the Company has conducted and is conducting its
business so as to comply in all material respects with all applicable statutes
and regulations, (iii) neither the Company nor any affiliated persons thereof is
a party or directly or indirectly subject to any supervisory agreement or other
similar operating restrictions imposed by any governmental authority which have
had or may be expected to have a material effect on the conduct of any of the
business of the Company.
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4.24 LOCK-UP ARRANGEMENTS. The Company has obtained from all
of its officers and directors and certain of its shareholders their written
letters of agreement that (i) for a period beginning on the Initial Closing Date
and ending on the close of business 12 months thereafter they will not, without
the prior written consent of the Underwriter, and (ii) for a period of six
months after such 12-month period ends, they will not, without the prior written
consent of the Company, offer, sell, contract to sell or grant any option for
the sale of or otherwise dispose of, directly or indirectly, any shares of
Common Stock of the Company (or any securities convertible into or exercisable
for such shares of Common Stock) owned by them, except as provided herein or in
the Registration Statement, and except for bona fide gifts to persons who agree
in writing with the Underwriter to be bound by this clause.
4.25 LABOR DISPUTES. The Company is not involved in any labor
dispute which would have a Material Adverse Effect and no such dispute is
threatened.
4.26 CONSENTS AND APPROVALS. Except for the order of the
Commission declaring the Registration Statement effective and permits and
similar authorizations required under the securities or Blue Sky laws of certain
jurisdictions, no consent, authorization, or approval is required from any
federal, state or local governmental agency or body or from any other third
party in connection with this Agreement and the transactions contemplated hereby
other than such consents, authorizations or approvals as have been obtained.
4.27 EQUITY INTERESTS. The Company does not own any shares of
stock or any securities of any corporation and does not have any equity interest
in any firm, partnership, association or other entity that is required to be
disclosed, and is not disclosed, in the Registration Statement and the
Prospectus.
4.28 DISTRIBUTION OF OFFERING MATERIALS. The Company has not
distributed and, prior to the later to occur of (i) the Closing Date and (ii)
the completion of the distribution of the Units, will not distribute any
offering material in connection with the offering and sale of the Units other
than the Registration Statement, the Prepricing Prospectus, the Prospectus or
other materials, if any, permitted by the Securities Act and the Rules.
4.29 ENVIRONMENTAL MATTERS. The Company (i) is in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business, and (iii) is in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or approvals
or, failure to comply with the terms and conditions of such permits, licenses or
approvals would not, singly or in the aggregate, have a Material Adverse Effect.
4.30 DOING BUSINESS WITH CUBA. The Company has complied with
all provisions of Florida Statutes, Section 517.075, relating to issuers doing
business with Cuba.
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5. REPRESENTATION AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder represents and warrants, as to such Selling Shareholder only
and not as to the other Selling Shareholders, severally and not jointly, to the
Underwriter (a) that such Selling Shareholder now has, and on the relevant
Closing Date will have valid title to such of the shares of Common Stock as are
to be sold by such Selling Shareholder pursuant to this Agreement, free and
clear of any security interests, claims, liens, equities and other encumbrances,
(b) that such Selling Shareholder now has, and on the relevant Closing Date will
have, the legal right and power, and all consents, approvals and authorizations
required by law, to enter into this Agreement and to sell, transfer and deliver
such shares of Common Stock in the manner provided in this Agreement and that no
such action will contravene any provision of applicable law or any material
agreement or other instrument binding upon such Selling Shareholder, (c) that
all information furnished in writing by or on behalf of such Selling Shareholder
for use in the Registration Statement and Prospectus is, and on the relevant
Closing Date will be, true, correct and complete in all material respects, and
(d) without having undertaken to determine the accuracy or completeness of the
information contained in the Registration Statement (except as provided by such
Selling Shareholder), nothing has come to the attention of such Selling
Shareholder which leads it to believe that the Registration Statement contains
any untrue statement of a material fact or omits to state any material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
6. CONDITIONS TO CLOSING(S). Each Closing shall be subject to each of
the following terms and conditions:
6.1 EFFECTIVENESS OF REGISTRATION STATEMENT; NO STOP ORDER.
The Registration Statement shall have become effective not later than 5:00 P.M.,
Eastern Time, on the date of this Agreement or on such later date and time as
shall be consented to in writing by the Underwriter. At each Closing Date, if
any, no stop order shall have been issued or proceedings therefor initiated or
threatened by the Commission and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
6.2 OPINION OF COMPANY COUNSEL. At each Closing Date, you
shall have received the favorable opinion of Taft, Stettinius & Hollister,
counsel for the Company, dated the Initial Closing Date or the Optional Units
Closing Date, as the case may be, addressed to the Underwriter and in form and
scope satisfactory to counsel for the Underwriter, to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the Commonwealth of
Pennsylvania, is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed), the maintenance of an office or the nature of its business
makes such qualification necessary, except where the failure so to qualify would
not have a Material Adverse Effect, and has full corporate power and authority
and, to the best of such counsel's knowledge after due inquiry, all necessary
and material authorizations, approvals,
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orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies, to own, lease, license and operate its
properties and to conduct its business in the United States as now being
conducted as described in the Registration Statement and Prospectus;
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Registration Statement and the Prospectus; all the shares of capital stock of
the Company outstanding prior to the issuance of the Units to be issued and sold
by the Company hereunder have been duly authorized and validly issued and are
fully paid and nonassessable and none of them were issued in violation of any
preemptive or other right; the Units to be issued and sold by the Company
hereunder have been duly authorized and, when issued, sold and delivered against
payment therefor pursuant to this Agreement, will be validly issued, fully paid
and nonassessable, and none of them will have been issued in violation of any
preemptive or, to the knowledge of such counsel after due inquiry, similar
rights that entitle or will entitle any person to acquire any shares of Common
Stock upon the issuance of the Units by the Company (other than upon exercise of
the Offering Warrants contained in the Units); and the Units and the other
capital stock of the Company conform as to legal matters to the description
thereof contained under the caption "Description of Securities" in the
Registration Statement and the Prospectus;
(iii) To such counsel's knowledge after due inquiry,
the Company does not own any shares of stock or any securities of any
corporation or have any equity interest in any firm, partnership, association or
other entity that is required to be disclosed, and is not disclosed, in the
Registration Statement and the Prospectus;
(iv) The certificates evidencing the Shares are in
the form approved by the Board of Directors of the Company and comply with the
Bylaws and the Articles of Incorporation of the Company and the laws of the
Commonwealth of Pennsylvania.
(v) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver the Units to be sold
by it as provided herein, and this Agreement has been duly and validly
authorized, executed and delivered by the Company, and is a valid, legal and
binding agreement and obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
(vi) To the best of such counsel's knowledge after
due inquiry, the Company is conveying to the Underwriters good and valid title
to the Units, free and clear of any liens, encumbrances, adverse claims,
security interests, or other restrictions whatsoever;
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(vii) To the best of such counsel's knowledge after
due inquiry, there are (A) no contracts or other documents which are required to
be described in or filed as exhibits to the Registration Statement or the
Prospectus other than those described in or filed as exhibits thereto, (B) no
legal or governmental or other proceedings or investigations pending or
threatened against, or involving the assets, properties or business of, the
Company, of a character required to be disclosed in the Registration Statement
and Prospectus, which have not been so disclosed and properly described therein,
and (C) no statutes or regulations applicable to the Company, or material
certificates, permits, grants or other consents, approvals, orders, licenses or
authorizations from regulatory officials or bodies, required to be obtained or
maintained by the Company, of a character required to be disclosed in the
Registration Statement and Prospectus, which have not been so disclosed and
properly described therein;
(viii) Neither the execution, delivery and
performance of this Agreement by the Company, nor the consummation of the
transactions herein contemplated (including, without limitation, the issuance
and sale by the Company of the Units), will give rise to a right to terminate or
accelerate the due date of any payment due under, or conflict with or result in
a breach of any term or provision of, or constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
or require consent under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or asset of the Company pursuant to the
terms of any agreement or instrument known to such counsel (having made due
inquiry with respect thereto) to which the Company is a party or by which the
Company or any of the properties or business of the Company is bound, nor will
such action result in any violation of the provisions of the Articles of
Incorporation or Bylaws of the Company or, to the knowledge of such counsel, any
statute or any order, rule, or regulation applicable to the Company or, to the
knowledge of such counsel, any court or any federal, state, local or other
regulatory authority or other governmental body having jurisdiction over the
Company;
(ix) To the best of such counsel's knowledge after
due inquiry, no consent, approval, authorization or order of, or registration or
filing with, any court or governmental agency or body, domestic or foreign, is
required to be obtained by or on behalf of the Company in connection with the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby (including, without limitation, the issuance
and sale by the Company of the Units), except such as may be required under the
Securities Act, by the National Association of Securities Dealers, Inc. or under
state securities or Blue Sky laws;
(x) To the best of such counsel's knowledge after due
inquiry, and except for those instances which do not and will not have a
Material Adverse Effect, the Company (a) is not in default (nor has an event
occurred which, with notice or lapse time or both, would constitute a default)
under, any indenture, mortgage, deed of trust, note, bank loan or credit
agreement or any other material agreement or instrument to which the Company is
a party or by which it or any of its properties or assets may be bound or
affected, (b) is not in violation of any term or provision of its Articles of
Incorporation or Bylaws, and, (c) is not in
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violation of any material franchise, license, grant, permit, judgment, decree,
order, statute, rule or regulation or has received any notice of conflict with
the asserted rights of others in respect of Intangibles necessary for the
conduct of its business, where, in each case, such matter is required to be
described in the Registration Statement and the Prospectus and is not described
therein;
(xi) The Registration Statement and the Prospectus
and any amendments or supplements thereto (other than the financial statements,
and other financial and statistical data included therein, as to which no
opinion need be rendered) comply as to form in all material respects with the
requirements of the Securities Act and the Rules;
(xii) The Registration Statement (including all
post-effective amendments, if any) is effective under the Securities Act and the
Rules, and, to the best of such counsel's knowledge after due inquiry, no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose are pending or threatened under the
Securities Act; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(xiii) To the best of such counsel's knowledge after
due inquiry, (A) the Company has good and marketable title to, or valid and
enforceable leasehold estates in, the items of real and personal property stated
in the Prospectus to be owned or leased by it, in each case free and clear of
all liens, encumbrances, and security interests, other than those referred to in
Prospectus and those which do not have a Material Adverse Effect, and (B) the
Company owns, or possesses adequate and enforceable rights to use, the
Intangibles (subject, with respect to copyrights owned by the Company, to
registration of those copyrights in the U.S. Copyright Office, upon which
registration the Company will be entitled to sue for infringement of those
copyrights), except as described in the Prospectus or where the lack of such
ownership or possession would not have a Material Adverse Effect; and
(iv) The Company is not, after giving effect to the
sale of the Units sold by it hereunder and application of the net proceeds from
such sale as described in the Prospectus under the caption "Use of Proceeds", an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
In addition, such counsel will state that, in the course of preparation
of the Registration Statement and the Prospectus, (X) such counsel had
conferences with officials of the Company, its independent auditors, and with
representatives of the Underwriter and its counsel, and also had discussions
with such officials of the Company with a view toward a clear understanding on
their part of the requirements of the Securities Act and the Rules with
reference to the preparation of registration statements and prospectuses, and
(Y) such counsel's examination of the Registration Statement and Prospectus and
its discussions in the above-mentioned conferences did not disclose to it any
information which gives it reason to believe that the Registration Statement or
the Prospectus (other than the schedules, financial statements and other
financial and statistical information as to which such counsel need express no
comment or opinion) at the time the
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Registration Statement became effective contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus (other than the schedules, financial statements and other financial
and statistical information as to which such counsel need express no comment or
opinion) contains any untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
Such opinion shall be to such further effect with respect to other
legal matters relating to this Agreement and the sale of the shares as counsel
for the Underwriter may reasonably request.
In rendering the foregoing opinion, such counsel may rely (A) as to
matters not governed by federal law or the laws of jurisdictions in which they
are admitted on opinions of other legal counsel reasonably satisfactory to the
Underwriter and its counsel and upon which, in such counsel's opinion, such
counsel is justified in relying, and (B) as to matters of fact upon certificates
of public officials and officers of the Company. Where such opinion shall state
that a matter is to the best of such counsel's knowledge after due inquiry, it
shall mean actual knowledge of those attorneys who have provided substantive
services in connection with the matters contemplated by this Agreement and may
be based upon certificates of a responsible officer of the Company and letters
received by the Company or such counsel from other legal counsel to the Company.
Copies of all such opinions and certificates shall be furnished to counsel to
the Underwriter on the Closing Date.
6.3 OPINION OF COUNSEL TO SELLING SHAREHOLDERS. At the Initial Closing
Date you shall have received the opinion of Taft, Stettinius & Hollister,
counsel to the Selling Shareholders, to the effect that:
(i) This Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling Shareholders and is a valid
and binding agreement of each of the Selling Shareholders, except as rights to
indemnity hereunder may be limited under applicable law;
(ii) To the best of such counsel's knowledge in
reliance upon one or more certificates from the Selling Shareholders, without
independent verification, (A) the execution, delivery and performance of this
Agreement will not contravene any material agreement or other instrument binding
upon any Selling Shareholder or any writ, order of injunction of any court or
other governmental body and (B) no consent, approval, authorization or order of,
or registration or filing with, any court or governmental body or agency is
required for the performance of this Agreement by any Selling Shareholder,
except such as are specified and have been obtained and such as may be required
by the securities or Blue Sky laws of the various states in connection with the
purchase and distribution of the Shares by the Underwriter (as to which such
counsel need not express any opinion);
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(iii) Each of the Selling Shareholders has good,
valid and marketable title to the shares of Common Stock to be sold by such
Selling Shareholder and has the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and to sell, transfer and
deliver such shares to be sold by such Selling Shareholder pursuant to the terms
of this Agreement.
(iv) To the best knowledge of such counsel, the
delivery of the certificates representing the shares of Common Stock to be sold
by each Selling Shareholder pursuant to this Agreement against payment therefor
as provided in this Agreement will pass valid title to such shares to the
purchase thereof free and clear of any security interests, claims, liens,
equities and other encumbrances, assuming that such purchasers are each "bona
fide purchasers (as defined in Section 1308.17 of the Ohio Revised Code.)
6.4 REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Company and the Selling Shareholders contained in this
Agreement shall be true and correct on and as of the date of this Agreement and
on and as of each Closing Date as if made on and as of each Closing Date.
6.5 PERFORMANCE. Neither the Company nor any of the Selling
Shareholders shall have failed at or prior to each Closing Date to have
performed or complied with any of its or their agreements herein contained and
required to be performed or complied with by it or them hereunder at or prior to
the Closing Date.
6.6 OFFICER'S CERTIFICATE. At each Closing Date, the
Underwriter shall have received a certificate of the principal executive officer
and the principal financial and accounting officers of the Company dated the
Initial Closing Date or Optional Units Closing Date, as the case may be, stating
that (i) the Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein required to be
performed or complied with it hereunder at or prior to the Initial Closing Date
or the Optional Units Closing Date, as the case may be, and (ii) all of the
representations and warranties of the Company contained in this Agreement are be
true and correct on and as of the date of this Agreement and on and as of the
Initial Closing Date or the Optional Units Closing Date, as the case may be, as
if made on and as of the Initial Closing Date or the Optional Units Closing
Date, as the case may be.
6.7 ACCOUNTANT'S LETTER. At the time this Agreement is
executed and at each Closing Date, you shall have received a letter, addressed
to the Underwriter and in form and substance satisfactory to the Underwriter in
all respects (including the nonmaterial nature of the changes or decreases, if
any, referred to in clause 6.7 (iii) below), from Grant Thornton LLP dated as of
the date of this Agreement and as of each Closing Date, as the case may be:
(i) Confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published Rules and
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stating that the answer to Item 13 of Part I of Registration Statement is
correct insofar as it relates to them;
(ii) Stating that, in their opinion, the financial
statements of the Company examined by them and included in the Registration
Statement and in the Prospectus comply as to form in all material respects with
the applicable accounting requirements of the Securities Act and the related
published Rules as they relate to small business issuers;
(iii) Stating that, on the basis of procedures used,
including a formal review, made in accordance with generally accepted auditing
standards but not an examination, which included a reading of the latest
available unaudited interim financial statements of the Company (with an
indication of the date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the shareholders and
board of directors of the Company and committees of such boards and inquiries to
certain officers and other employees of the Company responsible for financial
and accounting matters and other specified procedures and inquiries, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
financial statements and related schedules of the Company, included in the
Registration Statement and Prospectus, if any, (1) do not comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act and the related Rules, or (2) were not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and Prospectus; (B) at a specified date not more
than five business days prior to the date of such letter, there was any change
in the capital stock or long-term debt of the Company as compared with the
amounts shown on the balance sheet of the Company included in the Registration
Statement and Prospectus, other than as set forth in or contemplated by the
Registration Statement and Prospectus or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the period
from _______, 1997 to a specified date not more than five business days prior to
the date of such letter, there was any decrease in total revenues, operating
income, net income or earnings per share of the Company, as compared with the
corresponding period beginning _______, 1996 other than as set forth in or
contemplated by the Registration Statement and Prospectus, or, if there was any
such decrease, setting forth the amount of such decrease; and
(iv) Stating that they have compared the selected
financial data, specific dollar amounts, numbers of shares, percentages of
revenues and earnings and other financial information pertaining to the Company
set forth in the Prospectus, which have been specified by the Underwriter prior
to the date of this Agreement, to the extent that such amounts, numbers,
percentages and information may be derived from the general accounting records
of the Company, and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not constitute
an examination in accordance with generally accepted auditing standards) set
forth in the letter, and found them to be in agreement.
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6.8 SATISFACTORY OFFERING PROCEEDINGS; OPINION OF
UNDERWRITER'S COUNSEL. All proceedings taken in connection with the sale of the
Shares as herein contemplated shall be reasonably satisfactory in form and
substance to the Underwriter and to counsel for the Underwriter, and the
Underwriter shall have received from said counsel for the Underwriter a
favorable opinion, dated as of each Closing Date, with respect to such of the
matters set forth under subsection 6.2, and with respect to such other related
matters, as the Underwriter may reasonably require.
6.9 CERTIFICATES. There shall have been duly tendered to the
Underwriter certificates representing all the shares of Common Stock and the
Offering Warrants agreed to be sold by the Company and/or the Selling
Shareholders on each Closing Date in accordance with the provisions of this
Agreement.
6.10 NO STOP ORDER. No order suspending the sale of the Units,
in any jurisdiction designated by the Underwriter pursuant to subsection 7.4
hereof, shall have been issued on the Initial Closing Date or the Optional Units
Closing Date, as the case may be, and no proceedings for that purpose shall have
been instituted or, to the Underwriter's knowledge or that of the Company, shall
be contemplated.
6.11 NASD REVIEW. The National Association of Securities
Dealers (the "NASD"), upon review of the terms of the public offering of the
Units, shall not have objected to the Underwriter's participation in the same.
6.12 NASDAQ. The Common Stock and the Offering Warrants each
shall have been designated or approved for designation upon notice of issuance
on the Nasdaq SmallCap Market without waiver of any quantitative criterion for
such designation.
6.13 LOCK-UP LETTERS. You shall have received on or before the
Closing Date all "lock-up" letters described in subsections 4.24 and 7.9 hereof.
6.14 OTHER. The Company shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
reasonably requested.
Any certificate signed by any officer of the Company and delivered to
the Underwriter or to counsel for the Underwriter shall be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein. If any condition to the Underwriter's obligations
hereunder to be fulfilled prior to or at the Initial Closing Date or the
Optional Units Closing Date, as the case may be, is not so fulfilled, the
Underwriter may terminate this Agreement or, if the Underwriter so elects, waive
any such conditions which have not been fulfilled or extend the time of their
fulfillment.
7. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriter as follows:
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7.1 REGISTRATION STATEMENT. The Company will use its best
efforts to cause the Registration Statement to become effective and will notify
the Underwriter immediately, and confirm the notice in writing, (i) when the
Registration Statement and any post-effective amendment thereto becomes
effective, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceedings for that purpose, and (iii)
of the receipt of any comments from the Commission. The Company will make every
reasonable effort to prevent the issuance of a stop order, and, if the
Commission shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest possible
moment.
7.2 DELIVERY OF PROSPECTUS; AMENDMENTS AND SUPPLEMENTS. During
the time when a prospectus is required to be delivered under the Securities Act,
the Company will comply so far as it is able with all requirements imposed upon
it by the Securities Act, as now and hereafter amended, and by the Rules, from
time to time in force, so far as necessary to permit the continuance of sales of
or dealings in the Units in accordance with the provisions hereof and the
Prospectus. If at any time when a prospectus relating to the Units is required
to be delivered under the Securities Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Registration Statement or Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or supplement
the Registration Statement or Prospectus to comply with the Securities Act, the
Company will notify the Underwriter promptly and prepare and file with the
Commission an appropriate amendment or supplement in form satisfactory to the
Underwriter. The cost of preparing, filing and delivering copies of such
amendment or supplement shall be paid by the Company.
7.3 DELIVERY AND USE OF PROSPECTUS. The Company will deliver
to the Underwriter such number of copies of each Preliminary Prospectus as may
reasonably be requested by the Underwriter and, as soon as the Registration
Statement, or any amendment or supplement thereto, becomes effective, deliver to
the Underwriter three signed copies of the Registration Statement, including
exhibits, and all post-effective amendments thereto and deliver to each of the
several Underwriter such number of copies of the Prospectus, the Registration
Statement and supplements and amendments thereto, if any, without exhibits, as
the Underwriter may reasonably request for the purposes contemplated by the
Securities Act. The Company consents to the use, in accordance with the
provisions of the Securities Act and the Rules and with the securities or Blue
Sky laws of the jurisdictions in which the Shares are offered by the Underwriter
prior to the date of the Prospectus, of each Preliminary Prospectus so furnished
by the Company.
7.4 BLUE SKY QUALIFICATION. The Company will endeavor in good
faith, in cooperation with the Underwriter and its counsel, at or prior to the
time the Registration Statement becomes effective, to qualify the Units for
offering and sale under the securities laws
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relating to the offering or sale of the Units of such jurisdictions as the
Underwriter may reasonably designate and will file such consents to service of
process or other documents necessary or appropriate in order to effect such
registration or qualification; provided that no such qualification shall be
required in any jurisdiction in which such qualification will require the
Company to qualify to do business as a foreign corporation where it is not now
so qualified or to take action which would subject it to service of process in
suits, other than those arising out of the offering or sale of the Units, in any
jurisdictions where it is not now so subject. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Underwriter agrees
that such action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may reasonably be required by the
laws of such jurisdiction.
7.5 DOCUMENTS TO BE FURNISHED TO THE UNDERWRITER. For a period
of five years from the effective date of the Registration Statement, the Company
will furnish to the Underwriter the following:
(i) As soon as practicable after they have been sent
to shareholders of the Company or filed with the Commission, three copies of
each annual and interim financial and other report or communication sent by the
Company to its shareholders or filed with the Commission; and
(ii) As soon as practicable, three copies of every
press release and every material news item and article in respect of the Company
or the affairs of the Company which was released by the Company.
7.6 APPLICATION OF NET PROCEEDS. The Company will apply the
net proceeds from the sale of the Units sold by it hereunder in the manner set
forth under "Use of Proceeds" in the Prospectus.
7.7 UNAUDITED INTERIM FINANCIAL STATEMENTS. The Company will
furnish to the Underwriter as early as practicable prior to each Closing Date,
but not later than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have been
read by the Company's independent public accountants as stated in their letters
to be furnished pursuant to subsection 6.7 hereof.
7.8 SECURITIES ACT AND EXCHANGE ACT REQUIREMENTS. The Company
will use its best efforts to comply with all registration, filing and reporting
requirements of the Securities Act or the Exchange Act, which may from time to
time be applicable to the Company.
7.9 LOCK-UP ARRANGEMENTS. The Company will not, without the
prior written consent of the Underwriter offer, sell, contract to sell or grant
any option for the sale or otherwise dispose of, directly or indirectly, any
shares of Common Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock) or register with the Commission any
securities of the Company prior to the close of business on the date ____ days
from the Effective Date, except for the registration of the Units pursuant to
the Registration
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Statement and except for shares issuable upon the exercise of options granted
under the Company's 1997 Stock Option Plan..
7.10 RULE 424(B) FILING. If Rule 430A of the Rules is
employed, the Company will timely file the Prospectus pursuant to Rule 424(b) of
the Rules and will advise you of the time and manner of such filing.
7.11 STABILIZATION AND MANIPULATION. Except as stated in this
Agreement and in the Preliminary Prospectus and Prospectus, the Company has not
taken, nor will it take, directly or indirectly, any action designed to or that
might reasonably by expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Units.
7.12 SECONDARY TRADING QUALIFICATIONS. Until such time as the
Common Stock becomes eligible for trading on the Nasdaq National Market or a
registered stock exchange reasonably acceptable to the Underwriter, the Company
shall use its best efforts to maintain the listing of the Common Stock on the
Nasdaq SmallCap Market for at least five years from the Effective Date.
7.13 KEY MAN INSURANCE. The Company shall obtain and maintain
in full force and effect a key man life insurance policy in the amount of at
least $1,000,000 on the life of the Company's President, Thomas C. Haas, for a
minimum period of the longer of (a) three years from the Effective Date, or (b)
the term of any employment agreement between Mr. Haas and the Company.
7.14 BOARD OF DIRECTORS. For a period of three years from the
Effective Date, the Company shall take all necessary actions to secure the
election or appointment to its Board of Directors of two persons designated by
the Underwriter, or the appointment of two such persons as advisors to the Board
provided any such designees are reasonably acceptable to the Company's Board of
Directors.
7.15 PUBLIC RELATIONS. For a period of three years from the
Effective Date, the Company shall retain, at its expense, and utilize a public
relations firm acceptable to the Underwriter.
7.16 ANALYST. At the expiration of the "quiet period"
applicable to the Registration Statement under the Securities Act, and again six
months thereafter, the Company shall retain, at its expense, a securities
analyst acceptable to the Underwriter who shall then prepare research reports on
the Company.
7.17 CERTAIN RECORDS. For a period of three years from the
Effective Date, the Company at its expense, shall provide the Underwriter with
copies of the Company's daily stock transfer sheets, which the Company shall
send to the Underwriter at least weekly.
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8. INDEMNIFICATION AND CONTRIBUTION.
8.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they or any of them, may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that such indemnity shall not inure to the
benefit of the Underwriter (or any person controlling the Underwriter) on
account of any losses, claims, damages or liabilities arising from the sale of
the Shares if such untrue statement or omission or alleged untrue statement or
omission was made in such Preliminary Prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the
Underwriter specifically for use therein. The Company shall not be liable
hereunder to the Underwriter, or any controlling person thereof, to the extent
that any loss, claim, damage or other liability incurred by the Underwriter
arises from the Underwriter's fraudulent act or omission.
8.2 INDEMNIFICATION BY THE UNDERWRITER. The Underwriter agrees
to indemnify and hold harmless the Company, the Selling Shareholders, each
person, if any, who controls the Company or any Selling Shareholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
each director of the Company and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing indemnity from the
Company to the Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or omission or
alleged untrue statement or mission which was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment
thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Company by the Underwriter specifically
for use therein. The Underwriter shall not be liable hereunder to the Company or
any Selling Shareholder (including any controlling person, director or officer
thereof) to the extent that any loss, claim, damage or other liability incurred
by the Company arises from a fraudulent act or omission by the Company or such
Selling Shareholder.
8.3 INDEMNIFICATION BY THE SELLING SHAREHOLDERS. Each Selling
Shareholder, severally and not jointly, agrees to indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities to which any
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such person may become subject under the Securities Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and will
reimburse such person for any legal or other expenses reasonably incurred by
such person in connection with investigating or defending any such loss, claim,
damage, liability, action or proceeding; provided, however, that a Selling
Shareholder will only be liable in any such case and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement, or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in conformity with written information furnished
by or on behalf of such Selling Shareholder specifically for use in the
preparation thereof. In no event, however, shall the liability of any Selling
Shareholder for indemnification under this Section exceed an amount equal to the
offering price of the Common Stock sold by such Selling Shareholder, less
applicable underwriting discounts and commissions.
8.4 PROCEDURES. Any party that proposes to assert the right to
be indemnified under this Section 8 shall, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section 8, notify each such indemnifying party of the commencement of such
action, suit or proceeding, but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party otherwise than under this
Section. In the event any such action, suit or proceeding is brought against any
indemnified party and such indemnified party notifies the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the indemnifying
parties, (ii) the indemnified party shall have reasonably concluded that,
because of the existence of different or additional defenses available to the
indemnified party or of other reasons, there may be a conflict of interest
between the indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party) or (iii) the indemnifying parties shall not have employed counsel to
assume the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying parties, provided that
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the Company shall not be required to pay the fees and expenses of more than one
additional law firm representing the Underwriter. An indemnifying party shall
not be liable for any settlement of any action, suit, proceeding or claims
effected without its written consent, and no settlement shall be made without
including a full and complete release of the indemnified parties in form and
content reasonably satisfactory to such indemnified party.
8.5 CONTRIBUTION. If the indemnification provided for herein
is unavailable to an indemnified party under subsections 8.1, 8.2 or 8.3 hereof
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling shareholders, and the Underwriter respectively, from the
offering of the Units, or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Shareholders, and the Underwriter,
respectively, in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Shareholders and the Underwriter, respectively, shall be
deemed to be in the same proportion as the total net proceeds from the offering
and sale of the Units contemplated hereby (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set forth
in the table on the cover page of the Prospectus; provided that, in the event
that the Underwriter shall have purchased any Optional Units hereunder, any
determination of the relative benefits received by the Selling Shareholders or
the Underwriter from the offering and sale of the Units shall include the net
proceeds (before deducting expenses) received by the Selling Shareholders, and
the underwriting discounts and commissions received by the Underwriter, from the
sale of such Optional Units, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company, the Selling Shareholders and the
Underwriter, respectively, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Shareholders, or the Underwriter,
respectively, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders, and the Underwriter agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by a pro rata allocation or by any other method of allocation
that does not take account of the equitable considerations referred to in this
subsection 8.5. The amount paid or payable by an indemnified party as a result
of the losses, claims, damages, liabilities and expenses referred to in this
subsection 8.5 shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the investment banking fees, underwriting commissions, and expense allowance
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amounts applicable to the Units offered by the Underwriter hereunder exceeds the
amount of any damages which the Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission and, notwithstanding any other provision of this Agreement, no Selling
Shareholder shall be required to contribute any amount in excess of the product
of the number of shares sold by such Selling Shareholder times the price per
share paid to such Selling Shareholder pursuant hereto. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Securities
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
Any party entitled to contribution shall, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section 8, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve the party or parties from
whom contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section except to the extent that such
party has been harmed materially by the failure to receive such notice. No party
shall be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent.
8.6 SCOPE. The obligations of the Company under this Section 8
shall be in addition to any liability which the Company may otherwise have and
obligations of the Underwriter under this Section 8 shall be in addition to any
liability which the Underwriter may otherwise have. In addition a successor to
the Underwriter or any person controlling the Underwriter or to the Company, its
directors or officers who signed the Registration Statement, or any person
controlling the Company shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
8.7 PAYMENTS. Any losses, claims, damages, liabilities or
expenses for which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred, subject to the agreement of such indemnified party to return any
amounts paid to it if it should be determined ultimately that the indemnified
party is not entitled to indemnification under this Section 8.
9. EFFECTIVENESS AND TERMINATION.
9.1 EFFECTIVENESS. This Agreement shall become effective on
the later of (i) the execution and delivery hereof by the parties hereto, or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective by the Commission before the offering of the Shares may
commence, notification of the effectiveness of the Registration Statement or
such post-effective amendment by the Commission.
9.2 TERMINATION. This Agreement may be terminated by the
Underwriter by notifying the Company at any time prior to the Initial Closing
Date in the Underwriter's sole and
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absolute discretion. If this Agreement is terminated pursuant to any of its
provisions, except as otherwise provided in this Agreement, the Company shall
not be under any liability to the Underwriter, and the Underwriter shall be
under no liability to the Company, except that if this Agreement is terminated
by the Underwriter because of any failure, refusal or inability on the part of
the Company to comply with the terms or to fulfill any of the conditions of this
Agreement, the Company will reimburse the Underwriter for all reasonable
out-of-pocket expenses (including the fees and disbursements of its counsel)
reasonably incurred by it in connection with the proposed offering of the Units
or in contemplation of performing its obligations hereunder.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates, and such representations, warranties and
agreements of the Company and the Underwriter, including the indemnity and
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of (i) any investigation made by or an behalf
of the Underwriter or any person controlling the Underwriter or the Company, its
directors or officers or any person controlling the Company, (ii) delivery and
acceptance of any Units and payment therefor hereunder, and (iii) any
termination of this Agreement.
11. INFORMATION FURNISHED BY UNDERWRITER. The information set forth in
the last paragraph of the cover page, the stabilizing legend on the inside cover
page, and the section captioned "Underwriting" in any Preliminary Prospectus and
in the Prospectus constitute the only information furnished by or on behalf of
the Underwriter as such information is referred to in this Agreement, including,
without limitation, as such information is referred to in subsection 4.1 and
Section 8 hereof.
12. EXPENSES. The Company agrees to pay, or reimburse if paid by the
Underwriter, whether or not the transactions contemplated hereby are consummated
or this Agreement is terminated, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
those relating to (i) the preparation, printing, filing and delivery of the
Registration Statement, including all exhibits thereto, each Preliminary
Prospectus, the Prospectus, all amendments of and supplements to the
Registration Statement and the Prospectus, and any duplicating of the
Underwriting Agreement, (ii) the issuance of the Units and the preparation and
delivery of certificates for the Common Stock and Offering Warrants, (iii) the
registration or qualification of the Units for offer and sale under the
securities or "Blue Sky" laws of the various jurisdictions referred to in
subsection 7.4, including the fees and disbursements of counsel for the
Underwriter in connection with such registration and qualification and the
preparation and printing of preliminary and supplemental Blue Sky memoranda,
(iv) the furnishing (including costs of shipping and mailing) to the
Underwriter of copies of each Preliminary Prospectus, the Prospectus and all
amendments of or supplements to the Prospectus, and of the several documents
required by this Section to be so furnished, (v) the filing requirements of the
NASD in connection with its review of the terms of the public offering, (vi) the
furnishing (including costs of shipping and mailing) to the Underwriter of
copies of all reports and information required by subsection 7.5, (vii) all
transfer taxes, if any, with respect to the sale and delivery of the Units by
the Company to the Underwriter, (viii) the inclusion of the Common and Stock and
Offering Warrants on the Nasdaq SmallCap Market, (ix) the transportation and
other
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<PAGE> 27
expenses incurred by or on behalf of the Underwriter in connection with
presentations to prospective purchasers of the Units, (x) the fees and expenses
of the Company's accountants, and (xi) all other incidental costs of the
offering not specifically assumed by the Underwriter.
13. MISCELLANEOUS.
13.1 PARTIES IN INTEREST. This Agreement has been and is made
for benefit of the Underwriter, the Company, the Selling Shareholders, and their
respective successors and assigns, and, to the extent expressed herein, for the
benefit of persons controlling any of the Underwriter or the Company, and
directors and certain officers of the Company, and their respective successors
and assigns, and no other person, partnership, association or corporation shall
acquire or have any right under or by virtue of this Agreement.
13.2 NOTICES. All notices and communications hereunder shall
be in writing and mailed, telecopied or delivered or given by telephone or
verbally if subsequently confirmed in writing as follows:
(i) To the Underwriter: J.V. Delaney & Associates, 17
Muir Beach Circle, Corono del Mar, California 92625, Attention: Joseph V.
Delaney, Chairman and CEO (with a copy to Dinsmore & Shohl LLP, 1900 Chemed
Center, 255 East Fifth Street, Cincinnati, Ohio 45202, Attention: Charles F.
Hertlein, Jr., Esq.);
(ii) To the Company: Dayton General Systems, Inc.,
2492 Technical Drive, Miamisburg, Ohio 45342, Attention: Thomas C. Haas,
President (with copies to Taft, Stettinius & Hollister, 1800 Star Bank Center,
425 Walnut Street, Cincinnati, Ohio 45202-3957, Attention: Timothy E. Hoberg,
Esq.)
13.3 COUNTERPARTS. This Agreement may be executed by any one
or more of the parties hereto in any number of counterparts, each of which shall
be deemed an original, but all such counterparts shall together constitute one
and the same instrument.
13.4 CAPTIONS. The captions of the sections and subsections
have been inserted as a matter of convenience and reference only and shall not
control or affect the meaning or con struction of this Agreement.
13.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to principles of conflicts of laws.
13.6 ARBITRATION. (To be inserted)
If the foregoing correctly sets forth your understanding of the
agreement between us, please sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement by and among the Company and the
several Underwriter in accordance with its terms.
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<PAGE> 28
Very truly yours,
DAYTON GENERAL SYSTEMS, INC.
By______________________________
Thomas C. Haas, President
SELLING SHAREHOLDERS:
STERLING TRUST CO. STERLING TRUST CO.
(f/b/o Thomas Davis) (f/b/o Thomas Bryan)
By_______________________________ By_______________________________
Name: Name:
No. of Shares Offered: 2,000 No. of Shares Offered: 2,000
STERLING TRUST CO. WILDHORSE EXPLORATION CORP.
(f/b/o William Winkler)
By________________________________ By_______________________________
Name: Name:
No. of Shares Offered: 10,000 No. of Shares Offered: 4,000
CHURCH STREET FINANCIAL CORP.
By_______________________________ __________________________________
Name: Name: H.H. Croghan
No. of Shares Offered: 8,000 No. of Shares Offered: 20,000
_________________________________ __________________________________
Name: Dean Martin Name: James E. Cogan
No. of Shares Offered: 2,000 No. of Shares Offered: 8,000
_________________________________ __________________________________
Name: Joel Timmons Name: Robert Blackwell
No. of Shares Offered: 2,000 No. of Shares Offered: 2,000
28
<PAGE> 29
The foregoing Agreement is hereby confirmed and accepted by the undersigned.
J.V. DELANEY & ASSOCIATES
By:_______________________
Joseph V. Delaney,
Chairman and CEO
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<PAGE> 30
EXHIBITS
Annex A - Form of Common Stock Warrant
Annex B - Form of Escrow Agreement
30
<PAGE> 1
EXHIBIT 1.2
THE SECURITY EVIDENCED HEREBY MAY NOT BE TRANSFERRED EXCEPT (I) IN
ACCORDANCE WITH THE PROVISIONS OF PARAGRAPH 1 HEREOF AND (II) WITH EITHER (A) AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY BE
LAWFULLY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR (B) SUCH
REGISTRATION.
UNIT PURCHASE WARRANT
To Purchase _____ Units Each Consisting of Two Shares of
Common Stock of Dayton General Systems, Inc. and
One Warrant to Purchase One Additional Share of Common Stock
______________, 1997
THIS CERTIFIES THAT, in consideration for its payment of $______ to the
Company ,J. V. Delaney & Associates ("Initial Holder") or its registered assigns
is entitled to subscribe for and purchase from Dayton General Systems, Inc. (the
"Company"), a Pennsylvania corporation, at any time after the first anniversary
of the date hereof (which is the effective date of the registration statement to
which this warrant (herein referred to as the "Warrant") relates) to and
including _________, 2002 (the fifth anniversary of the effective date of the
registration statement for the public offering to which this Warrant relates),
_______ units ("Units") each consisting of (i) two fully paid and nonassessable
shares of the Company's Common Stock without par value ("Common Stock") together
with (ii) a warrant to purchase one additional share of Common Stock at a price
of $6.50 per share, all such warrants ("Offering Warrants") to have terms and
conditions identical to those described in the Company's Registration Statement
on Form SB-2, No. 333-___ (the "Registration Statement") under the Securities
Act of 1933 for the offering of securities to which this Unit Purchase Warrant
relates. The exercise price of this Warrant shall be $12.50 per Unit (which
price is equal to 125% of the price of the Company's Units offered in the public
offering to which this Warrant relates).
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY. The rights represented by this Warrant
may be exercised by the holder hereof, in whole or in part (but not as to a
fractional Unit), by written notice of exercise delivered to the Company 20 days
prior to the intended date of exercise and by the surrender of this Warrant
(properly endorsed if required) at the principal office of the Company and upon
payment to it by check of the purchase price for such Units. This Warrant may be
transferred, or divided into two or more warrants of smaller denominations
(collectively, the "Warrants"), subject to the following conditions: (i) during
the first year after the date hereof, the Warrant may not be exercised, sold,
transferred, assigned or hypothecated, and (ii) after such period, the Warrant
shall be transferable only to officers and employees of the Initial Holder,
<PAGE> 2
subject to the Company's receipt of the opinion of counsel as provided by
paragraph 7 herein to the effect that such transfer is not in violation of
federal or state securities laws.
2. ISSUANCE OF UNITS. The Company agrees that the Units purchasable
hereunder shall be and are deemed to be issued to the registered holder hereof
as of the close of business on the date on which payment shall have been made
for such Units as aforesaid. Certificates for the Units so purchased shall be
delivered to the registered holder hereof within a reasonable time, not
exceeding ten days after the rights represented by this Warrant shall have been
so exercised, and, unless this Warrant has expired, a new Warrant representing
the number of Units, if any, with respect to which this Warrant shall not then
have been exercised shall also be delivered to the registered holder hereof
within such time. Notwithstanding the foregoing, however, the Company shall not
be required to deliver any certificate for Units upon exercise of this Warrant,
except in accordance with the provisions, and subject to the limitations, of
paragraph 7 hereof.
3. COVENANTS OF COMPANY. The Company covenants and agrees that all
shares of Common Stock which may be included in Units issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized and issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof. The Company further covenants and
agrees that, during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant, a sufficient number of shares of its Common
Stock and Offering Warrants to provide for the exercise of the rights
represented by this Warrant.
4. ANTI-DILUTION ADJUSTMENTS. The above provisions are, however,
subject to the following:
(a) In case the Company shall at any time hereafter subdivide or
combine the outstanding shares of Common Stock or declare a dividend payable in
Common Stock, the exercise price of this Warrant in effect immediately prior to
the subdivision, combination or record date for such dividend payable in Common
Stock shall forthwith be proportionately increased, in the case of combination,
or decreased, in the case of subdivision or dividend payable in Common Stock,
and each share of Common Stock purchasable upon exercise of this Warrant shall
be changed to the number determined by dividing the then current exercise price
by the exercise price as adjusted after the subdivision, combination or dividend
payable in Common Stock.
(b) No fractional Units are to be issued upon the exercise of this
Warrant, but the Company shall pay a cash adjustment in respect of any fraction
of a Unit which would otherwise be issuable in an amount equal to the same
fraction of the market price per share of Common Stock on the day of exercise as
determined in good faith by the Company.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or
2
<PAGE> 3
substantially all of its assets to another corporation shall be effected in such
a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the holder hereof
shall thereafter have the right to purchase and receive, upon the basis and upon
the terms and conditions specified in this Warrant and in lieu of the shares of
Common Stock and/or Offering Warrants of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such stock, securities or assets as may be issued or payable with respect to or
in exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby (assuming, for
this purpose, the exercise of the Offering Warrants) had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of the holder of this Warrant to the end that the provisions hereof
(including without limitation provisions for adjustments of the Warrant purchase
price and of the number of Units purchasable upon the exercise of this Warrant)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any such consolidation, merger or sale unless prior
to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing such assets, shall assume by written instrument executed and mailed
to the registered holder hereof at the last address of such holder appearing on
the books of the Company, the obligation to deliver to such holder such shares
of stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase.
(d) Upon any adjustment of the Warrant purchase price, then, and in
each such case, the Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the registered holder of this Warrant at the
address of such holder as shown on the books of the Company, which notice shall
state the Warrant purchase price resulting from such adjustment and the increase
or decrease, if any, in the number of Units purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
5. COMMON STOCK. As used herein, the term "Common Stock" shall mean and
include the Company's presently authorized shares of Common Stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution, dissolution
or winding up of the Company.
6. NO VOTING RIGHTS. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF UNITS. The holder of this
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring any Units
3
<PAGE> 4
issued upon the exercise hereof ("Warrant Units"), of such holder's intention to
do so, describing briefly the manner of any proposed transfer. Promptly upon
receiving such written notice, the Company shall present copies thereof to the
Company's counsel and to counsel to the original purchaser of this Warrant. If
in the opinion of each such counsel the proposed transfer may be effected
without registration or qualification (under applicable federal and state laws),
the Company, as promptly as practicable, shall notify such holder of such
opinions, whereupon such holder shall be entitled to transfer the Warrant Units
or to dispose of shares of Common Stock received upon the previous exercise
hereof in accordance with the notice delivered by such holder to the Company,
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Units respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933.
If, in the reasonable opinion of either of the counsel referred to in
this paragraph 7, the proposed transfer or disposition described in the written
notice given pursuant to this paragraph 7 may not be effected without
registration or qualification of the Warrant Units, the Company shall promptly
give written notice thereof to the holder hereof, and such holder will limit its
activities in respect to such proposed transfer or disposition as, in the
opinion of both such counsel, are permitted by law.
8. REGISTRATION RIGHTS. (a) If the Company proposes to claim an
exemption under Section 3(b) for a public offering of any of its securities or
to register under the Securities Act of 1933 (except by a registration statement
on a form that does not permit the inclusion of shares by its security holders)
any of its securities, it will give written notice to all registered holders of
Warrants, and all registered holders of Units acquired upon the exercise of
Warrants, of its intention to do so and, on the written request of any
registered holders given within 20 days after receipt of any such notice (which
request must be made on or before ____________, 2004 (the seventh anniversary of
the effective date of the Registration Statement) and which notice shall specify
the Warrant Units intended to be sold or disposed of by such registered holder
and describe the nature of any proposed sale or other disposition thereof), the
Company will use its best efforts to cause all such Warrant Units, the
registered holders of which shall have requested the registration or
qualification thereof, to be included in such notification or registration
statement proposed to be filed by the Company. All expenses of such offering,
except the fees of special counsel and brokers' commissions to such holders,
shall be borne by the Company.
(b) Further, on a one-time basis only, upon request by a majority in
interest of Warrants, or by the holders of a majority of the Warrant Units
issued upon exercise thereof, the Company will, at the expense of such holders,
promptly take all necessary steps to register or qualify the Warrant Units under
Section 3(b) or Section 5 of the Securities Act of 1933 and such state laws as
such holders may reasonably request; provided that such request must be made
within five years from the effective date of the Registration Statement. The
Company shall use its best efforts to keep effective and maintain any
registration, qualification, notification or approval specified in this
paragraph for such period as may be necessary for the holders of the Warrant
Units to dispose of such Units and from time to time shall amend or supplement,
at the
4
<PAGE> 5
holder's expense, the prospectus, or offering circular used in connection
therewith to the extent necessary in order to comply with applicable law,
provided that the Company shall not be obligated to maintain any registration
for a period of more than six months after effectiveness except that a Form S-3
registration statement or successor thereof shall be maintained for up to 12
months after effectiveness.
(c) The Company shall indemnify the holder of this Warrant and of any
Warrant Units issued or issuable hereunder, its officers and directors, and any
person who controls such Warrant holder or such holder of Units within the
meaning of Section 15 of the Securities Act of 1933, against all losses, claims,
damages and liabilities caused by any untrue statement of a material fact
contained in any registration statement, prospectus, notification or offering
circular (and as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus relating to the
registration or qualification of the Warrant Units or caused by any omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading except insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or omission contained in
information furnished in writing to the Company by such Warrant holder or such
holder of Warrant Units expressly for use therein, and each such holder by its
acceptance hereof severally agrees that it will indemnify and hold harmless the
Company and each of its officers who signs such registration statement and each
of its directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act of 1933 with respect to losses,
claims, damages or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
holder expressly for use therein.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and this Warrant to be dated ______________, 1997.
DAYTON GENERAL SYSTEMS, INC.
By_________________________________
Its______________________________
5
<PAGE> 6
TO: DAYTON GENERAL SYSTEMS, INC.
ASSIGNMENT FORM -- To be Executed By the Registered Holder in Order to
Transfer the Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers _____
of the Warrants represented by the attached Warrant Certificate unto
__________________________________________________ (please print or typewrite
name and address including postal zip code of assignee) having the Social
Security or other identifying number of ________________, and does irrevocably
constitute and appoint ________________________ attorney to transfer the Warrant
Certificate on the records of the Company with full power of substitution in the
premises.
Date:__________________, 19____.
PLEASE NOTE: The signature(s) to the Purchase Form or the Assignment
Form must correspond to the name as written upon the face of the
Warrant Certificate in every particular without alteration or
enlargement or any change whatsoever.
6
<PAGE> 7
EXERCISE NOTICE
The undersigned Warrant holder hereby irrevocably elects to exercise
the attached Warrant Certificate. The Warrant is hereby exercised for
_____________________ shares and is accompanied by a check in the amount of $ to
cover the exercise price thereof.
Date: ___________________________________
(Name)
___________________________________
(Address)
___________________________________
(Tax ID No.)
___________________________________
(Signature)
7
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
DAYTON GENERAL SYSTEMS, INC.
FIRST. The name of the corporation is Dayton General Systems, Inc. (hereinafter
referred to as the "Corporation").
SECOND. The location and post office address of the registered office of the
Corporation in the Commonwealth of Pennsylvania is 1635 Market Street,
Philadelphia, Pennsylvania 19103, c/o CT Corporation System.
THIRD. The Corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
FOURTH. The purpose for which the Corporation is incorporated is to engage in,
and to do any lawful act concerning, any or all lawful business for which
corporations may be incorporated under said Business Corporation Law.
FIFTH. The term of existence of the Corporation is perpetual.
SIXTH. The aggregate number of shares of stock which the Corporation shall have
authority to issue is Ten Million One Hundred Thousand (10,100,000) shares which
shall be designated as follows:
(A) Ten Million (10,000,000) shares of Common Stock
with no par value;
(B) One Hundred Thousand (100,000) shares of undesignated
Preferred Stock with no par value and the following additional terms:
1. Except as otherwise provided in these Articles
of Incorporation (the "Articles") or by the amendment or amendments providing
for the issue of any series of Preferred Stock adopted by the Board of Directors
pursuant to authority expressly vested in it by these Articles, the Preferred
Stock may be issued at any time or from time to time in any amount, not
exceeding in the aggregate, including all shares of any and all series thereof
theretofore issued and outstanding, the One Hundred Thousand (100,000) shares of
Preferred Stock hereinabove authorized, as hereinafter provided, and for such
lawful consideration as shall be fixed from time to time by the Board of
Directors.
2. Authority is hereby expressly granted to the
Board of Directors from time to time to adopt amendments to these Articles
providing for the issue in one or more series of any unissued or treasury shares
of the Preferred Stock, and providing, to the fullest extent now or hereafter
permitted by
1
<PAGE> 2
the laws of the Commonwealth of Pennsylvania and notwithstanding the provisions
of any other Article of these Articles of the Corporation, in respect of the
matters set forth in the following subdivisions (i) to (ix), inclusive, as well
as any other rights or matters pertaining to such series:
(i) The designation and number of shares of
such series;
(ii) Voting rights, if any (to the fullest
extent now or hereafter permitted by the laws of the Commonwealth of
Pennsylvania);
(iii) The dividend rate or rates of such
series (which may be an adjustable or variable rate and which may be
cumulative);
(iv) The dividend payment date or dates of
such series;
(v) Redemption rights (to the fullest extent
now or hereafter permitted by the laws of the Commonwealth of Pennsylvania),
including the price or prices at which shares of such series may be redeemed;
(vi) The amount of the sinking fund, if any,
to be applied to the purchase or redemption of shares of such series and the
manner of its application;
(vii) The liquidation price or prices of
such series;
(viii) Whether or not the shares of such
series shall be made convertible into, or exchangeable for, shares of any other
class or classes or of any other series of the same class of stock of the
Corporation, and if made so convertible or exchangeable, the conversion price or
prices, or the rate or rates of exchange, and the adjustments, if any, of the
price or rate at which such conversion or exchange may be made; and,
(ix) Whether or not the issue of any
additional shares of such series or any future series in addition to such series
shall be subject to any restrictions and, if so, the nature of such
restrictions.
Any of the voting rights, dividend rate or rates, dividend payment date or
dates, redemption rights and price, sinking fund requirements, conversion rights
and restrictions on issuance of shares of any such series of Preferred Stock
may, to the fullest extent now or hereafter permitted by the laws of the
Commonwealth of Pennsylvania, be made dependent upon facts ascertainable outside
these Articles or outside the amendment or amendments
2
<PAGE> 3
providing for the issue of such Preferred Stock adopted by the Board of
Directors pursuant to authority expressly vested in it by this Article Sixth. If
the then-applicable laws of the Commonwealth of Pennsylvania do not permit the
Board of Directors to fix, by the amendment creating a series of Preferred
Stock, the voting rights of shares of such series, each holder of a share of
such series of Preferred Stock shall be entitled to one (1) vote for each share
of Preferred Stock of such series held by such holder.
3. Before any dividends shall be declared or paid
upon or set apart for, or distribution made on, the Common Stock and before any
sum shall be paid or set apart for the purchase or redemption of Preferred Stock
of any series or for the purchase of the Common Stock, the holders of Preferred
Stock of each series shall be entitled to receive any accrued dividends declared
by the Board of Directors, payable at the rate or rates fixed for such series in
accordance with the provisions of this Article Sixth, and no more, from the
dividend payment date thereof, or preceding the dividend payment date or dates
fixed from time to time by the Board of Directors.
4. If upon any dissolution, liquidation or
winding up of the Corporation or reduction of its capital stock, the assets so
to be distributed among the holders of the Preferred Stock pursuant to the
provisions of this Article Sixth or of the amendment or amendments providing for
the issue of such Preferred Stock adopted by the Board of Directors pursuant to
authority expressly vested in it by this Article Sixth shall be insufficient to
permit the payment to such holders of the full preferential amounts aforesaid,
then the entire assets of the Corporation shall be distributed ratably among the
holders of the Preferred Stock in proportion to the full preferential amounts to
which they are respectively entitled as aforesaid.
5. The term "accrued dividends", whenever used
herein with respect to the Preferred Stock of any series, shall be deemed to
mean that amount which would have been paid as dividends declared on the
Preferred Stock of such series to date had full dividends been paid thereon at
the rate fixed for such series in accordance with the provisions of this Article
Sixth, less in each case the amount of all dividends declared and paid upon the
shares of such series.
SEVENTH. Shareholders shall have no rights to cumulate their votes in the
election of directors.
EIGHTH. (A) The Corporation shall have the right to amend, alter, change or
repeal any provision contained in these Articles or any provision that may be
added or inserted in these Articles, provided that:
3
<PAGE> 4
(1) Such amendment, alteration, change, repeal,
addition or insertion is consistent with law and is accomplished
in the manner now or hereafter prescribed by statute or these
Articles; and
(2) Any provision of these Articles which
requires, or the change of which requires, the vote or consent of all or a
specific number or percentage of the holders of shares of any class or series
shall not be amended, altered, changed or repealed by any lesser amount, number
or percentage of votes or consents of such class or series.
(B) Any rights at any time conferred upon the shareholders of
the Corporation are granted subject to the provisions of this Article Eighth.
NINTH. The Board of Directors shall consist of such number of directors as shall
be fixed from time to time by resolution adopted by a majority of the directors
then in office. The initial director shall be
Thomas C. Haas
TENTH. The name and address of the incorporator is as follows:
Thomas C. Haas
2492 Technical Drive
Miamisburg, Ohio 45342
ELEVENTH: No transaction between the Corporation and any other entity shall in
any way be affected or invalidated by the fact that any director of the
Corporation is or has an interest in such other entity, including being a
director or officer of such other entity, provided that the fact of the interest
shall be disclosed or shall have been known to the Board of Directors, or a
majority thereof; and any director of the Corporation having such an interest
may be counted in determining the existence of a quorum at any meeting of the
Board of Directors of the Corporation which shall authorize such transaction,
and may vote thereat to authorize such transaction, with like force and effect
as if he were not so interested.
TWELFTH: To the extent permitted by law, the Corporation may, from time to time,
pursuant to authorization of the Board of Directors and without any action by
the shareholders, purchase or otherwise acquire shares of any class of stock,
bonds, debentures, notes, script, warrants, obligations, evidence of
indebtedness, or other securities of the Corporation (or any other corporation)
in such manner, upon such terms and in such amounts as the Board of Directors
may determine.
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<PAGE> 5
IN WITNESS WHEREOF, the undersigned has hereby set his hand
this 14th day of May, 1997.
/s/ Thomas C. Haas
----------------------------
Thomas C. Haas, Incorporator
5
<PAGE> 1
EXHIBIT 3.2
DAYTON GENERAL SYSTEMS, INC.
BY-LAWS
ARTICLE I
SHAREHOLDERS
SECTION 1. Meetings.
(a) Annual Meetings. The annual meeting of the shareholders of this
Corporation shall be held on such day, at such place within or without the
Commonwealth of Pennsylvania, and at such time of day as may be specified by the
Board of Directors.
(b) Special Meetings. Special meetings of the shareholders of the
Corporation, or of the holders of any class or series of shares of stock, may be
called at any time by the Board of Directors, the Chairman of the Board or such
other person or persons as may be authorized by law or the Articles of
Incorporation. Such meetings shall be held on such date and at such place,
within or without the Commonwealth of Pennsylvania, and time of day as may be
fixed by the Board of Directors or the Secretary.
(c) Record Date and Notice. The date of record for shareholders of the
Corporation, or of the holders of any class or series of shares of stock,
entitled to notice of and to vote at any annual or special meeting shall be
ninety days, or such lesser number of days prior to the meeting as the Board of
Directors shall fix.
SECTION 2. Notice.
Written notice of the date, place and time of all meetings of
shareholders of the Corporation, or of the holders of any class or series of
shares of stock, and of the purpose of each special meeting, shall be given to
each shareholder entitled to vote thereat at least ten days before the date of
the meeting, unless a greater period of notice is required by law or the terms
of the class or series of stock, or unless notice is waived.
SECTION 3. Voting.
Every shareholder entitled to vote may vote either in person or by
proxy in accordance with applicable law, these By-Laws and the Corporation's
Articles of Incorporation.
SECTION 4. Quorum.
The presence at a meeting, in person or by proxy, of the holders of
outstanding shares of stock of the Corporation entitled to cast at least a
majority of the votes which all shareholders are entitled to cast on any matter
to come before the meeting shall
<PAGE> 1
EXHIBIT 10.1
Agreement # G10530-1
LONWORKS(R)
OEM LICENSE AGREEMENT
This Agreement is entered into between ECHELON CORPORATION ("Echelon")
and Dayton General Systems ("Licensee") on the following terms and conditions:
1. DEFINITIONS
(a) "LonTalk(R) Protocol" means Echelon's protocol for control
networks.
(b) "Neuron(R) Chips" means semiconductor devices designed or used
to implement all or part of the LonTalk Protocol that are
manufactured by Echelon or by a supplier licensed by Echelon
to manufacture or distribute such devices.
(c) "LonWorks Applications" means equipment that incorporates
Neuron Chips and the LonTalk Protocol. LonWorks Applications
shall exclude development systems for developing applications
that use the LONTALK Protocol.
(d) "Echelon Intellectual Property" means (i) U.S. Patent No.
4,918,690, U.S. Patent No. 4,941,143, U.S. Patent No.
4,955,018, U.S. Patent No. 4,969,147, U.S. Patent No.
5,319,641 and foreign patents based upon such U.S. patents and
claiming the same inventions, and (ii) Echelon copyrights
governing the LonTalk Protocol.
(e) "Neuron Chip Firmware" means only the Echelon software which,
among other things, implements the LonTalk Protocol, and which
is identified as "Neuron Chip Firmware" in the documentation
and/or start up screen for Echelon's development systems for
developing applications that use the LonTalk Protocol.
2. LICENSE
(a) Echelon grants Licensee a nonexclusive, royalty-free, fully
paid license, under Echelon Intellectual Property, to make,
use and sell LONWORKS Applications. Licensee agrees that
whenever a Neuron Chip is executing instructions, the Neuron
Chip Firmware shall be loaded into it starting at address
location 0 (zero). Licensee's rights to use the LonTalk
Protocol and Neuron Chips shall not extend to use of the
LonTalk Protocol in devices that duplicate the functions of
all or part of the Neuron Chips, or to use the Neuron Chips
with any communications protocol other than the LonTalk
Protocol. The foregoing limitations shall apply to all Neuron
Chips incorporated by Licensee into its LonWorks Applications,
including Neuron Chips contained in products or equipment
purchased by Licensee.
(b) In the event that Licensee manufactures LonWorks Applications
in an incomplete form without the LonTalk Protocol, Licensee
may sell or otherwise distribute such LonWorks Applications
only to customers who have entered into a LonWorks Development
License Agreement or LonWorks OEM License Agreement with
Echelon or its subsidiaries that has an agreement number
preceded by the letter "E" or a subsequent letter of the
alphabet (an "OEM Licensee"). Licensee shall maintain records
of the names, addresses and Echelon License Agreement numbers
of its customers for such LonWorks Applications and shall,
within fifteen (15) days after the end of each calendar
quarter, provide Echelon with a report listing all of such
customers for the previous calendar quarter. If Echelon
notifies Licensee that any customer listed in such report is
not an OEM licensee, then Licensee shall promptly discontinue
selling such LonWorks Applications to such customer.
(c) Echelon grants Licensee a nonexclusive, royalty-free, fully
paid license to reproduce and distribute the Neuron Chip
Firmware without modification for use only with Neuron Chips;
provided that Neuron Chip Firmware is programmed into either:
(i) the memory of a Neuron Chip, or (ii) a memory device
attached to the memory bus of a Neuron Chip. Notwithstanding
the foregoing, Licensee may provide a master copy of the
Neuron Chip Firmware linked with an application program on
removable media to (A) an OEM Licensee who is a contract
manufacturer for Licensee's LonWorks Applications and (B) an
OEM Licensee for whom Licensee is designing LonWorks
Applications, for use and distribution by such OEM Licensee
pursuant to the terms of such OEM Licensee's agreement with
Echelon. Licensee agrees not to modify, translate, reverse
engineer, decompile, disassemble or otherwise attempt to
derive source code for the Neuron Chip Firmware (except to the
extent that such acts may not be prohibited under applicable
law).
(d) At the request of Licensee, and upon receipt of a fee of Fifty
United States Dollars (U.S. $50.00), Echelon will deliver to
Licensee one (1) copy of the Neuron Chip Firmware if Licensee
has not already received such a copy from Echelon.
(e) No license is granted, express or implied, under any patents,
trade secrets, know-how or other intellectual property of
Echelon covering specific applications or implementations of
the LonTalk Protocol, LonWorks Applications or Neuron Chips.
Licensee shall have no right under Echelon Intellectual
Property to modify the LonTalk Protocol.
(f) Licensee may make appropriate and truthful reference to
Echelon and Echelon products and technology in Licensee's
company and product literature, provided that Licensee
properly attributes Echelon's trademarks; and provided,
further, that Licensee does not use the name of Echelon or any
Echelon trademark in its name or its product name. No license
is granted, express or implied, under any Echelon trademarks,
trade names or service marks.
LonWorks OEM License Agreement Page 1 of 3
<PAGE> 2
3. USE OF NEURON CHIPS
LICENSEE ASSUMES RESPONSIBILITY FOR, AND HEREBY AGREES TO USE ITS BEST
EFFORTS IN, DESIGNING AND MANUFACTURING EQUIPMENT LICENSED HEREUNDER TO
PROVIDE FOR SAFE OPERATION THEREOF, INCLUDING, BUT NOT LIMITED TO,
COMPLIANCE OR QUALIFICATION WITH RESPECT TO ALL SAFETY LAWS,
REGULATIONS AND AGENCY APPROVALS, AS APPLICABLE. THE NEURON CHIP,
LONTALK PROTOCOL AND NEURON CHIP FIRMWARE ARE NOT DESIGNED OR INTENDED
FOR USE AS COMPONENTS IN EQUIPMENT INTENDED FOR SURGICAL IMPLANT INTO
THE BODY, OR OTHER APPLICATIONS INTENDED TO SUPPORT OR SUSTAIN LIFE,
FOR USE IN FLIGHT CONTROL OR ENGINE CONTROL EQUIPMENT WITHIN AN
AIRCRAFT, OR FOR ANY OTHER APPLICATION IN WHICH THE FAILURE OF THE
NEURON CHIP, LONTALK PROTOCOL OR NEURON CHIP FIRMWARE COULD CREATE A
SITUATION IN WHICH PERSONAL INJURY OR DEATH MAY OCCUR, AND LICENSEE
SHALL HAVE NO RiGHTS HEREUNDER FOR ANY SUCH APPLICATIONS.
4. INDEMNITY
Echelon shall indemnify Licensee for any liabilities, damages and costs
payable by Licensee to a third party in an action for infringement of
any third party United States patent by the LonTalk Protocol and for
reasonable attorney's fees relating thereto. The foregoing shall be
subject to the Licensee notifying Echelon promptly in writing of and
giving Echelon the exclusive authority to defend or settle any such
claim or proceeding. If the use of the LonTalk Protocol is enjoined or
is the subject of any actual or potential patent infringement action,
Echelon may, at its option, procure for Licensee the right to continue
to use the LonTalk Protocol or replace or modify the LonTalk Protocol
so that it becomes noninfringing. Notwithstanding the foregoing,
Echelon assumes no liability for any claims attributable to Licensee's
specific applications for the LonTalk Protocol or attributable to the
use of the LonTalk Protocol in combination with equipment or technology
not provided by Echelon if the claim would not have occurred but for
such specific application or combination. In addition, in no event
shall Echelon's liability to Licensee under this paragraph exceed the
amount of Two Thousand Five Hundred United States Dollars (U.S.
$2,500,00.). THE FOREGOING STATES THE ENTIRE LIABILITY OF ECHELON WITH
RESPECT TO INFRINGEMENT OF ANY PATENTS OR OTHER INTELLECTUAL PROPERTY
RIGHT BY THE LONTALK PROTOCOL, LONWORKS APPLICATIONS, NEURON CHIP,
ECHELON INTELLECTUAL PROPERTY OR NEURON CHIP FIRMWARE.
WARRANTY AND DISCLAIMER
Echelon represents and warrants that it has the right to grant the
licenses granted herein. ECHELON DISCLAIMS ALL OTHER WARRANTIES AND
CONDITIONS, EXPRESS, IMPLIED OR STATUTORY, RESPECTING THE LONTALK
PROTOCOL, LONWORKS APPLICATIONS, NEURON CHIPS, ECHELON INTELLECTUAL
PROPERTY OR NEURON CHIP FIRMWARE, INCLUDING BUT NOT LIMITED TO ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE AND ANY IMPLIED WARRANTIES ARISING FROM COURSE OF PERFORMANCE,
COURSE OF DEALING OR USAGE OF TRADE.
6. TERMI(NATION) AND TERMINATION
(a) The term of this Agreement shall be ten (10) years from the
date of execution unless terminated earlier as provided below.
Licensee may renew this Agreement for an additional ten (10)
year period upon written notice delivered to Echelon within
the last six (6) months of the initial term, Echelon agrees to
give Licensee six (6) months notice prior to expiration of the
initial term of this Agreement. If Echelon fails to give such
notice, then this Agreement shall remain in force until six
(6) months after notice of expiration is given by Echelon (but
in no event longer than six (6) months after ten (10) years
from the date of execution) unless renewed prior to such date.
(b) In addition, the non-breaching party may terminate this
Agreement upon a breach by the other party if such breach
remains uncured thirty (30) days after delivery by the
non-breaching party of written notice of the breach. The
provisions of paragraphs 5, 7 and 8 shall survive any
termination of this Agreement. All other provisions shall
terminate.
7. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS OR
OTHER SPECIAL CONSEQUENTIAL, INDIRECT, PUNITIVE OR INCIDENTAL DAMAGES,
HOWEVER CAUSED ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF
THIS AGREEMENT OR THE DEVELOPMENT OR DISTRIBUTION BY LICENSEE OF
APPLICATIONS OR SYSTEMS USING THE LONTALK PROTOCOL, NEURON CHIPS OR
NEURON CHIP FIRMWARE. THE FOREGOING SHALL NOT APPLY TO ANY BREACHES BY
LICENSEE OF SECTIONS 2 OR 3.
8. MISCELLANEOUS
(a) Licensee shall comply with any United States export controls
governing export of any technical data or technology provided
by Echelon. If Licensee is other than a U.S. entity or is
located outside the U.S., Licensee, as a prior condition to
exercising its rights hereunder, shall execute any letter of
written assurances required for the export of technical data
or technology by Echelon and shall comply with such other
requirements of the U.S. Department of Commerce or other
applicable agency for the export of technical data or
technology by Echelon and shall comply with such other
requirements of the U.S. Department of Commerce or other
applicable agency for the export of technical data or
technology by Echelon to Licensee.
(b) If Licensee is other than a U.S. entity or is located outside
of the U.S., Licensee represents that no consent or approval
of any governmental authority is required in connection with
the valid execution and performance of this Agreement.
(c) This Agreement will be governed by and construed in accordance
with the laws of the State of California, U.S.A., except that
body of California law concerning conflicts of law.
LonWorks OEM License Agreement Page 2 of 3
<PAGE> 3
(d) Licensee shall not assign this Agreement or any of its rights
or duties hereunder except to a successor-in-interest without
the prior written consent of Echelon which shall not be
unreasonably withheld.
(e) Use, duplication or disclosure by the U.S. Government is
subject to restrictions as set forth in subdivision (c)(i)(ii)
of the Rights in Technical Data and Computer Software clause
at DFARS 2152.227-7013, the Commercial Computer Software
Restricted Rights clause at FAR 52.227-19, or other comparable
regulations of other government agencies, as applicable.
(f) Licensee agrees that Echelon may disclose its name, address
and Agreement number to vendors of Neuron Chips or LonWorks
Applications for the purpose of verifying Licensee's status as
an Echelon licensee.
(g) This Agreement constitutes the entire agreement between the
parties, and supersedes any prior agreements, with respect to
the subject matter hereof. No amendment to any term of the
Agreement shall be valId unless mutually agreed to in writing
by the parties. The failure of either party to enforce any
provision of this Agreement shall not constitute a waiver of
such provision.
ECHELON CORPORATION: LICENSEE: Dayton General Systems
Signature: 161 Oliver R. Stanfeld Signature: 151 Thomas C. Haas
Print Name: Oliver R. Stanfield Print Name: Thomas c. Hass
Title: Vice President Title: CEO
Effective Date: May 26, 1995 Date Signed: May 22, 1995
Address: 4015 Miranda Avenue Address: 2492 Technical Drive
Palo Alto, CA 94304 Miamisburg, OH 45342
(800) 258-4LON
Phone: 513-847-7800
LonWorks OEM License Agreement Page 3 of 3
<PAGE> 1
Exhibit 10.2
AGREEMENT NUMBER C10519-2
SOFTWARE LICENSE AGREEMENT
BETWEEN
ECHELON CORPORATION
4015 MIRANDA AVENUE
PALO ALTO, CALIFORNIA 94304
AND
DEVELOPER
DGS
4601 GATEWAY CIRCLE
DAYTON, OH 45440
Echelon Corporation ("Echelon") enters into this Agreement to
license to Developer ("Developer") certain computer programs described in
Exhibit A attached hereto in accordance with the terms and conditions of this
Agreement.
This Agreement consists of this cover page, the attached Terms
and Conditions, and Exhibits A (Executable Files, Development Purpose and
Developer's Product), B (License Fees), C (Royalties), and D (End User License
Restrictions). There are separate sequentially numbered Exhibits A, B and C for
each computer program available from Echelon (e.g., Exhibit A-1, Exhibit A-2,
etc.). Additional Exhibits A, B and C may be added to this Agreement by
execution thereof by both parties. All references in the Terms and Conditions to
Exhibit A, Exhibit B, or Exhibit C include all Exhibit A's, all Exhibit B's, or
all Exhibit C's in effect, as applicable.
Developer has read, understands and agrees to the terms of
this Agreement and the undersigned is duly authorized to sign this Agreement.
ECHELON CORPORATION DEVELOPER
By:/s/ Oliver R. Stanfield By:/s/ Vernon F. Brannon
Oliver R. Stanfield Vernon F. Brannon
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
Date: 12-27-93 Date: 12-8-93
<PAGE> 2
SOFTWARE LICENSE AGREEMENT
TERMS AND CONDITIONS
1 DEFINITIONS.
1.1 "Object Code" means the computer program(s) set forth
on Exhibit A in object code form.
1.2 "Documentation" means the documentation accompanying
the Object Code.
1.3 "Executable Files" means the executable files set forth
on Exhibit A and the Support Files.
1.4 "Support Files" means the support files set forth on
Exhibit A.
1.5 "Utilities" means all other files supplied on the
distribution disk(s) not defined as Object Code or
Support Files.
1.6 "Licensed Software" means the Object Code, Support
Files, Utilities and Documentation.
1.7 "Developer's Product" shall have the meaning set forth
on Exhibit A.
1.8 "LONTALK(TM) Protocol" means Echelon's protocol for
control networks.
1.9 "Development Purpose" shall have the meaning set forth
on Exhibit A.
2 LICENSE.
2.1 Object Code. Echelon hereby grants Developer a nonexclusive,
nontransferable license to use the Object Code solely for the Development
Purpose, and to use the Documentation, Support Files and Utilities to support
such efforts. Developer may make one (1) copy of the Licensed Software for
backup purposes.
2.2 Executable Files. Echelon further grants Developer a nonexclusive,
nontransferable, worldwide license to use, reproduce and distribute Executable
Files. Developer may distribute the Executable Files only incorporated into and
as an integral part of Developer's Product. The foregoing license shall be
effective upon execution by Developer and Echelon of Exhibit C, and Exhibit C
may be executed at any time prior to distribution by Developer of Executable
Files.
2.3 Developer's Product. If Developer's Product as defined on Exhibit A
is a computer program and not a hardware product, then Developer agrees that the
Developer's Product into which the Executable Files are incorporated will
include software supplied
<PAGE> 3
by Developer which, by an objective examination of features and functions,
represents a significant enhancement and transformation of the Licensed Software
and results in a product substantially different from the Licensed Software.
Developer further agrees that it will not use any Licensed Software for the
purpose of developing, or incorporate the Licensed Software into, development
systems for developing applications which use the LONTALK Protocol.
2.4 Breach. Upon Echelon's request, Developer shall furnish to Echelon
evidence of compliance with the provisions of Section 2.3. Developer
acknowledges and agrees that its compliance with Section 2.3 is within the sole
discretion of Echelon, and that Developer's failure to comply with these
restrictions will enable Echelon to terminate this Agreement with respect to the
Licensed Software for which Developer is not in compliance immediately upon
notice without Developer's opportunity to cure.
2.5 Distributors. Developer may exercise its distribution rights
granted pursuant to Section 2.2 above through the use of third party
distributors, resellers, dealers and sales representatives (collectively,
"Distributors"). Each Distributor authorized by Developer shall agree in writing
to be bound by the provisions of Sections 3, 6, 7 and 8 hereof. Distributors
shall have no right to modify or reproduce (except as necessary to demonstrate
the Developer's Product to potential customers) the Licensed Software.
2.6 Ownership. Developer acknowledges that the Licensed Software is the
proprietary and confidential information of Echelon or its suppliers and that
Echelon or its suppliers retain all right, title, and interest in and to the
Licensed Software, including without limitation all copyrights and other
proprietary rights.
2.7 Restrictions. Developer agrees not to reverse engineer, reverse
assemble, decompile, or otherwise attempt to derive source code from the
Licensed Software. Developer may not use, modify, reproduce, sublicense,
distribute or otherwise provide to third parties the Licensed Software, in whole
or in part, other than as permitted under this Agreement. Developer is permitted
to allow third party contractors to use the Licensed Software at Developer's
place of business for the purposes set forth in Section 2.1 above, provided
that: (i) the Licensed Software is conspicuously identified as Confidential
Information as provided in Section 9 of this Agreement; and (ii) with respect to
the Licensed Software such contractor is subject to a confidentiality obligation
at least as stringent as that set forth in Section 9 this Agreement. Developer
shall have no right to reproduce, distribute or otherwise provide to third
parties the Documentation, except as provided in the previous sentence.
- 2 -
<PAGE> 4
3 END USER LICENSE RESTRICTIONS.
The following provisions of this Section 3 apply only if
Developer's Product as defined on Exhibit A is a computer program and not a
hardware product:
(i) Each copy of Developer's Product containing any Executable Files
that is distributed hereunder shall be distributed pursuant to a software
license agreement between Developer and the end user that incorporates the terms
and conditions set forth on Exhibit D. In jurisdictions in which an enforceable
copyright covering the Licensed Software exists, the agreement may be a written
agreement in the package containing such Developer's Product that is fully
visible to the end user and that the end user accepts by opening the package. In
all other jurisdictions, such agreement must be a written agreement signed by
the end user. Developer agrees to use its best efforts to enforce the
obligations of its end user software license agreements and to inform Echelon
immediately of any known breach of such obligations. Echelon may modify the
terms of Exhibit D upon sixty (60) days written notice to Developer. After the
end of such period, such Developer's Product may be distributed only pursuant to
the modified terms.
(ii) Notwithstanding the foregoing paragraph, Developer shall not be
obligated to distribute such Developer's Product pursuant to a software license
agreement as described in the foregoing paragraph for copies of such Developer's
Product that are distributed internally for Developer's internal business
purposes. For each such copy of Developer's Product, Developer agrees to be
bound by the restriction in Sections 1, 2, 4, 5, 6, 10, and 11 of Exhibit D with
respect to the Executable Files included in the Developer's Product.
4 CONSIDERATION.
4.1 License Fees. In consideration for the license granted
pursuant to Section 2.1, Developer agrees to pay to Echelon the one-time
nonrefundable license fee(s) set forth on Exhibit B. Upon receipt of Developer's
executed Exhibit B and a purchase order for the Licensed Software, Echelon will
invoice Developer for such fee. Payment of the invoiced amount will be due
within thirty (30) days of the invoice date. Any invoiced amount not paid when
due may bear interest at the rate of one and one-half percent (1 1/2%) per month
or, if less, the maximum amount permitted by applicable law.
4.2 Royalties.
(a) In consideration for the license granted pursuant to
Section 2.2, Developer agrees to pay to Echelon the royalties set forth on
Exhibit C for each copy of the Executable Files that is distributed by or for
Developer according to the terms of
- 3 -
<PAGE> 5
Exhibit C. If Developer's Product incorporating such Executable Files, as
defined on Exhibit A, is a computer program, the royalty shall be due for each
copy distributed and each copy shall be distributed for use only on a single
computer and not for use in a network. If Developer's Product incorporating such
Executable Files, as defined on Exhibit A, is a hardware product, the royalty
shall be due for each copy of such Executable Files distributed in each hardware
product. As used in this Section 4, "distribute" includes, but is not limited
to, distributed internally for business purposes other than solely for
development.
(b) Developer shall pay, within thirty (30) days after the end
of each calendar quarter or part thereof during the term of this Agreement, the
aggregate royalties for all such Developer's Products distributed by Developer
during such quarter. Developer will also submit to Echelon within thirty (30)
days after the end of each calendar quarter or part thereof during the term of
this Agreement, a reasonably detailed report for the quarter for which such
royalties are due, which describes (i) the number of such Developer's Products
distributed by Developer, and (ii) the calculation of the royalties due.
(c) Notwithstanding paragraph (a) above, no royalty will be
payable for limited numbers of such Developer's Product distributed by Developer
internally and to Distributors solely for marketing and sales demonstrations. In
addition, if such Developer's Product as defined on Exhibit A is a computer
program and not a hardware product, no royalties will be payable for limited
copies of Developer's Product distributed solely for the following purposes; (i)
limited copies internally and to Distributors for product maintenance and
support; (ii) as back up copies; (iii) as error corrections that are distributed
generally to third party customers for no fee (or for media and handling charges
only); or (iv) as error corrections that are distributed to internal users,
provided, that such error corrections do not incorporate new features or
functions.
4.3 Taxes.
(a) The fees and royalties payable hereunder do not include
any sales, use, excise, value-added, or similar taxes that may be applicable.
When Echelon has the legal obligation to collect such taxes, the appropriate
amount shall be added to Developer's invoice and paid by Developer unless
Developer provides Echelon with a valid tax exemption certificate authorized by
the appropriate taxing authority. Echelon agrees to take such steps as may be
practical to minimize such taxes.
(b) All payments by Developer shall be made free and clear of, and
without reduction for, any withholding taxes. Any such taxes which are otherwise
imposed on payments to Echelon shall be the sole responsibility of Developer.
Developer shall
- 4 -
<PAGE> 6
provide Echelon with official receipts issued by the appropriate taxing
authority or such other evidence as is reasonably requested by Echelon to
establish that such taxes have been paid. Developer will cooperate with Echelon
and take all actions reasonably necessary in order to secure a reduction or
elimination of withholding taxes pursuant to any income tax treaty between the
United States and the jurisdiction of the appropriate taxing authority, as
applicable.
4.4 Audit Rights. Developer agrees to make and to maintain, until the
expiration of two (2) years after the last payment under this Agreement is due,
complete books, records and accounts regarding products distributed by Developer
and payments due to Echelon hereunder. Echelon will have the right not more than
once every six (6) months to examine such books, records and accounts during
Developer's normal business hours to verify Developer's reports and payments
made to Echelon under this Agreement. Developer agrees promptly to pay the
amount of any shortfall and, if any such examination discloses a shortfall in
payment to Echelon of more than five percent (5%) for any quarter, to pay or
reimburse Echelon for the reasonable auditing expenses incurred in connection
with such examination.
5 SUPPORT.
Support, updates and training will be provided pursuant to
Echelon's standard programs, policies and prices. Developer agrees that any
Licensed Software update or upgrade (the "Replacement Software") provided by
Echelon is subject to this Agreement. In the event that Echelon provides
Developer with Replacement Software, then Developer agrees to destroy all copies
of the prior release of the applicable Licensed Software within thirty (30) days
after receipt of Replacement Software; provided, however, that Developer may
retain one copy of the prior release for backup, archival and support purposes.
6 WARRANTY AND DISCLAIMER.
Echelon warrants that the media on which the Licensed Software
is delivered will be free from defects in materials and workmanship for a period
of ninety (90) days after delivery. Except as expressly provided above, Echelon
licenses the Licensed Software to Developer on an "AS IS" basis. ECHELON AND ITS
SUPPLIERS MAKE AND DEVELOPER RECEIVES NO WARRANTIES OR CONDITIONS, EXPRESS,
IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, REGARDING THE LICENSED
SOFTWARE OR ITS USE OR OPERATION, ALONE OR IN COMBINATION WITH DEVELOPER'S
PRODUCT.
- 5 -
<PAGE> 7
7 LIMITATION OF LIABILITY.
IN NO EVENT SHALL ECHELON OR ITS SUPPLIERS BE LIABLE FOR
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR
THE USE OR DISTRIBUTION OF LICENSED SOFTWARE BY DEVELOPER OR ANY THIRD PARTY,
WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY,
PRODUCT LIABILITY OR OTHERWISE. IN NO EVENT SHALL ECHELON'S LIABILITY EXCEED THE
TOTAL AMOUNT PAID BY DEVELOPER TO ECHELON FOR THE LICENSED SOFTWARE GIVING RISE
TO SUCH LIABILITY.
8 LABELLING.
8.1 Notices. Developer shall not remove any copyright notices or
proprietary legends contained within the Licensed Software. Developer shall
include a copyright notice in Developer's Product that contains Executable Files
if such Developer's Product as defined on Exhibit A is a computer program, and
on Developer's Product if such Developer's Product as defined on Exhibit A is a
hardware product, reflecting the copyright ownership of Echelon and, if
appropriate, of Developer. Developer agrees to indicate in Developer's
documentation for such Developer's Product that such product contains
copyrighted material of Echelon.
8.2 Trademarks. Unless Echelon otherwise agrees in writing, Developer
may not use any Echelon trademarks, service marks, trade names, or logos in any
products, advertising, brochures, or promotional materials.
9 CONFIDENTIALITY.
9.1 Confidential Information. Developer acknowledges that information
which Echelon discloses to Developer in a tangible form and which is marked
"Confidential" or "Proprietary" (or with a similar legend), or that is disclosed
orally and confirmed in writing as confidential within a reasonable time,
constitutes the proprietary and confidential information of Echelon
("Confidential Information"). Even if not so marked, the parties agree that the
Licensed Software and Documentation shall be "Confidential Information"
hereunder.
9.2 Use and Disclosure. Developer agrees not to use, disclose,
distribute or disseminate Confidential Information except as expressly permitted
under this Agreement. Developer agrees to restrict access to such Confidential
Information to only those employees who need such Confidential Information in
order for Developer to exercise its rights hereunder. Developer will not use
such materials at a location other than Developer's address listed above without
Echelon's consent.
9.3 Remedies. Developer acknowledges that breach of the foregoing
confidentiality obligation would cause irreparable harm
- 6 -
<PAGE> 8
to Echelon, the extent of which would be difficult to ascertain. Accordingly,
Developer agrees that Echelon may seek immediate injunctive relief in the event
of a breach by Developer or any of its employees of the provisions of this
Section 9. In the event of such a breach, Echelon shall have the right to
terminate this Agreement immediately upon notice without opportunity to cure. In
addition, Developer shall indemnify Echelon for all losses, damages, costs and
expenses which Echelon may sustain or incur as a result of such a breach.
9.4 Notification. Developer agrees to notify Echelon promptly in the
event of any breach of its security under conditions in which it would appear
that the Confidential Information were prejudiced or exposed to loss. Developer
shall, upon request of Echelon, take all other reasonable steps necessary to
recover any compromised trade secrets disclosed to or placed in the possession
of Developer by virtue of this Agreement. The cost of taking such steps shall be
borne solely by Developer.
9.5 Exceptions. The foregoing restrictions will not apply to
information that Developer can demonstrate: (i) was known to Developer at the
time of disclosure to Developer by Echelon as shown by the files of Developer in
existence at the time of disclosure; (ii) has become publicly known through no
wrongful act of Developer; (iii) has been rightfully received from a third party
authorized by Echelon to make such disclosure without restriction; (iv) has been
approved for release by written authorization of Echelon; or (v) has been
independently developed by Developer without any use of Confidential Information
and by employees or other agents of Developer who have not been exposed to the
Confidential Information, provided that Developer can demonstrate such
independent development by a preponderance of the evidence, including documented
evidence prepared contemporaneously with such independent development.
10 DELIVERY OF THE LICENSED SOFTWARE.
Echelon will deliver to Developer the number of sets of the
Licensed Software set forth on Exhibit B upon receipt of Developer's executed
Exhibit B and purchase order for the Licensed Software. Each set may contain
copies of the Object Code, Utilities and Support Files in more than one version
or more than one medium; Developer's license permits use of only one copy from
each set as provided herein.
11 INDEMNIFICATION.
11.1 By Echelon. Echelon shall indemnify and hold harmless
Developer from and against all liabilities payable to third
parties and reasonable expenses of Developer (including
reasonable fees of attorneys and other professionals) resulting
from any infringement by the Licensed Software of any copyright
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<PAGE> 9
or trade secret of any third party. Developer shall promptly notify Echelon of
any such claim and, at Echelon's option, permit Echelon to control the defense
and settlement thereof. Developer shall not enter into any settlements that
affect Echelon without the prior written consent of Echelon, which shall not be
unreasonably withheld. In the event of such infringement, Echelon shall use
every reasonable effort to obtain a license under the intellectual property
rights that are infringed; provided that if in Echelon's judgment such a license
is not available on reasonable terms, Echelon may terminate the licenses granted
to Developer hereunder with respect to the infringing Licensed Software upon
written notice to Developer. Echelon shall have no liability for infringement
based on (i) use of other than the current release of the Licensed Software,
(ii) modification of the Licensed Software, or (iii) the combination or use of
the Licensed Software with software or any item or process not furnished by
Echelon if such infringement would have been avoided by the use of the Licensed
Software alone. IN NO EVENT SHALL ECHELON'S LIABILITY UNDER THIS SECTION 11.1
EXCEED THE TOTAL AMOUNT PAID BY DEVELOPER TO ECHELON FOR THE LICENSED SOFTWARE
GIVING RISE TO SUCH LIABILITY. THIS SECTION 11.1 STATES ECHELON'S ENTIRE
OBLIGATION WITH RESPECT TO INFRINGEMENT BY SUCH MATERIALS OF INTELLECTUAL
PROPERTY RIGHTS.
11.2 By Developer. Except to the extent Echelon is responsible for a
claim under Section 11.1 above, Developer shall indemnify, hold harmless and, at
Echelon's request, defend Echelon from and against any and all claims,
liabilities and expenses (including reasonable fees of attorneys and other
professionals) arising out of or in connection with Developer's use or
distribution of the Licensed Software.
12 TERM AND TERMINATION.
12.1 Term. This Agreement shall continue in full force and effect
unless and until terminated as provided in Section 12.2 below or in Section 2.4,
9.3, 11.1 or 13.2.
12.2 Termination.
(a) If either party defaults in the performance of any
provision of this Agreement, then the non-defaulting party may give written
notice to the defaulting party that if the default is not cured within thirty
(30) days the Agreement will be terminated. If the non-defaulting party gives
such notice and the default is not cured during the thirty (30) day period, then
the Agreement will terminate immediately upon notice by the non-defaulting
party.
(b) This Agreement will terminate automatically without
notice, (i) upon the institution by or against Developer of insolvency,
receivership or bankruptcy proceedings or any other proceedings for the
settlement of Developer's debts, (ii)
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<PAGE> 10
upon Developer's making an assignment for the benefit of creditors, or (iii) in
the event of Developer's dissolution or insolvency.
(c) Developer may terminate this Agreement either in its
entirety or with respect to particular Licensed Software for any reason or for
no reason upon thirty (30) days written notice to Echelon.
12.3 Effect of Termination. In the event of termination of this
Agreement, all rights and licenses granted herein shall terminate, except that
the following provisions shall apply: (i) Developer may continue to distribute
Developer's Product that contains the Executable Files for a period of ninety
(90) days after the effective date of such termination, subject to the payment
of applicable royalties; and (ii) Developer may continue to use the Licensed
Software only to provide support for third party end users existing as of the
end of the ninety (90) day period only for so long as Developer is contractually
obligated to provide such support and for internal end users for a one hundred
eighty (180) day period after the effective date of termination; provided,
however, that the foregoing provisions shall not apply if this Agreement is
terminated by Echelon pursuant to Section 9.3 or for the material default of
Developer, or is terminated by Developer pursuant to Section 12.2(c) above, and
the foregoing provisions shall not apply with respect to Licensed Software for
which Developer's rights are terminated pursuant to Section 2.4 or 11.1.
Promptly following termination of Developer's rights under this Section 12.3,
Developer shall return to Echelon all copies of the Licensed Software then in
its possession or control and erase any such copies from computer memory.
12.4 Survival. The parties' rights and obligations under Sections 2.6,
2.7, 4, 6, 7, 8, 9, 11 and 13 shall survive any termination of this Agreement.
All end user licenses granted by Developer to third parties prior to termination
or the end of the ninety (90) day period provided for in Section 12.3 above, as
applicable, shall also survive. In addition, Developer's license shall survive
with respect to copies of Developer's Product containing Executable Files that
were distributed internally prior to termination or the end of the ninety (90)
day period provided for in Section 12.3 above, as applicable, for so long as
Developer is not in breach of the applicable provisions of Exhibit D as set
forth in Section 3.
12.5 No Waiver. The failure of either party to enforce any provision of
this Agreement shall not be deemed a waiver of such provision. The rights of
Echelon under this Section 12 are in addition to any other rights and remedies
provided by law or under this Agreement.
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<PAGE> 11
13 MISCELLANEOUS.
13.1 Assignment. This Agreement may not be assigned by Developer
without the prior written consent of a duly authorized representative of
Echelon, and any purported assignment without such consent shall be void ab
initio.
13.2 Change of Control. In the event that any third party directly or
indirectly takes over or assumes the control of Developer or of substantially
all of Developer's assets then Echelon shall have the right to terminate this
Agreement effective upon notice to Developer.
13.3 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California, U.S.A., except that body of
California law concerning conflicts of law.
13.4 Arbitration. Either party may institute a suit for injunctive
relief to prevent a breach of this Agreement (plus an award of costs and
attorneys' fees), and Echelon may institute an action for royalties under this
Agreement (plus costs and attorneys' fees), in any court of competent
jurisdiction; as to any such suit, both parties accept, and hereby submit, to
the nonexclusive in personam jurisdiction of any state or federal court in San
Francisco or Santa Clara County, California. Any other dispute arising out of or
in connection with or relating to this Agreement shall be determined by binding
arbitration conducted in accordance with this Agreement, and, at its sole
election, Echelon may elect such arbitration instead of a court action for
adjudication of a royalty dispute.
(a) Initiation of Arbitration. Either party may commence an
arbitration proceeding hereunder by delivering a written demand to the other
party describing the dispute in sufficient detail to apprise the other party of
the facts and legal theory upon which the demanding party bases its claim and
stating the relief requested.
(b) Selection of Arbitrator. If the parties are unable to
agree on an arbitrator within twenty (20) days after receipt of the demand for
arbitration, the parties shall, within ten (10) days after expiration of the
twenty-day period, exchange lists setting forth five names of proposed
arbitrators; each party shall be entitled to strike up to three names from the
other party's list; and the unstricken names shall be submitted to the President
of the American Arbitration Association and the arbitrator shall be selected by
him or his designee from among the names submitted. In the event of any failure
in the process, the arbitrator shall in any event be selected by the President
of the American Arbitration Association or his designee.
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<PAGE> 12
(c) Limitation on Powers of Arbitrator. The arbitrator shall
apply California law (without reference to rules of conflicts of law) to the
merits of the dispute but the arbitrator shall not in any circumstances have the
power or authority to add to or detract from this Agreement, to find any
provision of this Agreement unconscionable or otherwise unenforceable or to
award any party punitive damages or any other remedy or damages prohibited by
this Agreement.
(d) Arbitration Hearing. The arbitration hearing shall be
conducted at a place (and at times) designated by the arbitrator in San
Francisco or in Santa Clara County, California and shall begin not later than
ninety (90) days after receipt of the demand for arbitration and, regardless of
the number of issues presented, shall last no longer than fifteen (15) business
days, with each side limited to half of the available hearing time for
presentation of its evidence, examination and cross-examination of witnesses and
argument. Except to the extent inconsistent with this Agreement, the hearing
shall be conducted in accordance with the provisions of California Code of Civil
Procedure Sections 1282, et seq., and such other rules of procedure as the
parties may agree upon.
(e) Decision; Costs. The arbitrator shall render a decision
within thirty (30) days after conclusion of the arbitration hearing. The joint
costs of arbitration (such as court reporting costs and the arbitrator's fees)
shall be borne equally by the parties except that the arbitrator, in his or her
discretion, may award such costs and/or reasonable attorney's fees and other
costs to be paid by the losing party to the prevailing party.
13.5 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, by messenger or
by telecommunication, addressed to the addresses first set forth above or at
such other address furnished with a notice in the manner set forth herein. In
the case of Echelon such notices shall be sent to the Chief Financial Officer
and in the case of Developer any such notices shall be sent to
___________________________, or such other names provided by one party to the
other. Such notices shall be deemed to have been served when delivered or, if
delivery is not accomplished by reason of some fault of the addressee, when
tendered.
13.6 Disclaimer of Agency. This Agreement shall not be construed as
creating an agency, partnership or any other form of legal association between
the parties.
13.7 Partial Invalidity. If any paragraph, provision, or clause thereof
in this Agreement shall be found or be held to be invalid or unenforceable in
any jurisdiction in which this
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<PAGE> 13
Agreement is being performed, the remainder of this Agreement shall be valid and
enforceable and the parties shall negotiate, in good faith, a substitute, valid
and enforceable provision which most nearly effects the parties' intent in
entering into this Agreement. The parties agree that all consideration for the
promises made and obligations undertaken in this Agreement is stated herein and
that neither party executes this Agreement in reliance on representations not
included in this document.
13.8 Complete Understanding. This Agreement, including all Exhibits,
constitutes the entire agreement between the parties with respect to the subject
matter hereof, and supersedes and replaces all prior or contemporaneous
understandings or agreements, written or oral, regarding such subject matter. No
terms of any purchase order issued by Developer shall be deemed to add to,
delete or modify the terms and conditions of this Agreement. No amendment to or
modification of this Agreement will be binding unless in writing and signed by a
duly authorized representative of both parties.
13.9 Export Controls.
(a) Developer understands and acknowledges that Echelon is
subject to regulation by agencies of the U.S. Government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain products
and technology to certain countries. Any and all obligations of Echelon to
provide products as well as any technical assistance shall be subject in all
respects to such United States laws and regulations as shall from time to time
govern the license and delivery of technology and products abroad by persons
subject to the jurisdiction of the United States, including the Export
Administration Act of 1979, as amended any successor legislation, and the Export
Administration Regulations issued by the Department of Commerce, International
Trade Administration, Bureau of Export Administration. Developer agrees to
cooperate with Echelon, including, without limitation, providing required
documentation, in order to obtain export licenses or exemptions therefrom.
Developer warrants that it will comply with the Export Administration
Regulations or other United States laws and regulations in effect from time to
time.
(b) Without in any way limiting the provisions of this
Agreement, Developer agrees that unless prior written authorization is obtained
from the Bureau of Export Administration or the Export Administration
Regulations explicitly permitting the reexport, it will not export, reexport, or
transship, directly or indirectly, to country groups S or Z (as defined in the
Export Administration Regulations and which currently consist of Cambodia, Cuba,
Libya, North Korea, and Vietnam), any of the technical data or software (if the
described on the Control List with a letter "A" following its Export Control ___
Number).
- 12 -
<PAGE> 14
13.10. Governmental Approval. Developer represents and warrants that no
consent, approval or authorization of or designation, declaration or filing with
any governmental authority is required in connection with the valid execution
and delivery of this Agreement. Alternatively, if any such actions are required,
Developer agrees to use its best efforts to obtain such consent, approval or
authorization and agrees to complete such designation, declaration or filing.
Echelon will cooperate as reasonably requested by Developer for the completion
of such required actions. Developer promptly will provide Echelon with copies of
any documents in connection with such actions.
13.11. United States Dollars. All license fees and royalties under this
Agreement are quoted and to be paid in United States Dollars.
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<PAGE> 15
Agreement Number C2-10519-2
EXHIBIT A-7
LONMANAGER(TM) API/LITE for Windows
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S
PRODUCT
A. The Object Code is the LONMANAGER API/LITE for Windows
Dynamic Link Libraries.
B. "Executable Files" means the LONMANAGER API/LITE for Windows
Dynamic Link Libraries.
C. "Support Files" means the files LB2LM.BAT, LONDB.DBD,
LDB.IMP, LONALT.DBD, LB200.DBD, LB210.DBD, SNVT.TYP,
LDBIMP.EXE, LDBIMP2.EXE, LDBCD.COM, DBIMP.EXE, DBEXP.EXE,
DBCHECK.EXE, AND INITDB.EXE.
D. "Developer's Product" means Developer's computer program(s) that are
designed to operate with Echelon's LONWORKS(TM) technology and
products, provided, that such Developer's Product may not be used in a
network comprised of more than one (1) channel or more than fifty (50)
NEURON(R) Chips. Developer's Product is a computer program.
E. "Development Purpose" means the purpose of incorporating
calls to the Object Code into Developer's Product.
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<PAGE> 16
Agreement Number C6-10519-2
EXHIBIT A-11
LONMANAGER(R) NSS for Windows(R)
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
A. The Object Code is the LonManager NSS for Windows Dynamic Link Libraries.
B. "Executable Files" means the LonManager NSS for Windows Dynamic Link
Libraries.
C. "Support Files" means those files listed in the file SUPPORT.TXT in the
LonManager NSS for Windows DOC directory. Support Files also includes the source
code file LDV32.C and the corresponding object code file LDV32.DLL. Developer
shall be entitled to modify the file LDV32.C only for the purpose of adapting
the file LDV32.DLL for use with the Developer's Product, pursuant to the
following terms:
(i) Notwithstanding Section 2.2 of the Software License Agreement,
Developer shall have no right to reproduce (except for backup purposes as
provided in Section 2.1) or distribute the source code file LDV32.C.
(ii) Developer's right to distribute the Support File LDV32.DLL is
limited to the object code either provided by Echelon or the object code
corresponding to Developer's modifications of the source code file LDV32.C in
accordance with the foregoing provisions.
D. "Developer's Product" means Developer's computer program(s) that are designed
to operate with Echelon's LONWORKS(R) technology and products. Developer's
Product is a computer program.
E. "Development Purpose" means the purpose in incorporating calls to the Object
Code into Developer's Product.
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<PAGE> 17
Agreement Number C8-10519-2
EXHIBIT A-13
LCA Field Compiler API
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
A. "Object Code" means those files set forth in the file OBJECT.TXT in the
product LICENSE directory.
B. "Executable Files" means those files set forth in the EXECUTE.TXT file in the
product LICENSE directory. As used herein, "Neuron C Compiler" means that subset
of Executable Files identified in EXECUTE.TXT associated with the LCA Neuron C
Compiler and "Neuron C Debugger" means that subset of Executable Files
identified in EXECUTE.TXT associated with the LCA Neuron C Debugger.
C. "Support Files" means those files listed in the file SUPPORT.TXT in the
product LICENSE directory.
D. "Developer's Product" means Developer's computer program(s), solely in
executable form, that are designed to operate with Echelon's LONWORKS(R)
technology and products. Developer's Product is a computer program. Developer's
Product shall exclude (i) general purpose development systems for developing
applications that use Echelon's LonTalk(R) Protocol, (ii) development systems
for developing computer programs written in programming languages that are
primarily text-based, including, but not limited to, Neuron C, C, C++, Ada,
Forth, Pascal, Basic, Fortran, Assembly, and similar languages, or (iii)
applications that generate images to be loaded into programmable or
mask-programmed read-only memory (PROM or ROM).
E. "Development Purpose" means the purpose of incorporating calls to the Object
Code into Developer's Product.
F. Additional software that is not designated as Object Code, Support Files or
Utilities will be provided in the EXA or EXAMPLES directories and their
subdirectories. Developer shall have the right to use, modify, reproduce and
distribute such software, in binary form only, solely for use with Developer's
Product. Except as specifically modified by the previous sentence, such software
shall be considered to be the Licensed Software for all purposes under this
Agreement except that the indemnity set forth in Section 11 shall not apply to
such software, AND ECHELON DISCLAIMS ANY WARRANTY OF NONINFRINGEMENT WITH
RESPECT TO SUCH SOFTWARE.
G. For the purposes of the LCA Field Compiler API, Section 2.1 is replaced with
the following: "2.1 Object Code. Echelon hereby grants Developer a
non-exclusive, nontransferable license to use the Object Code solely for the
Development Purpose, and to use the Documentation, Support Files and Utilities
to support
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<PAGE> 18
such efforts. Developer may make up to three (3) copies of the Licensed Software
solely to exercise the rights granted above and one (1) copy of the Licensed
Software for backup purposes."
H. For the purposes of the LCA Field Compiler API, add the following sentences
to the end of Section 4.2(a): "Royalty rates for Developer's Product are
initially fixed as follows: (A) for royalty level 1, the royalty rates set forth
in Exhibit C-13 shall be fixed for the shorter of: (1) a period of three (3)
years after the first day of the calendar quarter in which royalties first
accrue under this Exhibit C-13, or (2) a period of four (4) years after the date
this Exhibit A-13 has been signed by both parties; and (B) for royalty levels
other than level 1, the royalty rates shall be fixed until the end of the
quarter during which the applicable prepayment is exhausted. In subsequent
quarters, Developer's royalty level shall be at level 1 of the then current
Exhibit C-13 (or successor), unless Developer changes to a different level by
making a new nonrefundable prepayment prior to the start of the calendar quarter
pursuant to the then current Exhibit C-13 (or successor). From time to time
Echelon shall provide Developer with a copy of the then current Exhibit C-13 (or
successor)."
I. For the purposes of the LCA Field Compiler API, add the following to the end
of Section 8.1 "Developer shall ensure that Documentation and technical
literature for Developer's Product shall identify the version numbers of the LCA
Field Compiler API components as described in the Product Marking Requirements
appendix of the LCA Field Compiler API Programmer's Guide. If the appendix is
not include in the programmer's guide, then the version numbers of the Neuron C
Compiler, Neuron C Debugger (if supported), Neuron Chip firmware, and the Debug
Kernel shall be identified."
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<PAGE> 19
Agreement Number C8-15019-2
EXHIBIT A-13 (continued)
LCA Field Compiler API
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
J. For the purposes of the LCA Field Compiler API, Section 5 is replaced in its
entirety with the following:
5. SUPPORT
5.1 Definition. "Support" means (i) responses to inquiries regarding
the use of the Licensed Software when such inquiries are submitted via either
telephone, electronic mail, or facsimile during Echelon's business hours, and
(ii) updates to the Licensed Software that Echelon provides generally to its
support customers for no additional fee other than the support fee all as
further described in the LonSupport for LNS/LCA Program Services document.
Echelon's business hours are Monday through Friday, 8:00 to 16:30, Pacific time
in the US, 9:00 to 17:00 Greenwich Mean Time in Europe and 9:00 to 17:00 in
Japan. Services is not available on Echelon's regularly scheduled holidays. When
Echelon does not respond immediately to a Support inquiry, Echelon will use
reasonable efforts to respond within four (4) business hours of receipt in the
US and Japan, and eight (8) business hours in Europe. Developer may designate up
to three individuals who may place support calls with Echelon.
5.2 Term and Renewal. For a period of one (1) year after the date that
Exhibit A-13 has been signed by both parties (the "Support Period"), Echelon
will provide Support to Developer at no additional charge other than the license
fee. At least sixty (60) days prior to the end of then current Support term,
Echelon will provide Developer with Echelon's then current policies and prices
and issue an invoice to Developer for a twelve (12) month renewal term.
Developer may renew Support by paying the amount of the invoice or by issuing a
purchase order therefor on or before the last day of the then current term. If
Developer fails to renew the Support, the Support will automatically terminate
at the end of the then current term (and notwithstanding any failure of Echelon
to provide notice under this Section 5.2). If Developer allows the Support to
terminate without renewal and subsequently orders Support, than such Support
shall again be governed by this Agreement and the then current Echelon standard
policies and prices for Support.
5.3 Updates. Developer agrees that any Licensed Software update or
upgrade (the "Replacement Software") provided by Echelon is subject to this
Agreement (whether provided as part of Support or for a separate fee). In the
event that Echelon provides Developer with Replacement Software, then Developer
agrees to destroy all copies of the prior release of the applicable Licensed
Software within thirty (30) days after
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<PAGE> 20
receipt of Replacement Software; provided, however, that Developer may retain
one copy of the prior release for backup, archival and support purposes.
ECHELON CORPORATION DEVELOPER: Dayton General
Systems
Signature:/s/ Oliver R. Stanfield Signature:/s/ Vernon F. Brannon
- --------------------------------- -------------------------------
Oliver R. Stanfield Vernon F. Brannon
------------------------------- -------------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
--------------------------- ----------------
Date: 2-2-96 Date: 2-2-96
------ ------
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<PAGE> 21
Agreement Number C8-10519-2
EXHIBIT A-14U
NSS for Windows Upgrade to LNS Developer's Network Management
Used With Visual ControlKit for Windows(R)
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
A. "Object Code" means those files set forth in the file OBJECT.TXT in the
product LICENSE directory.
B. "Executable Files" means those files set forth in the EXECUTE.TXT file in the
product LICENSE directory.
C. "Support Files" means those files listed in the file SUPPORT.TXT in the
product LICENSE directory.
D. "Developer's Product" means Developer's computer program(s), solely in
executable form, that are designed to operate with Echelon's LONWORKS(R)
technology and products. Developer's Product is a computer program.
E. "Development Purpose" means the purpose of incorporating calls to the Object
Code into Developer's Product.
F. Additional software that is not designated as Object Code, Support Files or
Utilities will be provided in the EXA or EXAMPLES directories and their
subdirectories. Developer shall have the right to use, modify, reproduce and
distribute such software, in binary form only, solely for use with Developer's
Product. Except as specifically modified by the previous sentence, such software
shall be considered to be the Licensed Software for all purposes under this
Agreement except that the indemnity set forth in Section 11 shall not apply to
such software, AND ECHELON DISCLAIMS ANY WARRANTY OF NONINFRINGEMENT WITH
RESPECT TO SUCH SOFTWARE.
G. For the purposes of the LNS Developer's Kit for Windows, Section 2.1 is
replaced with the following: "2.1 Object Code. Echelon hereby grants Developer a
non-exclusive, nontransferable license to use the Object Code solely for the
Development Purpose, and to use the Documentation, Support Files and Utilities
to support such efforts. Developer may make up to three (3) copies of the
Licensed Software solely to exercise the rights granted above and one (1) copy
of the Licensed Software for backup purposes."
H. For the purposes of the LNS Developer's Kit for Windows, add the following
sentences to the end of Section 4.2(a): "Royalty rates for Developer's Product
are initially fixed as follows: (A) for royalty level 1, the royalty rates set
forth in Exhibit C-14U shall be fixed for the shorter of: (1) a period of three
(3) years after the first day of the calendar quarter in which
- 20 -
<PAGE> 22
royalties first accrue under this Exhibit C-14U, or (2) a period of four (4)
years after the date this Exhibit A-14U has been signed by both parties; and (B)
for royalty levels other than level 1, the royalty rates shall be fixed until
the end of the quarter during which the applicable prepayment is exhausted. In
subsequent quarters, Developer's royalty level shall be at level 1 of the then
current Exhibit C-14U (or successor), unless Developer changes to a different
level by making a new nonrefundable prepayment prior to the start of the
calendar quarter pursuant to the then current Exhibit C-14U (or successor). From
time to time Echelon shall provide Developer with a copy of the then current
Exhibit C-14U (or successor)."
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<PAGE> 23
Agreement Number C8-10519-2
EXHIBIT A-14U (continued)
NSS for Windows Upgrade to LNS Developer's Kit for Windows(R)
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
I. For the purposes of the LNS Developer's Kit for Windows, Section 5 is
replaced in its entirety with the following:
5. SUPPORT.
5.1 Definition. "Support" means (i) responses to inquiries regarding
the use of the Licensed Software when such inquiries are submitted via either
telephone, electronic mail, or facsimile during Echelon's business hours, and
(ii) updates to the Licensed Software that Echelon provides generally to its
support customers for no additional fee other than the support fee all as
further described in the LonSupport for LNS/LCA Program Services document.
Echelon's business hours are Monday through Friday, 8:00 to 16:30, Pacific time
in the US, 9:00 to 17:00 Greenwich Mean Time in Europe and 9:00 to 17:00 in
Japan. Service is not available on Echelon's regularly scheduled holidays. When
Echelon does not respond immediately to a Support inquiry, Echelon will use
reasonable efforts to respond within four (4) business hours of receipt in the
US and Japan, and eight (8) business hours in Europe. Developer may designate up
to three individuals who may place support calls with Echelon.
5.2 Term and Renewal. Developer has the right to separately order
LonSupport for LNS/LCA for one year periods according to these terms and
conditions and at Echelon's then current prices. At least sixty (60) days prior
to the end of the then current Support term, Echelon will provide Developer with
Echelon's then current policies and prices and issue an invoice to Developer for
a twelve (12) month renewal term. Developer may renew Support by paying the
amount of the invoice or by issuing a purchase order therefor on or before the
last day of the then current term. If developer fails to renew the Support, the
Support will automatically terminate at the end of the then current term (and
notwithstanding any failure of Echelon to provide notice under this Section
5.2). If Developer allows the Support to terminate without renewal and
subsequently orders Support, then such Support shall again be governed by this
Agreement and the then current Echelon standard policies and prices for Support.
5.3 Updates. Developer agrees that any Licensed Software update or
upgrade (the "Replacement Software") provided by Echelon is subject to this
Agreement (whether provided as part of Support or for a separate fee). In the
event that Echelon provides Developer with Replacement Software, then Developer
agrees to destroy all copies of the prior release of the applicable Licensed
Software within thirty (30) days after
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<PAGE> 24
receipt of Replacement Software; provided, however, that Developer may retain
one copy of the prior release for backup, archival and support purposes.
ECHELON CORPORATION DEVELOPER: DGS, Inc.
Signature:/s/ Oliver R. Stanfield Signature:/s/ Daniel B. Lackey
---------------------------- -----------------------
Oliver R. Stanfield Daniel B. Lackey
------------------- ----------------
(Print Name) (Print Name)
Title: Vice President Title: Secretary
--------------------- ----------------
Date: Nov. 5, 1996 Date: 10/30/96
----------------- -------------
Windows is a registered trademark of Microsoft Corporation.
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<PAGE> 25
Agreement Number
C2-10519-2
EXHIBIT B-7
LONMANAGER(TM) API/LITE for Windows
API LICENSE FEES
Licensed Software
Echelon Model
No. License Fee
Description Quantity
- --------------- ------------------------------------- -------- -----------
31400 LONMANAGER API/Lite for Windows 1 $9,450
A. Echelon has notified Developer that the LONMANAGER API/LITE for
Windows Licensed Software is not currently released for shipment. In order to
enable Developer to commence development and distribution of Developer's Product
incorporating the Executable Files under the terms of this Agreement, Echelon
has agreed to provide Developer with Echelon's API for Windows Licensed Software
on a temporary basis. Developer acknowledges that the following functions that
are resident in Echelon's API for Windows Object Code will not be resident in
the API/Lite for Windows Object Code when it is released (the "Reserved
Functions"):
ldb_build_load_order ldb_calc_timers
ldb_configure_rtr ldb_free_topology_data
ldb_get_chan_order ldb_get_chan_order_list
ldb_get_conflicting_routers ldb_get_redundant_rtrs
ldb_get_segments ldb_get_srve_pin_domain
ldb_get_topology_limits ldb_recalc_topology
ldb_rtr_in_path ldb_set_topology_limits
lon_rtr_prog_id lxt_build_load_order
lxt_check_all_rtr_config lxt_check_rtr_config
lxt_check_source_chan lxt_configure_rtr
lxt_configure_rtr_subnet lxt_get_msg_domain
lxt_get_rtr_srvc_pin lxt_install_rtr
lxt_get_srvc_pin_domain lxt_merge_subnet
lxt_merge_domain lxt_router_down_side
lxt_replace_rtr_domain ldb_get_near_chan
lxt_router_near_side
B. Developer agrees that it will not incorporate the Reserved Functions
in Executable Files produced under this Agreement and to return all copies of
the API for Windows Licensed Software to Echelon within thirty (30) days of
Developer's receipt of the API/Lite for Windows Licensed Software
ECHELON CORPORATION DEVELOPER
ECHELON CORPORATION DEVELOPER
By:/s/ Oliver R. Stanfield By:/s/ Vernon F. Brannon
------------------------------- ------------------------
Oliver R. Stanfield Vernon F. Brannon
-------------------------------- -------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
-------------------------- -------------------
Date: 12-27-93 Date: 12-7-93
-------------- -------------
- 24 -
<PAGE> 26
Agreement Number
C6-10519-2
EXHIBIT B-11
LONMANAGER(TM) NS for Windows(C)
API LICENSE FEES
Licensed Software
Echelon Model
No. License Fee
Description Quantity
- --------------- ------------------------------------- -------- -----------
34300 LONMANAGER NSS for Windows 1 $2,495
A. Echelon has notified Developer that the LONMANAGER NSS for Windows
Licensed Software is not currently released for shipment. In order to enable
Developer to commence development and distribution of Developer's Product
incorporating the Executable Files under the terms of this Agreement, Echelon
has agreed to provide Developer with a prototype version of Echelon's LonManager
NSS for Windows (the "Prototype Product") on a temporary basis.
Developer acknowledges that the LonManager NSS for Windows Licensed Software may
be different than the Prototype Product provided hereunder. Developer may
reproduce and distribute up to twenty-five (25) copies of Developer's Product
using the Prototype Product solely for beta testing purposes and no royalty
shall be due for such beta copies under section 4.2 but such beta copies shall
otherwise be subject to all terms and conditions of this Agreement. Developer
agrees that it will recall such copies of Developer's Product from its beta test
customers promptly upon release by Echelon of the commercial version of the
Licensed Software, but in any event not later than twelve (12) months after the
date of this Agreement. Developer agreed that Echelon will own all rights, title
and interest in and to any modifications to the Licensed Software resulting from
Developer comments on the Prototype Product.
B. Developer agrees that Echelon may publish Developer's company name
as a participant in the NSS for Windows Early Access Program.
ECHELON CORPORATION DEVELOPER
By:/s/ Oliver R. Stanfield By:/s/ Vernon F. Brannon
------------------------------- ------------------------
Oliver R. Stanfield Vernon F. Brannon
-------------------------------- -------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
-------------------------- -------------------
Date: 7-31-95 Date: 7-31-95
---------------------------- ---------------------
- 25 -
<PAGE> 27
Agreement Number
C6-10519-2
EXHIBIT B-13
LCA Field Compiler API
LICENSE FEES
Licensed Software
Echelon Model
No. License Fee
Description Quantity
- ----------- --------------------------- -------- ------------
33300 LCA Field Compiler API 1 $4,995
A. As of the date of this Agreement, Developer designates the following
individual to fulfill Developer's royalty reporting requirements under this
Agreement.
Name: Vernon F. Brannon Title: President
Address: 2492 Technical Drive Phone #: (513) 847-7800
Miamisburg, OH 45342 Fax #: (513) 847-7810
Developer agrees to notify Echelon of any change in the above information.
ECHELON CORPORATION DEVELOPER
By:/s/ Oliver R. Stanfield By:/s/ Vernon F. Brannon
------------------------------- ------------------------
Oliver R. Stanfield Vernon F. Brannon
-------------------------------- -------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
-------------------------- -------------------
Date: 2/2/96 Date: 2 Feb 1996
--------------------------- --------------------
- 26 -
<PAGE> 28
Agreement Number
C8-
EXHIBIT B-14U
NSS for Windows Upgrade to LNS Developer's Kit for Windows(C)
LICENSE FEES
Licensed Software
Echelon Model
No. License Fee
Description Quantity
- ----------- ------------------------------- -------- -----------
34301-05 NSS for Windows Upgrade to LNS 1 $1,750
Developer's Kit for Windows
A. Developer agrees that its rights with respect to the LonManager NSS
for Windows product under the Agreement and Exhibits A-11, B-11, and C-11, or
the LonManager(R) NSS for Windows(R) Early Access Program Agreement, as
applicable, are hereby terminated.
Echelon has notified Developer that the LNS Developer's Kit for Windows Licensed
Software is not currently released for shipment. In order to enable Developer to
commence development and distribution of Developer's Product incorporating the
Executable Files under the terms of this Agreement, Echelon has agreed to
provide Developer with a prototype version of Echelon's LNS Developer's Kit for
Windows (the "Prototype Product") on a temporary basis.
Developer acknowledges that the LNS Developer's Kit for Windows Licensed
Software may be different than the Prototype Product provided hereunder.
Developer may reproduce and distribute up to twenty-five (25) copies of
Developer's Product using the Prototype Product solely for beta testing purposes
and no royalty shall be due for such beta copies under section 4.2 but such beta
copies shall otherwise be subject to all terms and conditions of this Agreement.
Developer agrees that it will recall such copies of Developer's Product from its
beta test customers promptly upon release by Echelon of the commercial version
of the Licensed Software, but in any event not later than twelve (12) months
after the date of this Agreement. Developer agrees that Echelon will own all
rights, title and interest in and to any modifications to the Licensed Software
resulting from Developer comments on the Prototype Product.
B. Developer agrees that Echelon may publish Developer's company name
as a participant in the LNS Early Access Program.
C. As of the date of this Agreement, Developer designates the following
individual to fulfill Developer's royalty reporting requirements under this
Agreement.
Name: Daniel B. Lackey Title: Secretary
Address: 2492 Technical Drive Phone #: 937-847-7800
Miamisburg, OH 45342 Fax #: 937-847-7810
Developer agrees to notify Echelon of any change in the above information.
ECHELON CORPORATION DEVELOPER
Signature:/s/ Oliver R. Stanfield Signature:/s/ Daniel B. Lackey
-------------------------- -------------------------
Oliver R. Stanfield Daniel B. Lackey
----------------------------- ----------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: Secretary
----------------------------- ----------------------------
Date: Nov. 5, 1996 Date: 10/30/96
----------------------------- ----------------------------
- 27 -
<PAGE> 29
Agreement Number
C2-10519-2
EXHIBIT C-7
LONMANAGER(TM) API/LITE for Windows
API ROYALTIES
A. Royalties.
<TABLE>
<CAPTION>
Licensed
Software
Echelon
Model No. Description Royalty
- --------- ----------- -------
<S> <C> <C>
31400-1 LONMANAGER API.LITE for Windows Royalty Level 1 $60
31400-2 LONMANAGER API.LITE for Windows Royalty Level 2 $55
31400-3 LONMANAGER API.LITE for Windows Royalty Level 3 $50
31400-4 LONMANAGER API.LITE for Windows Royalty Level 4 $45
31400-5 LONMANAGER API.LITE for Windows Royalty Level 5 $36
31400-6 LONMANAGER API.LITE for Windows Royalty Level 6 $30
31400-7 LONMANAGER API.LITE for Windows Royalty Level 7 $27
31400-8 LONMANAGER API.LITE for Windows Royalty Level 8 $24
31400-9 LONMANAGER API.LITE for Windows Royalty Level 9 $21
31400-10 LONMANAGER API.LITE for Windows Royalty Level 10 $18
</TABLE>
<TABLE>
<CAPTION>
Unit Volume
Item Commitment Level
---- ----------------
<S> <C>
LONMANAGER API.LITE for Windows Royalty Level 1 Less than 25
LONMANAGER API.LITE for Windows Royalty Level 2 25 to 99 inclusive
LONMANAGER API.LITE for Windows Royalty Level 3 100 to 249 inclusive
LONMANAGER API.LITE for Windows Royalty Level 4 250 to 999 inclusive
LONMANAGER API.LITE for Windows Royalty Level 5 1,000 to 2,499 inclusive
LONMANAGER API.LITE for Windows Royalty Level 6 2,500 to 4,999 inclusive
LONMANAGER API.LITE for Windows Royalty Level 7 5,000 to 9,999 inclusive
LONMANAGER API.LITE for Windows Royalty Level 8 10,000 to 24,999 inclusive
LONMANAGER API.LITE for Windows Royalty Level 9 25,000 to 49,999 inclusive
LONMANAGER API.LITE for Windows Royalty Level 10 50,000 or more
</TABLE>
B. For the first year of this Agreement, Developer's royalty will be
based on Developer's expected volume for such year. For each subsequent year of
this Agreement,, Developer's royalty will be based on the volume actually
achieved in the previous year.
C. Developer's expected volume for the first year of this Agreement as
mutually agreed with Echelon is __________________. If no volume level is set
forth in the previous sentence, then Developer shall be deemed to have specified
level 1.
ECHELON CORPORATION DEVELOPER
Signature:/s/ Oliver R. Stanfield Signature:/s/ Vernon F. Brannon
-------------------------- ---------------------------
Oliver R. Stanfield Vernon F. Brannon
---------------------------------- -----------------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
----------------------------- ------------------------------
Date: 12-27-93 Date: 12-7-93
----------------------------- ------------------------------
- 28 -
<PAGE> 30
Agreement Number
C6-10519-2
EXHIBIT C-11
LONMANAGER(TM) NSS for Windows(TM)
ROYALTIES
A. Royalties.
As used herein, "Node" means a device that implements layers 1 through
6 of the LonTalk Protocol. Developer's royalty payment for each copy of an
Executable File that is distributed by or for Developer shall be based on the
number of Nodes that the Executable File can access as set forth in the table
below. An Executable File shall be deemed to have unlimited Node capacity unless
Developer explicitly restricts the capacity of the Executable File either by
implementing source code that prevents the user from creating and accessing
networks with more than 64 Nodes or by implementing any other method for
achieving such limitation as described in the Documentation.
<TABLE>
<CAPTION>
Royalty Annual Unit Volume Unlimited Node 64 Node
Level Commitment Level Capacity Capacity
----- ---------------- -------- --------
<S> <C> <C> <C>
1 Less than 25 $150.00 $45.00
2 25 to 99 inclusive $135.00 $40.50
3 100 to 249 inclusive $120.00 $36.00
4 250 to 999 inclusive $105.00 $31.50
5 1,000 to 2,499 inclusive $ 90.00 $27.00
6 2,500 to 4,999 inclusive $ 75.00 $22.50
7 5,000 to 9,999 inclusive $ 67.50 $20.25
8 10,000 to 24,999 inclusive $ 60.00 $18.00
9 25,000 to 49,999 inclusive $ 52.50 $15.75
10 50,000 to 74,999 inclusive $ 45.00 $13.50
11 75,000 to 99,999 inclusive $ 37.50 $11.25
12 100,000 to 249,999 inclusive $ 33.75 $10.13
13 250,000 to 499,999 inclusive $ 30.00 $ 9.00
14 500,000 to 999,999 inclusive $ 26.25 $ 7.88
15 1,000,000 to 1,499,999 inclusive $ 22.50 $ 6.75
16 1,500,000 and greater $ 18.75 $ 5.63
</TABLE>
B. For the first year of this Agreement, Developer's royalty will be based on
Developer's expected volume for such year. Developer's volume will be calculated
as the sum of all royalty-bearing Executable Files distributed by or for
Developer under this Agreement. For each subsequent year of this Agreement,
Developer's royalty will be based on the volume actually achieved in the
previous year.
C. Developer's expected volume for the first year of this Agreement as mutually
agreed with Echelon is __________________. If no volume level is set forth in
the previous sentence, then Developer shall be deemed to have specified level 1.
D. As of the date of this Agreement, Developer designates the following
individual to fulfill Developer's royalty reporting requirements under this
Agreement:
Name: Title:
----------------------------- ----------------------------------
Address: Phone #:
--------------------------- ----------------------------------
Fax #:
----------------------------- ----------------------------------
Developer agrees to notify Echelon of any change in the above information.
- 29 -
<PAGE> 31
Agreement Number
C6-10519-2
EXHIBIT C-11 (cont.)
LONMANAGER(TM) NSS for Windows(C)
ROYALTIES
E. For the purposes of the LonManager NSS for Windows, add the following new
Section 4.2(d):
"(d) As used herein, "Node" means a device that implements layers 1
through 6 of the LonTalk Protocol and "Demonstration Copy" means a version of
Developer's Product that includes any Executable Files that is (i) distributed
for pre-sales, marketing purposes only to Developer's potential customers, (ii)
distributed for no fee (or for media and handling charges only), and (iii) can
install and manage only two Nodes. Notwithstanding paragraph (a) above, no
royalty will be payable for a reasonable number of Demonstration Copies
distributed by or for Developer. Developer shall submit to Echelon within thirty
(30) days after the end of each calendar quarter or part thereof during the term
of this Agreement a reasonably detailed report for the quarter of the number of
Demonstration Copies distributed by or for Developer. All other terms of this
Agreement remain in effect with respect to Demonstration Copies, including but
not limited to Section 3, END USER LICENSE RESTRICTIONS."
F. For the purposes of the LonManager NSS for Windows, add the following new
Section 4.2(e):
"(e) If Echelon provides Replacement Software (as defined in Section 5)
to Developer for no fee (or for media and handling charges only), and if
Developer distributes such Replacement Software to its existing licensees of the
Executable Files for no fee (or for media and handling charges only), then no
royalty shall be due for such Replacement Software. If Echelon charges a fee
(other than media and handling charges only) for such Replacement Software,
and/or if Developer charges its customers a fee (other than media and handling
charges only) for such Replacement Software, and such Replacement Software is
distributed to Developer's existing licensees of the Executable Files, then the
royalty due for such Replacement Software shall be 15% of the royalty due by
Developer according to the level set forth in item A. In any event, the standard
royalty shall be due for copies of Replacement Software that are distributed to
customers that are not existing licensees of the Executable Files."
ECHELON CORPORATION DEVELOPER
Signature:/s/ Oliver R. Stanfield Signature:/s/ Vernon F. Brannon
----------------------------- ------------------------
Oliver R. Stanfield Vernon F. Brannon
- --------------------------------------- --------------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
-------------------------------- ------------------------
Date: 7-31-95 Date: 7-31-95
-------------------------------- ---------------------------------
- 30 -
<PAGE> 32
Agreement Number
C8-10519-2
EXHIBIT C-13
LCA Field Compiler API
ROYALTIES
A. Royalties.
<TABLE>
<CAPTION>
Royalty Prepaid Neuron C Neuron C
Level Royalties Compiler Debugger
----- --------- -------- --------
<S> <C> <C> <C>
1 None $800.00 $400.00
2 $15,000 $360.00 $180.00
</TABLE>
B. The royalties set forth above vary with the amount of nonrefundable
prepayment made by Developer. In order to select a royalty level 2, Developer
shall pre-pay royalties to Echelon as set forth above. Such prepayment is
creditable at the rate of 100% against royalties payable by Developer to Echelon
under this Agreement, SOLELY FOR DEVELOPER'S PRODUCT UNDER THIS EXHIBIT C-13 (or
successor). Any such credit shall be shown by Developer in its royalty reports
required hereunder. In the quarter that such prepayment is exhausted,
Developer's royalty obligation for additional copies of Developer's Product in
such quarter shall remain at level 2. In subsequent quarters, Developer's
royalty level shall be at level 1 of the then current Exhibit C-13 (or
successor), unless Developer changes to a different level by making a new
nonrefundable prepayment prior to the start of the calendar quarter pursuant to
the then current Exhibit C-13 (or successor).
C. For the purposes of the LCA Field Compiler API, add the following new Section
4.2(d):
"(e) If Echelon provides Replacement Software (as defined in Section 5)
to Developer for no fee (or for media and handling charges only), and if
Developer distributes such Replacement Software to its existing licenses of the
Executable Files for no fee (or for media and handling charges only), then no
royalty shall be due for such Replacement Software. If Echelon charges a fee
(other than media and handling charges only) for such Replacement Software,
and/or if Developer charges its customers a fee (other than media and handling
charges only) for such Replacement Software, and such Replacement Software is
distributed to Developer's existing licensees of the Executable Files, then the
royalty due for such Replacement Software shall be 15% of the royalty due by
Developer according to the level set forth in item A. In any event, the standard
royalty shall be due for copies of Replacement Software that are distributed to
customers that are no existing licensees of the Executable Files."
ECHELON CORPORATION DEVELOPER
Signature:/s/ Oliver R. Stanfield Signature:/s/ Vernon F. Brannon
---------------------------- ----------------------
Oliver R. Stanfield Vernon F. Brannon
- -------------------------------------- --------------------------------
(Print Name) (Print Name)
Title: Vice President & CFO Title: President
------------------------------- -------------------------
Date: 2/2/96 Date: 2 Feb 1996
-------------------------------- ----------------------------------
- 31 -
<PAGE> 33
Agreement Number
C8-
EXHIBIT C-14U
NSS for Windows Upgrade to LNS Developer's Kit for Windows(C)
ROYALTIES
A. Royalties.
As used herein, "Node" means a device that implements layers 1 through
6 of the LonTalk Protocol. Developer's royalty payment for each copy of an
Executable File that is distributed by or for Developer shall be based on the
number of Nodes that the Executable File can access as set forth in the table
below. An Executable File shall be deemed to have 32,385 Node capacity unless
Developer explicitly restricts the capacity of the Executable File either by
implementing source code that prevents the user from creating and accessing
networks with more than a fixed number of nodes or by implementing any other
method for achieving such limitation as described in the Documentation.
<TABLE>
<CAPTION>
Royalty Prepaid 32 Node 256 Node 1,024 Node 4,096 Node 8,192 Node 32,385 Node
Level Royalties Capacity Capacity Capacity Capacity Capacity Capacity
----- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 None $ 56.00 $ 119.00 $ 250.00 $ 445.00 $ 750.00 $1,950.00
2 $ 15,000 $ 25.20 $ 53.55 $ 112.50 $ 204.75 $ 337.50 $ 877.50
3 $ 50,000 $ 18.48 $ 39.27 $ 82.50 $ 150.15 $ 247.50 $ 643.50
4 $150,000 $ 13.44 $ 28.56 $ 60.00 $ 109.20 $ 180.00 $ 468.00
5 $500,000 $ 8.96 $ 19.04 $ 40.00 $ 72.80 $ 120.00 $ 312.00
</TABLE>
B. The royalties set forth above vary with the amount of nonrefundable
prepayment made by Developer. In order to select a royalty level other than 1,
Developer shall pre-pay royalties to Echelon at the level chosen by Developer.
Such prepayment is creditable at the rate of 100% against royalties payable by
Developer to Echelon under this Agreement SOLELY FOR DEVELOPER'S PRODUCT UNDER
THIS EXHIBIT C-14U (or successor). Any such credit shall be shown by Developer
in its royalty reports required hereunder. In the quarter that such prepayment
is exhausted, Developer's royalty obligation for additional copies of
Developer's Product in such quarter shall be at the level that corresponds to
such prior prepayment. In subsequent quarters, Developer's royalty level shall
be at level 1 of the then current Exhibit C-14U (or successor), unless Developer
changes to a different level by making a new nonrefundable prepayment prior to
the start of the calendar quarter pursuant to the then current Exhibit C-14U (or
successor).
C. For the purposes of the LNS Developer's Kit for Windows, add the following
new Section 4.2(d):
"(d) As used herein, "Node" means a device that implements layers 1
through 6 of the LonTalk Protocol and "Demonstration Copy" means a version of
Developer's Product that includes any Executable Files that is (i) distributed
for pre-sales, marketing purposes only to Developer's potential customers, (ii)
distributed for no fee (or for media and handling charges only), and (iii) can
install and manage only two Nodes. Notwithstanding paragraph (a) above, no
royalty will be payable for a reasonable number of Demonstration Copies
distributed by or for Developer. Developer shall submit to Echelon within thirty
(30) days after the end of each calendar quarter or part thereof during the term
of this Agreement a reasonably detailed report for the quarter of the number of
Demonstration Copies distributed by or for Developer. All other terms of this
Agreement remain in effect with respect to Demonstration Copies, including but
not limited to Section 3, END USER LICENSE RESTRICTIONS."
- 32 -
<PAGE> 34
Agreement Number
C8-10519-2
EXHIBIT C-14U (continued)
NSS for Windows Upgrade to LNS Developer's Kit for Windows
ROYALTIES
D. For the purposes of the LNS Developer's Kit for Windows, add the following
new Section 4.2(e):
"(e) If Echelon provides Replacement Software (as defined in Section 5)
to Developer for no fee (or for media and handling charges only), and if
Developer distributes such Replacement Software to its existing licenses of the
Executable Files for no fee (or for media and handling charges only), then no
royalty shall be due for such Replacement Software. If Echelon charges a fee
(other than media and handling charges only) for such Replacement Software,
and/or if Developer charges its customers a fee (other than media and handling
charges only) for such Replacement Software, and such Replacement Software is
distributed to Developer's existing licensees of the Executable Files, then the
royalty due for such Replacement Software shall be 15% of the royalty due by
Developer according to the level set forth in item A. In any event, the standard
royalty shall be due for copies of Replacement Software that are distributed to
customers that are not existing licensees of the Executable Files."
ECHELON CORPORATION DEVELOPER
Signature:/s/ Oliver R. Stanfield Signature:/s/ Daniel B. Lackey
Oliver R. Stanfield Daniel B. Lackey
(Print Name) (Print Name)
Title: Vice President & CFO Title: Secretary
Date: Nov. 5, 1996 Date: 10/30/96
- 33 -
<PAGE> 35
Agreement Number
C8-10519-2
EXHIBIT D
END USE LICENSE RESTRICTIONS
All end user licenses of Developer's Product shall include provisions
that:
(1) only a non-exclusive, non-transferable license to use the copy of
the software on either (a) a single computer, or (b) a network server for access
by one user, by way of a terminal or computer attached to the network server, is
granted. Should the user choose to install the software on additional computers,
or increase user access via a network server, the user must first acquire a
license for each additional such computer or user who will use the software, as
applicable, with the understanding that at any one time (and regardless of the
number of media sets included with the software), the number of computers on
which the software is installed or users who are permitted to use the software,
as applicable, may not exceed the number of single-user licenses that the user
has;
(2) Developer or its suppliers retains all title and copyrights to the
software, and all copies thereof, and the license is not a sale;
(3) the end user may not copy the software, except for one (1) copy of
the software solely for backup purposes and provided that the end user
reproduces proprietary notices on the copy;
(4) the end user may not modify, translate, reverse assemble,
decompile, or disassemble the software;
(5) use, duplication or disclosure by the U.S. Government is subject to
restrictions as set forth in DOD FARS 252.227-7013 or FAR 52.227, as applicable,
or equivalent rights;
(6) Echelon is a direct and intended beneficiary of the license
agreement and may enforce it directly against the end user;
(7) Echelon shall not be liable to the end user for any loss of data,
lost profits, cost of cover or other special, incidental, punitive,
consequential, or indirect damages arising out of the use of the software;
(8) Echelon makes no warranties, express, implied or statutory,
regarding the software, including without limitation the implied warranties of
merchantability and fitness for a particular purpose;
(9) the end user's rights with respect to the software may be
terminated, either immediately or after a notice period not exceeding thirty
(30) days, upon unauthorized copying of the software or failure to comply with
the restrictions contained in the license agreement; and
(10) upon termination of the license, the end user shall return all
copies of the software to the party from which the software was acquired.
Echelon may be referred to as Developer's supplier.
- 34 -
<PAGE> 36
Agreement Number
C2-10519-2
EXHIBIT D
END USER LICENSE RESTRICTIONS
All end user licenses of Developer's Product shall include provisions
that:
(1) only a non-exclusive, non-transferable license to use the copy of
the software provided on a single computer is granted;
(2) the software may not be used by more than one user at a time, or in
a network or multi-user system;
(3) Developer or its suppliers retains all title and copyrights to the
software, and all copies thereof, and the license is not a sale;
(4) the end user may not copy the software, except for one (1) copy of
the software solely for backup purposes and provided that the end user
reproduces proprietary notices on the copy;
(5) the end user may not modify, translate, reverse assemble,
decompile, or disassemble the software;
(6) use, duplication or disclosure by the U.S. Government is subject to
restrictions as set forth in DOD FARS 252.227-7013 or FAR 52.227, as applicable,
or equivalent rights;
(7) Echelon is a direct and intended beneficiary of the license
agreement and may enforce it directly against the end user;
(8) Echelon shall not be liable to the end user for any loss of data,
lost profits, cost of cover or other special, incidental, punitive,
consequential, or indirect damages arising out of the use of the software;
(9) Echelon makes no warranties, express, implied or statutory,
regarding the software, including without limitation the implied warranties of
merchantability and fitness for a particular purpose;
(10) the end user's rights with respect to the software may be
terminated, either immediately or after a notice period not exceeding thirty
(30) days, upon unauthorized copying of the software or failure to comply with
the restrictions contained in the license agreement;
(11) upon termination of the license, the end user shall return all
copies of the software to the party from which the software was acquired.
Echelon may be referred to as Developer's supplier.
- 35 -
<PAGE> 1
Exhibit 10.3
SALES AGREEMENT
Customer DGS, Inc.
--------------------------------------------------
Street Address 4601 Gateway Circle
--------------------------------
City Dayton State OH Zip Code 45440
------ --- -----
Telephone
SHIP TO ABOVE UNLESS NOTED:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ECHELON agrees to sell to CUSTOMER the hardware products ("Hardware
Products") and license to CUSTOMER the software products ("Software Products")
listed on Schedule A (collectively "Products"). CUSTOMER understands that such
Products will be either new or reconditioned. Any Software Products in this
Agreement are licensed subject to the corresponding Software License,
Development License, and OEM License Agreements attached hereto as Exhibits A, B
and C, respectively. Additional exhibits may be added to this Agreement from
time to time as CUSTOMER purchases or licenses other products from ECHELON.
THE FOLLOWING "TERMS AND CONDITIONS", SCHEDULE A AND
EXHIBITS A THROUGH C ARE ATTACHED TO THIS SALES AGREEMENT AND
MADE A PART HEREOF.
ACCEPTED BY:
ECHELON CORPORATION CUSTOMER DGS, Inc.
By:/s/ Oliver R. Stanfield By: /s/ T. Haas for DGS
Title: Vice President & CEO Title: CEO
Date: 11-30-03 Date: Nov. 29, 1993
<PAGE> 2
1. Prices, License Fees and Taxes. The prices for Hardware Products and license
fees for Software Products are set forth on Schedule A and are exclusive of all
federal, state, municipal, or other government taxes or duties (except taxes
paid on net income). Any such tax fee, or charge shall be paid by the CUSTOMER.
If ECHELON is required to pay any such tax, fee, or charge, the CUSTOMER shall
reimburse ECHELON therefor. All prices are quoted in United States dollars.
2. Terms of Payment. CUSTOMER agrees to pay ECHELON's invoices within 30 days of
the shipment of Products; provided, however that ECHELON reserves the right to
require payment in advance or by letter of credit. CUSTOMER will pay ECHELON
interest of one and one-half percent (1 1/2%) per month (18% per year), or a
lower interest rate set by law, for all amounts not paid when due. All payments
are to be made in United States dollars.
3. Delivery. Delivery will be F.O.B. ECHELON's shipping facility. Title (except
title to licensed Software Products) will pass to CUSTOMER upon ECHELON's
delivery to a carrier. Upon delivery to the carrier, CUSTOMER will become
responsible for and bear the entire risk of loss or damage to the Products.
Scheduled delivery dates are estimates only.
4. Cancellation or Delay of Orders.
(a) CUSTOMER may cancel any order (or part thereof) or postpone
delivery dates for any Products without charge by giving ECHELON
written notice not less than sixty (60) days (Freeze Date) prior to
ECHELON's scheduled delivery date for those Products. If CUSTOMER
requests a postponement of over six (6) months, the order for such
Products shall be considered cancelled. (b) If CUSTOMER cancels any
order (or part thereof) or requests delay in delivery after the Freeze
Date, there will be a twenty-five percent (25%) restocking charge.
CUSTOMER will have no rights in partially completed goods from
cancelled orders. (c) If CUSTOMER requests and is granted a delay in
delivery, and if ECHELON has, prior to such request, notified CUSTOMER
of price changes that are effective at the time of the new delivery
date, then ECHELON's price to CUSTOMER on Products for which delivery
was delayed and any penalties due to ECHELON hereunder shall be based
upon ECHELON's new list prices.
5. Substitutions and Modifications. ECHELON reserves the right to make
substitutions or modifications to the specifications or implementations of the
Products, provided that these substitutions and modifications do not materially
reduce overall system performance.
6. Shipment Packaging and Mode of Transportation. CUSTOMER may provide ECHELON
with written shipment and packaging instructions to within twenty (20) days of
the scheduled delivery date. ECHELON will use its reasonable efforts to
accommodate these
<PAGE> 3
instructions. In the absence of specific instructions, ECHELON will ship the
Products by the method it deems most advantageous and in standard commercial
packaging. Transportation and insurance charges will be collect, or if prepaid,
will be invoiced to CUSTOMER. When special packaging is requested or, in the
opinion of ECHELON, required, the costs of the same, if not set forth on the
invoice, will be separately invoiced to and paid by CUSTOMER. Equipment held or
stored for CUSTOMER after an agreed upon delivery date shall be held or stored
at CUSTOMER's sole expense and risk.
7. Security Interest. ECHELON hereby reserves a purchase money security interest
in all Products sold or licensed hereunder and the proceeds thereof in the
amount of their purchase price until all such Products have been paid for in
full. CUSTOMER hereby agrees to perform all acts necessary or appropriate to
assist ECHELON in perfecting and maintaining such security interest. In the
event of a default by CUSTOMER of any of its obligations to ECHELON, ECHELON
will have the right, without liability to CUSTOMER, to repossess the Products
sold or licensed hereunder.
8. Installation and Training. Product installation per ECHELON's installation
instructions is the responsibility of CUSTOMER. CUSTOMER will be provided with
telephone support in accordance with ECHELON's standard practice. Additional
support will be available based on ECHELON's then current pricing and practice.
CUSTOMER may contract for training subject to ECHELON's then current schedules,
pricing, and practices.
9. Limited Warranty. ECHELON warrants the Hardware Products against defects in
materials and workmanship for a period of ninety (90) days after shipment to
CUSTOMER. ECHELON's sole and exclusive liability and CUSTOMER's sole remedy
under this warranty shall be, at ECHELON's option, to repair or replace any such
defective Hardware Products. The products which CUSTOMER considers defective
shall be returned to ECHELON, by a method of shipment approved by ECHELON in
advance. This warranty shall be void if in ECHELON's reasonable opinion such
defective condition was caused in whole or in part by CUSTOMER's misuse,
neglect, testing, attempts to repair, or any other cause beyond normal usage, or
by accident, fire, or other hazard. Repair or replacement does not extend the
warranty period for such Hardware Product. The limited warranty, if any, for
Software Products will be as set forth in the Software License Agreement
attached hereto as Exhibit A.
THE WARRANTY SET FORTH ABOVE IS IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
10. Limitation of Liability. ECHELON'S LIABILITY UNDER OR FOR BREACH OF THIS
AGREEMENT SHALL NOT EXCEED THE PURCHASE PRICE OR LICENSE FEE PAID FOR THE
PRODUCTS LESS REASONABLE RENTAL OR PAST USE. IN NO EVENT SHALL ECHELON BE LIABLE
FOR COSTS OF
<PAGE> 4
PROCUREMENT OF SUBSTITUTE GOODS. IN NO EVENT SHALL ECHELON BE LIABLE FOR ANY
SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES ARISING IN ANY WAY OUT OF THIS
AGREEMENT, HOWEVER CAUSED, AND ON ANY THEORY OF LIABILITY. THESE LIMITATIONS
SHALL APPLY NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY PROVIDED HEREIN.
11. Patent Infringement. ECHELON agrees to indemnify, hold harmless, and defend
CUSTOMER from and against any and all suits or proceedings and any and all
liability, loss, or damage arising out of any claim that the use of the Hardware
Products infringes any United States patent; provided, however, that CUSTOMER
notifies ECHELON promptly in writing of any such suit or proceeding and gives
ECHELON sole control of the defense and all negotiations for the settlement or
compromise thereof. This indemnity shall not apply if normally noninfringing
Hardware Products are rendered infringing by reason of CUSTOMER'S particular use
of such Hardware Products. At its Option, ECHELON may at any time replace,
modify, or procure for the CUSTOMER the right to continue using any Hardware
Products to avoid any infringement. The indemnification for Software Products is
as set forth in the Software License Agreement attached hereto as Exhibit A.
ECHELON'S LIABILITY UNDER THIS PARAGRAPH 11 SHALL NOT EXCEED THE TOTAL
PURCHASE PRICE OF THE PRODUCTS, THE FOREGOING STATES THE ENTIRE LIABILITY AND
OBLIGATION OF ECHELON WITH RESPECT TO INFRINGEMENT OR CLAIMS OF INFRINGEMENT OF
ANY PATENT, COPYRIGHT, TRADE SECRET, OR OTHER INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHT BY THE HARDWARE PRODUCTS OR ANY PART THEREOF.
12. Software License. CUSTOMER hereby agrees to the terms and conditions of the
Software License Agreement attached hereto as Exhibit A.
13. Development and OEM License. CUSTOMER understands that it may not purchase
NEURON,(R) Chips without having first entered into a LONWORKS(TM) Development
License Agreement with ECHELON. CUSTOMER agrees not to use in other than a
development environment or sell products or technology using ECHELON's
LONTALK(TM) Protocol without having first entered into a LONWORKS OEM License
Agreement with ECHELON. ECHELON's standard Development and OEM License
Agreements are attached hereto as Exhibits B and C, respectively.
14. Termination of Licenses. CUSTOMER agrees that, if the Products are being
purchased for CUSTOMER's use pursuant to a trial, rental, or lease program, then
CUSTOMER's rights under the Software License, Development License and OEM
License Agreements shall terminate upon termination of the applicable trial,
rental or lease period or any extensions thereof; provided, however, that if
CUSTOMER purchases the Products at the end of such period, then such rights
shall continue perpetually except as provided elsewhere herein or in such
license agreements. Within two (2) weeks after any such termination, CUSTOMER
shall return to ECHELON or a third party designated by ECHELON the original
<PAGE> 5
and all copies, in whole or in part, including partial copies and modifications
of the Software Products, or destroy such items and deliver certification
thereof to ECHELON.
15. Export Controls. CUSTOMER agrees not to export or reexport, or cause to be
exported or reexported, any Products received hereunder, or the direct product
of such Products, to any country to which, under the laws of the United States,
CUSTOMER is or might be prohibited from exporting its technology or direct
product thereof.
16. Partial Invalidity. If any provision in this Agreement shall be held to be
invalid or unenforceable, the remainder of this Agreement shall remain valid and
enforceable.
17. Acceptance. CUSTOMER will accept Products if such Products conform to all
material specifications of ECHELON. CUSTOMER will provide ECHELON with notice of
any material nonconformities within ten (10) days of CUSTOMER's receipt of
Products ("Initial Acceptance Period"). After resolution or correction, ECHELON
will provide CUSTOMER with notice that such nonconformities have been resolved
or corrected, and a new ten (10) day acceptance period ("Subsequent Acceptance
Period") will commence. If ECHELON is not provided with notice of any such
nonconformities during any Initial or Subsequent Acceptance Period, then
CUSTOMER agrees that the Products shall be deemed accepted.
18. General Provisions. ECHELON and CUSTOMER agree that (i) this Agreement shall
be governed by the laws of the State of California, (ii) CUSTOMER shall not
assign this Agreement without the prior written consent of ECHELON, (iii) no
modification to this Agreement, or any waiver of any rights, shall be effective
unless assented to in writing and the waiver of any breach or default shall not
constitute a waiver of any other rights hereunder or any subsequent breach or
default, (iv) the prevailing party in any legal action hereunder shall be
entitled to reimbursement of its expenses including without limitation
reasonable attorneys' fees, (v) any required notices hereunder shall be given in
writing at the address of each party set forth on the reverse side of this page,
and shall be deemed served when delivered or, if delivery is not accomplished by
reason or some fault of the addressee, when tendered, and (vi) this Agreement
and the Software License Agreement, the LONWORKS Development License Agreement
and the LONWORKS OEM License Agreement attached hereto as Exhibits A, B and C,
respectively, constitute the entire and exclusive agreement between the parties
hereto with respect to the subject matter hereof.
19. Termination. In the event of (i) a material breach of this Agreement by
CUSTOMER (ii) any proceeding, voluntary or involuntary, in bankruptcy or
insolvency by or against CUSTOMER, or (iii) any assignment of CUSTOMER's assets
for the benefit of creditors, this Agreement shall, if such condition is not
corrected within thirty (30) days after written notice thereof from ECHELON, at
ECHELON's option, terminate, and ECHELON may
<PAGE> 6
elect to cancel any unfilled orders hereunder. Within two (2) weeks after any
such termination, CUSTOMER shall return to ECHELON the original and all copies,
in whole or in part, including partial copies and modifications, of the Software
Products, or destroy such items and deliver certification thereof to ECHELON.
Notwithstanding the foregoing, the provisions of Sections 9, 10, 11, 13 and 14
hereof shall survive any termination of this Agreement.
20. Arbitration. Any dispute or claim arising out of this Agreement, the
Software License Agreement, or the Development or OEM License Agreements, shall
be finally settled by binding arbitration in San Francisco, California under the
Rules of Arbitration of the International Chamber of Commerce by three
arbitrators appointed in accordance with said rules. Judgment on the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof.
<PAGE> 7
SALES AGREEMENT
ADDENDUM
ECHELON acknowledges that CUSTOMER has entered into the Sales Agreement
to which this Addendum is attached with the expectation of obtaining financing
for the Products covered thereby pursuant to Trial, Rental or Lease Programs
offered through Echelon Credit Corporation. Accordingly,
1. ECHELON hereby consents to the assignment by CUSTOMER of its right
and obligation to purchase the Products for the purpose of obtaining such
financing.
2. ECHELON agrees that, if CUSTOMER is unable to obtain such financing
by ___________________________________________, the Sales Agreement will
terminate with no further obligation of ECHELON or CUSTOMER, except that if such
Products have been delivered to CUSTOMER, the last sentence of Section 19 shall
apply.
ACCEPTED BY:
ECHELON CORPORATION CUSTOMER DGS, Inc.
By:/s/ Oliver R. Stanfield By: /s/ T. Haas for DGS
Title: Vice President & CEO Title: CEO
Date: 11-30-93 Date: Nov. 29, 1993
<PAGE> 8
Exhibit A
LonBuilder(TM)
SOFTWARE LICENSE AGREEMENT
Echelon Corporation ("Echelon") grants you a non-exclusive, non-transferable
license to use the copy of the software and documentation contained in this
package and any updates or upgrades thereto provided by Echelon according to the
terms set forth below. If the software contained in this package is being
provided to you as an update or upgrade to software which you have previously
licensed, then you agree to destroy all copies of the prior release of this
software within thirty (30) days after opening this package; provided, however,
that you may retain one copy of the prior release for backup, archival and
support purposes.
LICENSE
You may:
(a) install the software on only one computer,
(b) use the software only for developing applications using
Echelon's LonWorks(TM) tools and components.
(c) make one (1) copy of the software in machine readable form
solely for backup purposes, provided that you reproduce all
proprietary notices on the copy, and
(d) physically transfer the software from one computer to another, provided
that the software is removed from the computer which it was installed
and is used on only one computer at a time.
You may not:
(a) use the software on more than one workstation at a time or
in a multi-user system,
(b) modify, translate, revere engineer, decompile or disassemble
the software, (except to the extent that such acts may be
prohibited under applicable law),
(c) copy the software (except for the backup copy or for the copies made
automatically by the system for use with NEURON(R) embedded within
LONBUILDER(TM) products), or copy the accompanying documentation, or
(d) rent, transfer or grant any rights in the software or
accompanying documentation in any form to any person without
the prior written consent of Echelon.
This license is not a sale. Title and copyrights to the software, accompanying
documentation and any copy made by you remain with Echelon. Unauthorized copying
of the software or the accompanying documentation, or failure to comply with the
above restrictions, will result in automatic termination of this license and
will make available to Echelon other legal remedies.
<PAGE> 9
LIMITED WARRANTY AND DISCLAIMER
Echelon warrants that, for a period of ninety (90) days from the date of
delivery to you, the diskettes on which the software is furnished under normal
use will be free from defects in materials and workmanship and the software
under normal use will perform substantially in accordance with the software
specifications contained in the LonBuilder Developer's Workbench documentation.
Echelon's entire liability and your exclusive remedy under this warranty (which
is subject to your returning the software to Echelon) will be, at Echelon's
option, to use reasonable commercial efforts to attempt to correct or work
around errors, to replace the software or diskettes with functionally equivalent
software or diskettes, as applicable, or to refund the purchase price and
terminate this Agreement.
EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTIES, ECHELON MAKES AND YOU RECEIVE
NO WARRANTIES ON CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR IN ANY COMMUNICATION
WITH YOU, AND ECHELON SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. Echelon
does not warrant that the operation of the software will be uninterrupted or
error free or that the software will meet your specific requirements.
LIMITATION OF LIABILITY
IN NO EVENT WILL ECHELON BE LIABLE FOR LOSS OF DATA, LOST PROFITS, COST OF COVER
OR OTHER SPECIAL INCIDENTAL, PUNITIVE, CONSEQUENTIAL OR INDIRECT DAMAGES ARISING
FROM THE USE OF THE SOFTWARE OR ACCOMPANYING DOCUMENTATION, HOWEVER CAUSED AND
ON ANY THEORY OF LIABILITY. THIS LIMITATION WILL APPLY EVEN IF ECHELON OR ANY
AUTHORIZED DISTRIBUTOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. YOU
ACKNOWLEDGE THAT THE AMOUNTS PAID BY YOU FOR THE LonBuilder DEVELOPER'S
WORKBENCH REFLECT THIS ALLOCATION OF RISK.
GENERAL
This Agreement will be governed by the laws of the State of California. This
Agreement is the entire agreement between us and supersedes any other
communications or advertising with respect to the software and accompanying
documentation. If an provision of this Agreement is held invalid, the remainder
of this Agreement shall continue in full force and effect. Using duplication, or
disclosure by the U.S. Government is subject to restrictions as set forth in
subdivision (c)(1)(ii) of the Rights and Technical Data and Computer Software
clause at DFARS 252.227- 7013.
<PAGE> 10
Exhibit B
LonWorks(TM)
DEVELOPMENT LICENSE AGREEMENT
This Agreement is entered into between ECHELON CORPORATION ("Echelon")
and __________________________________, ("Licensee") on the following terms and
conditions:
1. DEFINITIONS
(a) "LonTalk(TM) Protocol" means Echelon's protocol for
control networks.
(b) "NEURON CHIPS" means semiconductor devices designed or used to
implement all or part of the LonTalk Protocol that are
manufactured by Echelon or by a supplier licensed by Echelon
to manufacture or distribute such devices.
(c) "LonWorks Applications" means equipment that incorporates
NEURON CHIPS and the LonTalk Protocol, LonWorks Applications
shall exclude development systems for developing applications
that use the LonTalk Protocol.
(d) "Echelon Intellectual Property" means (i) U.S. Patent
No.4,918,690, U.S. Patent No. 4,941,143, U.S. Patent
No. 4,955,018, U.S. Patent No. 4,969,147 and foreign
patents based upon such U.S. patents and claiming the
same inventions, and (ii) Echelon copyrights governing
the LonTalk Protocol.
(e) "NEURON CHIP Firmware" means only the Echelon software
identified in the LonBuilder(TM) documentation and/or
start up screen as "NEURON CHIP FIRMWARE," which, among
other things, implements the LonTalk Protocol.
(f) "Interface" means Echelon's proprietary interface
between the NEURON CHIP and a transceiver as claimed in
U.S. Patent No. 5,182,746. commonly known as the
`special purpose mode interface.'
2. LICENSE
(a) Echelon grants Licensee a nonexclusive license, under
Echelon Intellectual Property, solely to use NEURON
CHIPS to develop and design LonWorks Applications.
Licensee agrees that whenever a NEURON CHIP is
executing instructions, the NEURON CHIP Firmware shall
be loaded into it starting at address location 0
(zero). Licensee's right to use the LonTalk Protocol
and NEURON CHIPS shall not extend to use of the LonTalk
Protocol in devices that duplicate functions of all or
part of the NEURON CHIPS, or to use the NEURON CHIPS
with any communications protocol other than the LonTalk
Protocol. The foregoing limitations shall apply to all
NEURON CHIPS used by Licensee, including NEURON CHIPS
contained in products of equipment purchased by
Licensee.
(b) Echelon hereby grants Licensee a nonexclusive license,
under U.S. Patent No. 5,182,746 and any foreign patents
based thereon claiming the same inventions to develop
<PAGE> 11
and design transceivers (only as part of LonWorks
Applications) that incorporate the Interface. Unless otherwise
approved in writing by Echelon, such transceivers must be of
Licensee's own proprietary design and LonWorks Applications
containing such transceivers must include Licensee's
proprietary software that will perform the end use functions,
in addition to network connection, for which the particular
LonWorks Application was designed.
(c) Echelon grants Licensee a nonexclusive license to
reproduce the NEURON CHIP Firmware without modification
for use only with NEURON CHIPS and only for developing
and designing LonWorks Applications. Licensee shall
not use in other than a development environment, sell
or otherwise distribute products, technology or NEURON
CHIP that include NEURON CHIP Firmware without entering
a LonWorks OEM License Agreement with Echelon.
(d) Echelon grants Licensee the additional right to have
made LonWorks Applications that do not incorporate the
Interface, subject to the following limitations:
(i) such LonWorks Applications may be used for internal
development purposes only and may not be sold or
otherwise distributed, (ii) title to the NEURON CHIP
and any memory device that contains the LonTalk
Protocol or Neuron Chip Firmware must be at all times
with Licensee and Licensee shall not provide to its
manufacturer the LonTalk Protocol or NEURON CHIP
Firmware unless the LonTalk Protocol or NEURON CHIP
Firmware has already been incorporated into the NEURON
CHIP or memory device and (iii) Licensee's manufacturer
must acknowledge in writing to Licensee that it ha read
and understands the limitations of this Agreement and
will not knowingly manufacture items that are in
violation of the provisions of this Agreement, Licensee
shall have no right to have made transceivers, or
components thereof, that incorporate the Interface.
(e) No license is granted, express or implied, under any patents,
trade secrets, know-how or other intellectual property of
Echelon covering specific applications or implementations of
the LonTalk Protocol, LonWorks Applications, Interface or
NEURON CHIPS. Licensee shall have no right under Echelon
Intellectual Property to modify the LonTalk Protocol.
3. USE OF Neuron Chips
LICENSEE ASSUMES RESPONSIBILITY FOR, AND HEREBY AGREES TO USE ITS BEST
EFFORTS IN, DESIGNING AND MANUFACTURING EQUIPMENT LICENSED HEREUNDER TO
PROVIDE FOR SAFE OPERATION THEREOF, INCLUDING, BUT NOT LIMITED TO,
COMPLIANCE OR QUALIFICATION WITH RESPECT TO ALL SAFETY LAWS,
REGULATIONS OR AGENCY APPROVALS, AS APPLICABLE. THE Neuron Chip,
LonTalk PROTOCOL, INTERFACE AND Neuron Chip FIRMWARE ARE NOT DESIGNED,
INTENDED OR AUTHORIZED FOR USE AS COMPONENTS IN EQUIPMENT INTENDED FOR
SURGICAL IMPLANT INTO THE BODY, OR OTHER APPLICATIONS INTENDED TO
SUPPORT OR SUSTAIN LIFE, OR
<PAGE> 12
FOR ANY OTHER APPLICATION IN WHICH THE FAILURE OF THE Neuron Chip,
LonTalk PROTOCOL, INTERFACE AND Neuron Chip FIRMWARE COULD CREATE A
SITUATION IN WHICH PERSONAL INJURY OR DEATH MAY OCCUR.
4. WARRANTY DISCLAIMER
ECHELON DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED OR
STATUTORY, RESPECTING THE LonTalk PROTOCOL, LonWorks APPLICATIONS,
Neuron Chips, ECHELON INTELLECTUAL PROPERTY, INTERFACE OR Neuron Chip
FIRMWARE, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
5. TERMINATION
The non-breaching party may terminate this Agreement upon a breach by
the other party if such breach remains uncured thirty (30) days after
delivery by the non-breaching party of written notice of the breach.
The provisions of paragraphs 3, 4, 6, 7 and 9 shall survive any
termination of this Agreement. All other provisions shall terminate.
6. SOFTWARE LICENSE AGREEMENTS
Licensee agrees to be bound by the terms and conditions of the software
license agreements accompanying any LonBuilder Developer's Workbench
and software updates thereto purchased by Licensee.
7. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL,
CONSEQUENTIAL, INDIRECT, PUNITIVE OR INCIDENTAL DAMAGES, HOWEVER CAUSED
ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR
THE DEVELOPMENT OR DISTRIBUTION BY LICENSEE OF APPLICATIONS OR SYSTEMS
USING THE LonTalk PROTOCOL, Neuron Chips, INTERFACE OR Neuron Chip
FIRMWARE.
8. RELATED COMPANIES
A parent corporation of Licensee that owns more than fifty percent
(50%) of the voting stock or other equity interests in Licensee, and
subsidiaries and affiliates of Licensee or such parent in that Licensee
or such parent own more than fifty percent (50%) of the voting stock or
other equity interests, shall be entitled to the rights of Licensee
under this Agreement: provided that Licensee and each parent,
subsidiary or affiliate desiring such rights shall first agree in
writing to be bound by the terms of this Agreement or if they were a
party hereto.
9. MISCELLANEOUS
(a) Licensee shall comply with any United States export controls
governing export of any technical data or technology provided
by Echelon. If Licensee is other than a U.S. entity or is
located outside the U.S. Licensee, as a prior condition to
exercising its rights hereunder, shall execute any letter of
written assurances required for the export of technical data
or
<PAGE> 13
technology by Echelon and shall comply with such other
requirements of the U.S. Department of Commerce or other
applicable agency for the export of technical data or
technology by Echelon to Licensee.
(b) If Licensee is other than a U.S. entity or is located outside
of the U.S., Licensee represents that no consent or approval
of any governmental authority is required in connection with
the valid execution and performance of this Agreement.
(c) This Agreement will be governed by and construed in accordance
with the laws of the State of California, U.S.A., except that
body of California law concerning conflicts of law.
(d) Licensee shall not assign this Agreement or any of its rights
or duties hereunder except to a successor-in-interest without
the prior written consent of Echelon which shall not be
unreasonably withheld.
(e) Use, duplication or disclosure by the U.S. Government is
subject to restrictions as set forth in subdivision (c)(i)(ii)
of the Rights in Technical Data and Computer Software clause
at DFARS 252.227-7013.
(f) Licensee agrees that Echelon may disclose its name, address
and Agreement number to vendors of NEURON CHIPS or LonWorks
Applications for the purpose of verifying Licensee's status as
an Echelon licensee.
(g) This Agreement constitutes the entire agreement between
the parties, and supersedes any prior agreements, with
respect to the subject matter hereof. No amendment to
any term of the Agreement shall be valid unless
mutually agreed to in writing by the parties. The
failure of either party to enforce any provision of
this Agreement shall not constitute a waiver of such
provision.
ECHELON CORPORATION: LICENSEE:DGS, Inc.
Signature: /s/ Oliver R. Stanfield Signature: T. Haas for DGS
Print Name: Oliver R. Stanfield Print Name: Tom Haas
Title: Vice President & CEO Title: CEO
Effective Date:11-30-93 Date Signed: Nov. 29, 1993
Address: 4015 Miranda Avenue Address: 4601 Gateway Circle
Palo Alto, CA 94304 Dayton, OH
(800) 258-4LON Phone: 513-439-0036
LonBuilder S/N:
<PAGE> 14
Exhibit C
LonWorks(TM)
OEM LICENSE AGREEMENT
This Agreement is entered into between ECHELON CORPORATION
("Echelon") and _____________________________("Licensee") upon
the following terms and conditions:
1. DEFINITIONS
(a) "LonTalk(TM) Protocol" means Echelon's protocol for
control networks.
(b) "NEURON(R) Chips" means semiconductor devices designed or used
to implement all or part of the LonTalk Protocol that are
manufactured by Echelon or by a supplier licensed by Echelon
to manufacture or distribute such devices.
(c) "LONWORKS Applications" means equipment that incorporates
NEURON CHIPS and the LONTALK Protocol. LONWORKS Applications
shall exclude development systems for developing applications
that use the LONTALK Protocol.
(d) "Echelon Intellectual Property" means (i) U.S. Patent
No, 4,918,690., U.S. Patent No. 4,941,143, U.S. Patent
No. 4,955,018, U.S. Patent No. 4,969,147 and foreign
patents based upon such U.S. patents and claiming the
same inventions, and (ii) Echelon copyrights governing
the LONTALK Protocol.
(e) "NEURON CHIP Firmware" means only the Echelon software
identified in the LONBUILDER(TM) documentation and/or start up
screen as "NEURON CHIP Firmware", which, among other things,
implements the LONTALK Protocol.
(f) "Interface" means Echelon's proprietary interface
between the NEURON CHIP and a transceiver as claimed in
U.S. Patent No. 5,182,746, commonly known as the
'special purpose mode interface'.
2. LICENSE
(a) Echelon grants Licensee a nonexclusive license, under
Echelon Intellectual Property, to make, use and sell
LONWORKS Applications, Licensee agrees that whenever a
NEURON CHIP is executing instructions, the NEURON CHIP
Firmware shall be loaded into it starting at address
location 0 (zero). Licensee's rights to use the
LONTALK Protocol and NEURON CHIPS shall not extend to
use of the LONTALK Protocol in devices that duplicate
the functions of all or part of the NEURON CHIPS, or to
use the NEURON CHIPS with any communications protocol
other than the LONTALK Protocol. The foregoing
limitations shall apply to all NEURON CHIPS used by
Licensee, including NEURON CHIPS contained in products
or equipment purchased by Licensee.
(b) In the event that Licensee manufactures LONWORKS
Applications in an incomplete form without the LONTALK
Protocol. Licensee may sell or otherwise distribute
such LONWORKS Applications only to customers who have
<PAGE> 15
entered into a LONWORKS Development License Agreement or
LONWORKS OEM License Agreement with Echelon or its
subsidiaries that has an agreement number preceded by the
letter "E" or a subsequent letter of the alphabet. Licensee
shall maintain records of the names, addresses and Echelon
License Agreement numbers of its customers for such LONWORKS
Applications and shall, within fifteen (15) days after the end
of each calendar quarter, provide Echelon with a report
listing all of such customers for the previous calendar
quarter. If Echelon notifies Licensee that any customer listed
in such report is not an Echelon licensee, then Licensee shall
promptly discontinue selling such LONWORKS Applications to
such customer.
(c) Echelon hereby grants Licensee a nonexclusive license
under U.S. Patent No. 5,182.746 and any foreign patents
based thereon claiming the same inventions, to make,
use and sell transceivers (only as part of LONWORKS
Applications) that incorporate the Interface. Unless
otherwise approved in writing by Echelon, such
transceivers must be of Licensee's own proprietary
design and LONWORKS Applications containing such
transceivers must include Licensee's proprietary
software that will perform the end use functions, in
addition to network connection, for which the
particular LONWORKS Application was designed.
(d) Echelon grants Licensee a nonexclusive license to
reproduce and distribute the NEURON CHIP Firmware
without modification for use only with NEURON CHIPS:
provided that NEURON CHIP Firmware is programmed into
either: (i) the memory of a NEURON CHIP, or (ii) a
memory device attached to the memory bus of a NEURON
CHIP. At the request of Licensee. Echelon will
deliver to Licensee one (1) copy of the NEURON CHIP
Firmware if Licensee has not already received such a
copy from Echelon.
(e) Echelon grants Licensee the additional right to have
made LONWORKS Applications that do not incorporate the
Interface, subject to the following limitations:
(i) title to the NEURON CHIP and any memory device that
contains the LONTALK Protocol or NEURON CHIP Firmware
must be at all times with Licensee and Licensee shall
not provide to its manufacturer the LONTALK Protocol or
NEURON CHIP Firmware unless the LONTALK Protocol or
NEURON CHIP Firmware has already been incorporated into
the NEURON CHIP or memory device and (ii) Licensee's
manufacturer must acknowledge in writing to Licensee
that it has read and understands the limitations of
this Agreement and will not knowingly manufacture items
that are in violation of the provisions of this
Agreement. Licensee shall have no right to have made
transceivers, or components thereof, that incorporate
the Interface.
(f) No license is granted, express or implied, under any
patents, trade secrets, know-how or other intellectual
<PAGE> 16
property of Echelon covering specific applications or
implementations of the LONTALK Protocol, LONWORKS
Applications, Interface or NEURON CHIPS. In addition, Licensee
shall have no right to use Echelon's trademarks, trade names
or logos without the prior written consent of Echelon.
Licensee shall have no right under Echelon Intellectual
Property to modify the LONTALK Protocol.
3. LICENSE FEE
Upon execution of this Agreement, Licensee shall pay Echelon the
non-refundable amount of Two Thousand Five Hundred U.S. Dollars (U.S.
$2,500), unless this Agreement replaces a prior version of the OEM
License Agreement for which Licensee has already paid such amount to
Echelon.
4. USE OF NEURON CHIPS
LICENSEE ASSUMES RESPONSIBILITY FOR, AND HEREBY AGREES TO USE ITS BEST
EFFORTS IN, DESIGNING AND MANUFACTURING EQUIPMENT LICENSED HEREUNDER TO
PROVIDE FOR SAFE OPERATION THEREOF, INCLUDING, BUT NOT LIMITED TO,
COMPLIANCE OR QUALIFICATION WITH RESPECT TO ALL SAFETY LAWS,
REGULATIONS OR AGENCY APPROVALS, AS APPLICABLE. THE NEURON CHIP,
LONTALK PROTOCOL, INTERFACE AND NEURON CHIP FIRMWARE ARE NOT DESIGNED,
INTENDED OR AUTHORIZED FOR USE AS COMPONENTS IN EQUIPMENT INTENDED FOR
SURGICAL IMPLANT INTO THE BODY, OR OTHER APPLICATIONS INTENDED TO
SUPPORT OR SUSTAIN LIFE, OR FOR ANY OTHER APPLICATION IN WHICH THE
FAILURE OF THE NEURON CHIP, LONTALK PROTOCOL, INTERFACE AND NEURON CHIP
FIRMWARE COULD CREATE A SITUATION IN WHICH PERSONAL INJURY OR DEATH MAY
OCCUR.
5. INDEMNITY AND WARRANTY DISCLAIMER
(a) Echelon shall indemnify Licensee for any liabilities,
damages and costs payable by Licensee to a third party
in an action for infringement of any third party United
States patent by the LONTALK Protocol and for
reasonable attorney's fees relating thereto. The
foregoing shall be subject to the Licensee notifying
Echelon promptly in writing of and giving Echelon the
exclusive authority to defend or settle any such claim
or proceeding. If the use of the LONTALK Protocol is
enjoined or is the subject of any actual or potential
patent infringement action, Echelon may, at its option,
procure for Licensee the right to continue to use the
LONTALK Protocol or replace or modify the LONTALK
Protocol so that it becomes noninfringing.
Notwithstanding the foregoing, Echelon assumes no
liability for any claims attributable to Licensee's
specific applications for the LONTALK Protocol or
attributable to the use of the LONTALK Protocol in
combination with equipment or technology not provided
by Echelon if the claim would not have occurred but for
such specific application or combination. In addition,
<PAGE> 17
in no event shall Echelon's liability to Licensee under this
paragraph exceed the fee paid by Licensee to Echelon under
this Agreement. THE FOREGOING STATES THE ENTIRE LIABILITY OF
ECHELON WITH RESPECT TO INFRINGEMENT OF ANY PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHT BY THE LONTALK PROTOCOL, LONWORKS
APPLICATIONS, NEURON CHIPS. ECHELON INTELLECTUAL PROPERTY,
INTERFACE OR NEURON CHIP FIRMWARE.
(b) EXCEPT FOR THE REMEDIES AVAILABLE UNDER PARAGRAPH 5(a),
ECHELON DISCLAIMS ALL WARRANTIES AND CONDITIONS,
EXPRESS, IMPLIED OR STATUTORY, RESPECTING THE LONTALK
PROTOCOL, LONWORKS APPLICATIONS, NEURON CHIPS, ECHELON
INTELLECTUAL PROPERTY, INTERFACE OR NEURON CHIP
FIRMWARE, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
6. TERM AND TERMINATION
(a) The term of this Agreement shall be ten (10) years from the
date of execution unless terminated earlier as provided below.
Licensee may renew this Agreement for an additional ten (10)
year period upon written notice delivered to Echelon within
the last six (6) months of the initial term.
(b) In addition, the non-breaching party may terminate this
Agreement upon a breach by the other party if such breach
remains uncured thirty (30) days after delivery by the
non-breaching party of written notice of the breach. The
provisions of paragraphs 4, 5, 7.8 and 10 shall survive any
termination of this Agreement. All other provisions shall
terminate.
7. SOFTWARE LICENSE AGREEMENTS
Licensee agrees to be bound by the terms and conditions of the software
license agreements accompanying any LONBUILDER Developer's Workbench
and software updates thereto purchased by Licensee.
8. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL,
CONSEQUENTIAL, INDIRECT, PUNITIVE OR INCIDENTAL DAMAGES, HOWEVER CAUSED
ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR
THE DEVELOPMENT OR DISTRIBUTION BY LICENSEE OF APPLICATIONS OR SYSTEMS
USING THE LONTALK PROTOCOL, NEURON CHIPS, INTERFACE OR NEURON CHIP
FIRMWARE.
9. RELATED COMPANIES
A parent corporation of Licensee that owns more than fifty percent
(50%) of the voting stock or other equity interests in Licensee, and
subsidiaries and affiliates of Licensee or such parent in that Licensee
or such parent own more than fifty percent (50%) of the voting stock or
other equity interests, shall be entitled to the rights of Licensee
under this Agreement; provided, that Licensee and each parent,
<PAGE> 18
subsidiary or affiliate desiring such rights shall first agree in
writing to be bound by the terms of this Agreement as if they were a
party hereto.
10. MISCELLANEOUS
(a) Licensee shall comply with any United States export
controls governing export of any technical data or
technology provided by Echelon. If Licensee is other
than a U.S. entity or is located outside the U.S.,
Licensee, as a prior condition to exercising its rights
hereunder, shall execute any letter of written
assurances required for the export of technical data or
technology by Echelon and shall comply with such other
requirements of the U.S. Department of Commerce or
other applicable agency for the export of technical
data or technology by Echelon to Licensee.
(b) If Licensee is other than a U.S. entity or is located outside
of the U.S., Licensee represents that no consent or approval
of any governmental authority is required in connection with
the valid execution and performance of this Agreement.
(c) This Agreement will be governed by and construed in accordance
with the laws of the State of California, U.S.A., except that
body of California law concerning conflicts of law.
(d) Licensee shall not assign this Agreement or any of its rights
or duties hereunder except to a successor-in-interest without
the prior written consent of Echelon which shall not be
unreasonably withheld.
(e) Use, duplication or disclosure by the U.S. Government is
subject to restrictions as set forth in subdivision (c)(i)(ii)
of the Rights in Technical Data and Computer Software clause
at DFARS 252.227-7013.
(f) Licensee agrees that Echelon may disclose its name, address
and Agreement number to vendors of NEURON CHIPS or LONWORKS
Applications for the purpose of verifying Licensee's status as
an Echelon licensee.
(g) This Agreement constitutes the entire agreement between
the parties, and supersedes any prior agreements, with
respect to the subject matter hereof. No amendment to
any term of the Agreement shall be valid unless
mutually agreed to in writing by the parties. The
failure of either party to enforce any provision of
this Agreement shall not constitute a waiver of such
provision.
ECHELON CORPORATION: LICENSEE:
Signature:____________________ Signature:____________________
Print Name:___________________ Print Name:___________________
Title:________________________ Title:________________________
Effective Date:_______________ Date Signed: _________________
Address: 4015 Miranda Avenue Address:______________________
Palo, Alto, CA 94304 ______________________________
(800) 258-4LON Phone:________________________
LonBuilder S/N:_______________
<PAGE> 1
Exhibit 10.4
MASTER LEASE AGREEMENT
ECHELON
CREDIT CORPORATION No. 5063
This Master Lease Agreement (the "MLA") is entered into by and between
Echelon Credit Corporation ("Lessor"), having its principal place of business at
4015 Miranda Avenue, Palo Alto, California 94304, and DGS, Inc. ("Lessee"),
having its principal place of business at 4601 Gateway Circle, Dayton, OH 45440.
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees
to lease from Lessor, the equipment (the "Equipment") referenced in each of the
schedules (the "Schedule" or "Schedules") which incorporate this MLA therein
(the "Lease").
2. TERM. Each Lease shall be effective upon the execution of the MLA
and the related Schedule by the Lessor and the Lessee, The lease term (the
"Lease Term") of the Equipment referenced in each of the Schedules shall
commence on the rent commencement date specified in each Schedule (the "Rent
Commencement Date"). The Rent Commencement Date shall be the date upon which the
Equipment is delivered and determined to be ready for use at Lessee's location
as referenced in a certificate pursuant to which Lessee unconditionally accepts
the Equipment subject to such Lease (the "Certificate of Acceptance"). Lessor
shall not he obligated, or bound by, any Lease until Lessee has provided to
Lessor a "Certificate of Acceptance" and has received the advance Rent
payment(s) required by such Lease, Lessee agrees to use its best efforts to
pursue all acceptance procedures set forth in the Agreement.
3. RENT. The rent (the "Rent") for the Equipment referenced in any
Schedule shall be as stated in such Schedule and shall be payable according to
the provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
Overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AND ASSIGNMENT. Lessee will select the type, quantity and
Supplier of each item of Equipment designated in a Schedule, and Lessee hereby
assigns to Lessor all of its right, title and interest in and to the related
equipment sales agreement, a copy of which has been provided to Lessor by Lessee
(the "Agreement"). The Agreement may be amended with the consent of Lessor. Any
such assignment with respect to Equipment shall become binding upon Lessor when
Lessor and Lessee have entered into a Lease with respect to such Equipment and
Lessor has received a related Certificate of Acceptance. Upon such an assignment
becoming effective, Lessor shall be obligated to purchase the Equipment from the
Supplier in accordance with the
<PAGE> 2
provisions of the Agreement. It is expressly agreed that Lessee shall at all
times remain liable to Supplier under the Agreement to perform all the duties
and obligations of Lessee thereunder, except for the obligation to purchase the
Equipment to the extent expressly assumed by the Lessor hereunder, and that the
Lessee shall be entitled to the same rights of the purchaser of the Equipment
under the Agreement, except such right, title and interest in the Equipment
retained exclusively by the Lessor as owner of the Equipment. Lessor shall have
no liability for a Supplier's failure to meet the terms and conditions of the
Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment
of all transportation, packing, installation, testing and other charges
associated with the delivery, installation or use of any Equipment which are not
included in the Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY,
OR ITS FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR
ANY OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES ARISING FROM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON
STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to
each item of Equipment. Lessee, at its expense, shall protect Lessor's title and
keep the Equipment free from all claims, liens, encumbrances and legal
processes. The Equipment is personal property and is not to be regarded as part
of the real estate on which it may be situated. If requested by Lessor, Lessee
will, at Lessee's expense, furnish a landlord or mortgagee waiver with respect
to the Equipment. The Equipment shall not be removed from the location specified
in the Schedule without the written consent of Lessor. Lessee shall, upon
Lessor's request, affix and maintain plates, tags or other identifying labels.
showing Lessor's ownership of the Equipment in a prominent position on the
Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment
by Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall have
the right to inspect the Equipment at the premises where the Equipment is
located. Lessee shall notify Lessor promptly of any claims, liens, encumbrances
or legal processes with respect to the Equipment.
<PAGE> 3
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall not
be deemed evidence of any intent to create a security interest under the Uniform
Commercial Code update program applicable to the Equipment then available from
the Supplier.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain
each item of Equipment in good condition, normal wear and tear excepted and
shall, at all times during the Lease Term, subscribe to the software update
program applicable to the Equipment then available from the Supplier. Lessee
shall not make any addition, alteration, or attachment to the Equipment without
Lessor's prior written consent. Lessee shall make no repair, addition,
alteration or attachment to the Equipment which interferes with the normal
operation or maintenance thereof, creates a safety hazard, or might result in
the creation of a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to
perform any of its obligations under a Lease, Lessor may perform any act or make
any payment which Lessor deems necessary for the maintenance and preservation of
the Equipment subject thereto and Lessor's title thereto. All sums so paid by
Lessor (together with all related Overdue Charges), and reasonable attorneys'
fees incurred by Lessor in connection therewith, shall be additional rent
payable to Lessor on demand. The performance of any such act or the making of
any such payment by Lessor shall not be deemed a waiver or release of any
obligation or default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross negligence or willful misconduct of Lessor. Such indemnities and
assumptions of liabilities and obligations shall continue in full force and
effect, notwithstanding the expiration or other termination of such Lease.
Nothing contained in any Lease shall authorize Lessee to operate the Equipment
subject thereto so as
<PAGE> 4
to incur or impose any liability on, or obligation for or on behalf of, Lessor.
13. NO OFF-SET. All Rent shall be paid by Lessee irrespective of any
off-set, counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, the manufacturer or Supplier of the Equipment or any other
party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without lessor's prior
written consent, (a) sell, assign, transfer, pledge, hypothecate, or otherwise
dispose of, encumber or suffer to exist a lien upon or against, any of the
Equipment or any Lease or any interest therein, by operation of law or
otherwise, or (b) sublease or lend any of the Equipment or permit any of the
Equipment to be used by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its
interest in any of the Equipment and any Lease. Upon Lessor's written request,
Lessee shall pay directly to the assignee of any such interest all Rent and
other sums due under an assigned Lease. THE RIGHTS OF ANY SUCH ASSIGNEE SHALL
NOT BE SUBJECT TO ANY ABATEMENT, DEDUCTION, OFF-SET, COUNTERCLAIM, RECOUPMENT,
DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE AGAINST LESSOR OR ANY OTHER PERSON
OR ENTITY. Notwithstanding the foregoing, any such assignment (a) shall be
subject to Lessee's right to possess and use the Equipment subject to a Lease so
long as Lessee is not in default thereunder, and (b) shall not release any of
Lessor's obligations hereunder.
16. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if
any, to renew a lease or purchase the Equipment subject thereto, upon expiration
of the then current Lease Term of such Lease, Lessee shall, at its expense,
cause such Equipment to be removed, disassembled, and placed in the same
condition as when delivered to Lessee (reasonable wear and tear excepted) and
properly crate such Equipment for shipment and deliver it to a common carrier
designated by Lessor. Lessee will ship such Equipment, F.O.B. destination, to
any address specified in writing by Lessor within the continental United States.
All additions, attachments, alterations and repairs made or placed upon any of
the Equipment shall become part of such Equipment and shall be the property of
Lessor.
<PAGE> 5
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be
deemed to constitute an Event of Default hereunder: (a) Lessee fails to pay
Rent, any other amount it is obligated to pay under a Lease or any other amount
it is obligated to pay to Lessor and does not cure such failure within 10 days
of such amount becoming due; (b) Lessee fails to perform or observe any
obligation or covenant to be performed or observed by Lessee hereunder or under
any Schedule, including, without limitation, supplying all requested
documentation, and does not cure such failure within 10 days of receiving
written notice thereof from Lessor; (c) any warranty, representation or
statement made or furnished to Lessor by or on behalf of Lessee is proven to
have been false in any material respect when made or furnished; (d) the
attempted sale or encumbrance by Lessee of the Equipment, or the making of any
levy, seizure or attachment thereof or thereon; or (e) the dissolution,
termination of existence, discontinuance of business, insolvency, or appointment
of a receiver of any part of the property of Lessee, assignment by Lessee for
the benefit of its creditors, the commencement of proceedings under any
bankruptcy, reorganization or arrangement laws by or against Lessee, or any
other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after the occurrence of any Event
of Default, Lessor may exercise one or more of the following remedies: (a)
Lessor may terminate any or all of the Leases with respect to any or all items
of Equipment subject thereto; (b) Lessor may recover from Lessee all Rent and
other amounts then due and to become due under any or all of the Leases; (c)
Lessor may take possession of any or all items of Equipment, wherever the same
may be located, without demand or notice, without any court order or other
process of law and without liability to Lessee for any damages occasioned by
such taking of possession, and any such taking of possession shall not
constitute a termination of any Lease; (d) Lessor may demand that Lessee return
any or all items of Equipment to Lessor in accordance with Paragraph 16; and (e)
Lessor may pursue any other remedy available at law or in equity, including,
without limitation, seeking damages, specific performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall
sell, lease or otherwise dispose of such item in a commercially reasonable
manner, with or without notice and on public or private bid, and apply the net
proceeds thereof (after deducting the estimated fair market value of such item
at the expiration of the term of the applicable Lease, in the case of sale, or
the rents due for any period beyond the scheduled expiration of such Lease, in
the case of any subsequent lease of such item, and all expenses, including,
without limitation, reasonable attorneys' fees, incurred in connection
therewith) towards the Rent and other amounts due under such Lease, with any
excess net proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not
exclusive, and in addition to any other remedy referred to herein or otherwise
available to Lessor in law or in equity.
<PAGE> 6
Any repossession or subsequent sale or lease by Lessor of any item of Equipment
shall not bar an action for a deficiency as herein provided, and the bringing of
an action or the entry of judgment against Lessee shall not bar Lessor's right
to repossess any or all items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of
each of Lessee's fiscal years, Lessee shall deliver to Lessor a copy of Lessee's
annual report, if any, and an audited balance sheet and profit and loss
statement with respect to such year. If audited financial statements of Lessee
for such year are not prepared, Lessee may provide financial statements
certified by an officer of Lessee. At Lessor's request, Lessee shall deliver to
Lessor a balance sheet and profit and loss statement for any of its fiscal
quarters, certified by an officer of Lessee.
20. INSURANCE. Lessee shall obtain and maintain for the entire Lease
Term of each Lease (and any renewal or extension thereof), at its own expense,
property damage and personal liability insurance and insurance against loss or
damage to the Equipment, including, without limitation, loss by fire (with
extended coverage), theft and such other risks of loss as are customarily
insured against with respect to the types of Equipment leased hereunder and by
the types of businesses in which such Equipment will be used by Lessee. Such
insurance shall be in such amounts, with such deductibles, in such form and with
such insurers as shall be satisfactory to Lessor; provided, however, that the
amount of the insurance against loss or damage to the Equipment shall not be
less than the greater of the replacement value of the Equipment, from time to
time, or the original purchase price of the Equipment. Each insurance policy
shall name Lessee as an insured and Lessor as an additional insured or loss
payee, and shall contain a clause requiring the insurer to give Lessor at least
30 days prior written notice of any alteration in the terms of such policy or of
the cancellation thereof. Lessee shall furnish to Lessor a certificate of
insurance or other evidence satisfactory to Lessor that such insurance coverage
is in effect; provided, however, that Lessor shall be under no duty either to
ascertain the existence of or to examine such insurance policy or to advise
Lessee in the event such insurance coverage shall not comply with the
requirements hereof. Lessee shall give Lessor prompt notice of any damage to, or
loss of, any of the Equipment, or any part thereof, or any personal injury or
property damage occasioned by the use of any of the Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due,
and, on a net after-tax basis, shall indemnify, protect and hold harmless Lessor
against all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from
<PAGE> 7
the payment of taxes it would otherwise be obligated to pay or reimburse to
Lessor as herein provided) and federal taxes on Lessor's net income. Lessee
shall, at its expense, file when due with the appropriate authorities any and
all tax and similar returns, and reports required to be filed with respect
thereto, for which it has indemnified Lessor hereunder or, if requested by
Lessor, notify Lessor of all such requirements and furnish Lessor with all
information required for Lessor to effect such filings. Any fees, taxes or other
charges paid by Lessor upon failure of Lessee to make such payments shall, at
Lessor's option, become immediately due from Lessee to Lessor and shall be
subject to the Overdue Charge from the date paid by Lessor until the date
reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid
by a court of competent jurisdiction, such invalidity shall not affect the other
provisions of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified mail, postage prepaid, return receipt
requested, addressed to the party to which it is being sent at its address set
forth herein or to such other address as such party may designate in writing to
the other party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule
constitute the entire agreement between Lessor and Lessee with respect to the
lease of the Equipment subject to such Schedule, and supersede all previous
communications, understandings, and agreements, whether oral or written, between
the parties with respect to such subject matter. No provision of any Lease may
be changed, waived, amended or terminated except by a written agreement,
specifying such change, waiver, amendment or termination, signed by both Lessee
and Lessor, except that Lessor may insert, on the appropriate schedule, the
serial number of Equipment, after delivery of such Equipment, and the
Installation Date for the Equipment, after receiving a Certificate of
Installation with respect thereto. No waiver by Lessor of any Event of Default
shall be construed as a waiver (of any future Event of Default or any other
Event of Default. At the expiration of the Lease Term with respect to a Lease,
upon notice given by Lessee at least ninety (90) days prior thereto, (a) such
Lease shall be renewed or the Equipment subject thereto shall be purchased under
the terms and conditions set forth herein for a term and rent amount or purchase
price, as the case may be, to be agreed upon, or (b) if no such agreement is
reached prior to the expiration of such Lease Term or such notice specifies that
Lessee intends to return the Equipment, then Lessee shall return the Equipment
to Lessor in the manner prescribed in Paragraph 16 of this MLA. In the absence
of Lessor's timely receipt of the notice contemplated by the preceding sentence,
the Lease shall be automatically extended, on a month-to-month basis, until
terminated (upon notice by either party given at least ninety (90) days prior to
the end of the month on which the termination
<PAGE> 8
is to be effective) or until renewed or the Equipment subject thereto is
purchased by agreement of the parties. Unless otherwise agreed, Lessee shall
continue to pay the Rent for each month following such Lease Term until the
Equipment subject to such Lease is returned pursuant to Paragraph 16 of this
MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in
accordance with the internal laws, but not the choice of laws provisions, of the
State of California. The titles of the sections of this MLA are for convenience
only and shall not define or limit any of the terms or provisions hereof. Time
is of the essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit
of, the permitted assigns, representatives and successors of the Lessor and
Lessee. If there is more than one Lessee named in this MLA, the liability of
each shall be joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per
month of any payment under a Lease which is past due, including, without
limitation, any amounts not included in any payment of Rent hereunder, or the
highest charge permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
Accepted by:
Echelon Credit Corporation LESSEE: DGS, Inc.
By:/s/ Oliver R. Stanfield By:/s/ Thomas Haas
Name: Oliver R. Stanfield Name: Tom Haas
Title: Vice President & CFO Title: CEO
Date: 11-30-93 Date: 11-29-93
<PAGE> 9
MLA #5063 LOCATION: DGS, Inc.
Schedule A
<TABLE>
<CAPTION>
==========================================================================================================
EXTENDED
QUANTITY MODEL# DESCRIPTION UNIT PRICE PRICE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 20000 Starter Kit $17,995.00 $17,995.00
- ----------------------------------------------------------------------------------------------------------
1 25400 LonBuilder Router $ 1,595.00 $ 1,595.00
- ----------------------------------------------------------------------------------------------------------
1 27400 TP Transceiver $ 495.00 $ 495.00
- ----------------------------------------------------------------------------------------------------------
1 28000 Multi-Function $ 295.00 $ 295.00
I/O Kit
- ----------------------------------------------------------------------------------------------------------
1 27810 Appl. Interface $ 195.00 $ 195.00
Kit
- ----------------------------------------------------------------------------------------------------------
1 1st Yr-LonSupport $ 3,750.00 $ 3,750.00
Premier
- ----------------------------------------------------------------------------------------------------------
1 101-1 Training Class $ 1,800.00 $ 1,800.00
==========
- ----------------------------------------------------------------------------------------------------------
TOTAL PRICE $26,125.00
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
FASTART PACKAGE BUNDLE PRICE: $21,125.00
- ----------------------------------------------------------------------------------------------------------
2 55010-00 TP/XF-78 TP Ctrl. $ 58.00 $ 116.00
Mod.
- ----------------------------------------------------------------------------------------------------------
1 73000-6 SLTA/2 Starter $ 396.00 $ 396.00
Kit
- ----------------------------------------------------------------------------------------------------------
1 LonSupport $ 2,250.00
Premier 2nd Yr (9
mos.)
- ----------------------------------------------------------------------------------------------------------
1 Premier - 3 Yr $ 3,000.00 $ 3,000.00
==========
- ----------------------------------------------------------------------------------------------------------
TOTAL FINANCE PRICE: $26,887.00
==========================================================================================================
</TABLE>
ACCEPTED BY:
ECHELON CORPORATION DGS, INC.
By: By:
------------------------------- -----------------------------
Title: Title:
---------------------------- --------------------------
Date: Date:
----------------------------- ---------------------------
<PAGE> 10
LEASE SCHEDULE NO. 1 TO MASTER LEASE AGREEMENT NO. 5063
ECHELON
CREDIT CORPORATION
This Schedule and its supplements incorporate by this
reference the terms and conditions of the Master Lease Agreement,
Number 5063, between ECHELON Credit Corporation (Lessor) and DGS,
Inc. (Lessee).
1. Supplier: Echelon Corporation
2. Location of Equipment: 4601 Gateway Circle, Dayton, OH
45440
3. Equipment value: $26,887.00 (exclusive of sales and/or use
taxes)
4. Lease Term: The Lease Term of the Equipment described in
this Schedule shall begin on the Rent Commencement Date
referenced below in Paragraph 6 and its expiration date
shall be 36 months after such Rent Commencement Date.
5. Rent: $759.00 per month (exclusive of sales and/or use
taxes) due and payable at the Rent Commencement Date and on
the same date of each succeeding month of the Lease Term.
The advance Rent payment shall be $1,518.00. This amount
includes $759.00 for the first month, and $759.00 for the
last 1 month, of the Lease Term.
6. Rent Commencement Date: ___________________, 19__
7. Purchase Option:
Lessee shall have the option to purchase the Equipment for its fair
market value for continued use ("FMV"), on the expiration of this Lease
or any renewal term, provided Lessee is not in default of any of its
obligations under this Lease on such expiration date. This purchase
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. The purchase price for such Equipment
shall be payable upon the expiration date of such term. FMV shall be
equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement
costs for the Equipment. In the event that the Lessor and Lessee are
unable to agree upon the purchase price for the Equipment, such
purchase price will be determined by an independent appraiser to be
selected by Lessor. Lessee shall be responsible for all applicable
sales and/or use taxes on the Equipment. Upon exercise of this purchase
option and payment of the purchase price,
<PAGE> 11
Lessor shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. Renewal Option:
Lessee shall have the option to renew this Lease, on the expiration
date of this Lease or any renewal term, for the fair market rental for
the continued use of the Equipment ("FMR") and on such other terms as
may be agreed upon by Lessor and Lessee prior to such expiration date,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This renewal option may only be
exercised by Lessee's written notice to Lessor not earlier than 180
days, nor later than 90 days, prior to the end of the Lease Term or any
renewal term. FMR shall be equal to the value of the monthly rental of
the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment, for
the renewal term.
9. Tax Benefits:
Lessee understands that Lessor intends to claim the "Tax Benefits",
consisting of the maximum Modified Accelerated Cost Recovery System
deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased
to, a tax-exempt entity or government agency; and (ii) Lessee is not
now, and during the term of this Lease will not become, a public
utility. Without limitation by the preceding sentence, Lessee agrees
not to take any action, fail to take any action, or misstate any fact
which may result in any loss to Lessor of the Tax Benefits. Lessee
agrees to pay promptly to Lessor an amount which will fully compensate
Lessor, on an after-tax basis, for any loss of the Tax Benefits, plus
interest, penalties and additions to tax, any loss in time value of the
Tax Benefits, and any taxes imposed on any such compensation payment,
resulting from Lessee's acts, omissions or misstatements, including,
without limitation, with respect to the representations and warranties
in the preceding paragraph. A loss of Tax Benefits occurs at the
earliest of: (i) the happening of any event causing the loss; (ii)
payment by Lessor of any additional tax resulting from the loss; or
(iii) any adjustment to the tax return of Lessor, Lessor's right to
recovery of a loss of Tax Benefits shall survive the expiration or
termination of this Lease.
10. Description of Equipment:
See Schedule A which is attached hereto and made a part hereof by this
reference.
<PAGE> 12
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule.
Accepted by:
ECHELON Credit Corporation LESSEE: DGS, Inc.
By:/s/ Oliver R. Stanfield By:/s/ Thomas C.Haas
------------------------------- -----------------------------
Name: Oliver R. Stanfield Name: Thomas C. Haas
---------------------------- --------------------------
Title: Vice President & CFO Title: CEO
--------------------------- --------------------------
Date: 11-30-93 Date: 11-29-93
---------------------------- --------------------------
<PAGE> 13
LEASE SCHEDULE NO. 2 TO MASTER LEASE AGREEMENT NO. 5063
ECHELON
CREDIT CORPORATION
This Schedule and its supplements incorporate by this reference the
terms and conditions of the Master Lease Agreement, Number 5063, between ECHELON
Credit Corporation (Lessor) and DGS, Inc. (Lessee).
1. Supplier: Echelon Corporation
2. Location of Equipment: 4601 Gateway Circle, Dayton, OH
45440
3. Equipment value: $3,150.00 (exclusive of sales and/or use
Taxes)
4. Lease Term: The Lease Term of the Equipment described in
this Schedule shall begin on the Rent Commencement Date
referenced below in Paragraph 6 and its expiration date
shall be 34 months after such Rent Commencement Date.
5. Rent: $97.00 per month (exclusive of sales and/or use
taxes) due and payable at the Rent Commencement Date and on
the same date of each succeeding month of the Lease Term.
The advance Rent payment shall be $194.00. This amount
includes $97.00 for the first month, and $97.00 for the last
1 month(s), of the Lease Term.
6. Rent Commencement Date: April 1, 1994
7. Purchase Option:
Lessee shall have the option to purchase the Equipment for its fair
market value for continued use ("FMV"), on the expiration of this Lease
or any renewal term, provided Lessee is not in default of any of its
obligations under this Lease on such expiration date. This purchase
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. The purchase price for such Equipment
shall be payable upon the expiration date of such term. FMV shall be
equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement
costs for the Equipment. In the event that the Lessor and Lessee are
unable to agree upon the purchase price for the Equipment, such
purchase price will be determined by an independent appraiser to be
selected by Lessor. Lessee shall be responsible for all applicable
sales and/or use taxes on the Equipment. Upon exercise of
<PAGE> 14
this purchase option and payment of the purchase price, Lessor shall
execute and deliver to Lessee such documents as Lessee may reasonably
request in order to vest in Lessee all right, title and interest in the
Equipment.
8. Renewal Option:
Lessee shall have the option to renew this Lease, on the expiration
date of this Lease or any renewal term, for the fair market rental for
the continued use of the Equipment ("FMR") and on such other terms as
may be agreed upon by Lessor and Lessee prior to such expiration date,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This renewal option may only be
exercised by Lessee's written notice to Lessor not earlier than 180
days, nor later than 90 days, prior to the end of the Lease Term or any
renewal term. FMR shall be equal to the value of the monthly rental of
the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment, for
the renewal term.
9. Tax Benefits:
Lessee understands that Lessor intends to claim the "Tax Benefits",
consisting of the maximum Modified Accelerated Cost Recovery System
deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased
to, a tax-exempt entity or government agency; and (ii) Lessee is not
now, and during the term of this Lease will not become, a public
utility. Without limitation by the preceding sentence, Lessee agrees
not to take any action, fail to take any action, or misstate any fact
which may result in any loss to Lessor of the Tax Benefits. Lessee
agrees to pay promptly to Lessor an amount which will fully compensate
Lessor, on an after-tax basis, for any loss of the Tax Benefits, plus
interest, penalties and additions to tax, any loss in time value of the
Tax Benefits, and any taxes imposed on any such compensation payment,
resulting from Lessee's acts, omissions or misstatements, including,
without limitation, with respect to the representations and warranties
in the preceding paragraph. A loss of Tax Benefits occurs at the
earliest of: (i) the happening of any event causing the loss; (ii)
payment by Lessor of any additional tax resulting from the loss; or
(iii) any adjustment to the tax return of Lessor. Lessor's right to
recovery of a loss of Tax Benefits shall survive the expiration or
termination of this Lease.
<PAGE> 15
10. Description of Equipment:
See Schedule A which is attached hereto and made a part hereof by this
reference.
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule.
Accepted by:
ECHELON Credit Corporation LESSEE: DGS, Inc.
By:/s/ Oliver R. Stanfield By:/s/ Thomas C. Haas
------------------------------- --------------------------------
Name: Oliver R. Stanfield Name: Thomas C. Haas
---------------------------- -----------------------------
Title: Vice President & CFO Title: CEO
--------------------------- ----------------------------
Date: 3-30-94 Date: 3-15-94
---------------------------- -----------------------------
<PAGE> 16
SCHEDULE A
DGS, Inc. MLA #5063-2
4601 Gateway Circle
Dayton, OH 45440
(1) LonManager API/Lite for Windows Premier
TOTAL COST $3,150.00
<PAGE> 17
ECHELON
LonSupport Agreement #LS10391 (to be assigned by Echelon)
This Agreement is entered into between Echelon Corporation ("Echelon") and DGS,
Inc. ("Customer") on the following terms and conditions:
DEFINITIONS
1.1 "Product(s)" means the then current release of any Echelon software
product ("Software Products") currently licensed to Customer by Echelon or any
hardware product ("Hardware Product") owned by Customer, provided, that any such
product(s) is listed on Exhibit A.
1.2 "Effective Date" means the earlier of the date that the initial
payment is received by Echelon or the date Echelon receives an initial purchase
order hereunder, provided, however, that if the Product for which service is
being purchased is under Echelon's limited warranty and either payment or a
purchase order is received by Echelon, then the Effective Date shall be the day
after expiration of such limited warranty.
1.3 "Hardware Exchange" means the replacement of Customer's defective
Hardware Product by Echelon at no additional charge subject to the procedure set
forth in Section 2.6.
1.4 "Software Update" means any subsequent release of a Software
Product provided by Echelon to Customer at no additional charge as replacement
software, which updates shall be subject to the terms of the license agreement
between Echelon and Customer with respect to such Software Product. Echelon
shall determine the content of a Software Update or the eligibility of a new
release of a Software Product as a Software Update in its sole discretion.
1.5 "Technical Support" means responses made by Echelon to Customer's
inquiries with respect to a Product when such inquiries are submitted in English
via either telephone, facsimile, or an electronic mail service, subject to the
service levels and hours of operation set forth on Exhibit A.
1.6 "LonSupport Premier Service" means that combination of Hardware
Exchange, Software Updates and Technical Support set forth on Exhibit A and
identified with a support model number ("Model Number") provided to Customer by
Echelon for the period commencing on the Effective Date and ending on the last
day of the same month one (1) year hence, or with respect to a renewal
hereunder, the applicable anniversary of such last day.
1.7 "Software Update Service" means provision of Software Updates as
set forth on Exhibit A and identified with a Model Number to Customer by Echelon
for the period commencing on the Effective Date and ending on the last day of
the same month one
<PAGE> 18
(1) year hence, or with respect to a renewal hereunder, the applicable
anniversary of such last day.
1.8 "Site" means Customer's facility where the Products are located,
including contiguous buildings, within a radius of one kilometer. Echelon shall
make the final determination of what constitutes a Site.
ORDERS AND ACCEPTANCE
2.1 Echelon shall provide Customer with Exhibit A, "LonSupport
Services", and any modifications thereto made by Echelon from time to time.
2.2 Customer may order LonSupport Premier Service(s) or Software Update
Service(s) for Customer's Product(s) by executing this Agreement (which
incorporates the then current version of Exhibit A) and providing Echelon with
Customer's purchase order that set forth at a minimum: (i) the Model Number;
(ii) the list price for such service; and (iii) any discounts to which Customer
is entitled under Exhibit A. On or before each anniversary of the Effective
Date, Customer may order an extension of the period of service for an additional
twelve (12) month period by issuing a new purchase order as provided in the
previous sentence.
2.3 Customer must purchase either LonSupport Premier Service(s) or
Software Update Service(s), as applicable, under this Agreement for all copies,
versions, or units of a specific Product at a single Site if such service is
purchased for any of them. However, some discounts for such copies, versions, or
units are available as described in Exhibit A.
2.4 Customer may order LonSupport Premier Service(s) or Software Update
Service(s) for additional Product(s) by issuing a new or amended purchase order
(incorporating this Agreement and the then current version of Exhibit A) that
sets forth at a minimum: (i) the Model Number; (ii) the list price for such
service; and (iii) any discounts to which Customer is entitled under Exhibit A.
The term of coverage for additional Product(s) added to this Agreement shall be
coterminous with the term of the Agreement. Any fees or charges for the
additional Products shall be prorated to reflect the reduced initial term of the
additional Products.
2.5 Echelon's issuance of an invoice to Customer shall constitute
Echelon's acceptance of Customer's purchase order and Echelon's agreement to
provide the ordered services as such services are further defined on the then
current version of Exhibit A. Otherwise, Echelon shall notify Customer within
fifteen (15) business days of receipt of Customer's purchase order that Echelon
declines to provide such services for Customer.
2.6 To initiate a Hardware Exchange for a defective Hardware
Product(s), Customer shall request delivery of a
<PAGE> 19
replacement Hardware Product(s) and a Return Material Authorization (RMA) number
from Echelon's Customer Support staff. Echelon shall ship replacement Hardware
Product(s), freight prepaid, to Customer, and Customer shall return to Echelon
the defective Hardware Product(s) within ten (10) working days of receipt of
such replacement Hardware Product(s), freight prepaid, carefully packaged and
properly insured, with the RMA number displayed on the outside of the shipping
carton. Echelon shall accept such defective Hardware Product(s) in exchange for
the replacement Hardware Product(s), provided, that such defect is not due to
Customer's improper use, abuse, or neglect; or to Customer's alterations,
modifications, or attempts to repair the Hardware Product(s) without Echelon's
approval. If Echelon does not accept such defective Hardware Product(s) in
exchange for the replacement Hardware Product(s), or if Customer does not return
to Echelon the defective Hardware Product(s) giving rise to such exchange within
thirty (30) days of Customer's receipt of Echelon's replacement Hardware
Product(s), then Customer agrees to purchase at Echelon's then current list
price any replacement Hardware Product(s) shipped to Customer. Replacement
Hardware Product(s) may be new or reconditioned, functionally equivalent to new.
Echelon shall have all right, title and interest in and to any returned
defective Hardware Product(s) if Echelon accepts such defective Hardware
Product(s) in exchange for the replacement Hardware Product(s).
3. PAYMENT TERMS
3.1 Customer shall pay all invoices hereunder within thirty (30) days
of the date of the invoice. Echelon reserves the right to request payment in
advance or by letter of credit.
3.2 All fees and payments under this Agreement are quoted and to be
paid in United States Dollars. Customer shall be responsible for any sales, use
or other taxes or duties (except taxes paid on net income) and agrees to pay any
such tax, fee, or charge upon invoice by Echelon.
4. TERM AND TERMINATION
4.1 The term of this Agreement shall be twelve (12) months from the
Effective Date, provided that such term shall be extended until there are no
outstanding purchase orders issued by Customer pursuant to Section 2.2 or 2.4,
above, and accepted by Echelon pursuant to Section 2.5, above.
4.2 If either party falls to perform its obligations under this
Agreement and such failure continues for fifteen (15) days after receipt of
written notice of such failure, the other party shall have the right to
terminate this Agreement.
4.3 The provisions of Sections 5,6 and 7 shall survive termination of
this Agreement for any reason.
<PAGE> 20
5. WARRANTY EXCLUSION
Echelon agrees to use reasonable efforts to provide service(s) and support as
set forth in this Agreement. CUSTOMER ACKNOWLEDGES THAT ALL PRODUCTS AND
SERVICES PROVIDED PURSUANT TO THIS AGREEMENT ARE PROVIDED AS IS, AND ECHELON
DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT
LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
6. LIMITATION OF LIABILITY
IN NO EVENT SHALL ECHELON BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT, WHETHER UNDER
THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, OR OTHERWISE, AND
EVEN IF ECHELON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT
SHALL ECHELON'S LIABILITY EXCEED THE TOTAL SUPPORT FEE PAID BY CUSTOMER TO
ECHELON FOR A ONE YEAR PERIOD FOR THE PRODUCT GIVING RISE TO SUCH LIABILITY.
7. MISCELLANEOUS
7.1 This Agreement will be governed by the laws of the State of
California, U.S.A., without reference to conflicts of law principles.
7.2 This Agreement may not be assigned by Customer without the prior
written consent of Echelon. This Agreement, including all exhibits, constitutes
the entire agreement between the parties with respect to the subject matter
hereof, and supersedes all prior understandings and agreements regarding such
subject matter. No terms of any purchase order issued by Customer shall be
deemed to add to, delete or modify the terms and conditions of this Agreement.
No amendment to or modification of this Agreement, or waiver of rights under
this Agreement, will be binding unless mutually agreed in writing. The waiver of
any breach or default shall not constitute a waiver of any other right hereunder
or any subsequent breach or default. If any provision in this Agreement shall be
held to be invalid or unenforceable, the remainder of this Agreement shall
remain valid and enforceable. Echelon shall not be liable for delays or failure
to perform under this Agreement due to causes beyond its reasonable control.
7.3 Customer agrees not to export or re-export, or cause to be exported
or re-exported, any software, products or technical data or the direct product
thereof, to any country to which, under the laws of the United States, Customer
is or might be prohibited from exporting its technology or the direct product
thereof.
7.4 Any notices required by this Agreement shall be given in writing at
the address of each party set forth below, and shall be deemed served when
delivered or, if delivery is not
<PAGE> 21
accomplished by reason of some fault of the addressee, when tendered.
Echelon Corporation Customer DGS, Inc.
Signature:/s/ Oliver R. Stanfield Signature:/s/ Thomas C. Haas
Print Name: Oliver R. Stanfield Print Name: Thomas C. Haas
Title: Vice President & CFO Title: CEO
Effective Date: 4-4-94/1-30-97 Date Signed: 3-15-94
Address: 4015 Miranda Avenue Address: 4601 Gateway Circle
Palo Alto, CA 94304 Dayton, OH 45440
Phone: +1-800-258-4LON (US&Canada) Phone: (513) 439-0036
+1-415-855-7400
Serial Numbers: Service Selected: Premier( ) Update ( )
LonBuilder(TM) Workstation Serial No.(s)
LonManager(TM) APL API/Lite for DOS Serial No.(s)
LonManager APL API/Lite for Windows Serial No.(s): 9324C03-0048
LonBuilder Software Kit Serial No.(s):
<PAGE> 22
Exhibit A
LONSUPPORT(TM) SERVICES
<TABLE>
<CAPTION>
Model Product Software Technical Hardware List
Number Updates Support Exchange Price
<S> <C> <C> <C> <C>
90000 LonSupport Premier $3,750
-LonBuilderTM Hardware and Software Yes Yes Yes*
-MIP/P20 and MIP/P50 Developer's Kit Yes Yes N/A
-MIP/DPS Developer's Kit Yes Yes N/A
-LonManagerTM LonMakerTM Installation Tool Yes** Yes N/A
-LonManager Profiler Yes** Yes N/A
-LonManager DDE Server Yes** Yes N/A
-Control Modules and Transceivers N/A Yes N/A
-Routers and Router Modules N/A Yes N/A
-Serial LonTalkTM Adapters and Serial
Gateways N/A Yes N/A
90000-1 Each additional system at same site As Above As Above As Above $1,875
90010-1 LonBuilder Software Kit Premier
(Systems 1-4) Yes Yes Yes $1,500
90010-2 Each additional system at same site (5+) Yes Yes Yes $1,250
90100 LonManager API for DOS Premier Yes Yes N/A $1,400
90100-1 Each additional system at same site Yes Yes N/A $ 700
90200 LonManager API for Windows Premier Yes Yes N/A $1,750
90200-1 Each additional system at same site Yes Yes N/A $ 875
90300 LonManager API/Lite for DOS Premier Yes Yes N/A $ 840
90300-1 Each additional system at same site Yes Yes N/A $ 420
90400 LonManager API/Lite for Windows Premier Yes Yes N/A $1,050
90400-1 Each additional system at same site Yes Yes N/A $ 525
</TABLE>
<TABLE>
<CAPTION>
Model Product Software Technical Hardware List
Number Updates Support Exchange Price
<S> <C> <C> <C> <C>
23090 LonBuilder Software Update Service $2,250
-LonBuilder Software Yes No N/A
-MIP P/20 and MIP/P50 Developer's Kit Yes No N/A
-MIP/DPS Developer's Kit Yes No N/A
-LonManager LonMaker Installation Tool Yes** No N/A
-LonManager Profiler Yes** No N/A
-LonManager DDE Server Yes** No N/A
-Control Modules and Transceivers N/A No N/A
-Routers and Router Modules N/A No N/A
-Serial LonTalk Adapters and Serial
Gateways N/A No N/A
23090-1 Each additional system at same site As Above As Above As Above $1,125
31190 LonManager API for DOS Software Update Yes No N/A $1,000
Service
31190-1 Each additional system at same site Yes No N/A $ 500
31290 LonManager API for Windows Software Yes No N/A $1,250
Update Service
31290-1 Each additional system at same site Yes No N/A $ 625
31390 LonManager API/Lite for DOS Update Service Yes No N/A $ 600
31390-1 Each additional system at same site Yes No N/A $ 300
31490 LonManager API/Lite for Windows Update Yes No N/A $ 750
Service
31490-1 Each additional system at same site Yes No N/A $ 375
</TABLE>
*Covered LonBuilder boards: Control Processor, Extender Card, Neuron(R) 3120
Programmer, Neuron Emulator, Single Board Computer (SBC), Router, Interface
Adapter, Development Station Backplane, Backplane Transceiver, LonBuilder
PL-10/LP-10/+Twisted Pair/+TP- RS485 Transceivers, Applications Interface Board
and Multi-Function I/O Kit. (+Use of the bread-board area on these transceivers
voids warranty and contract coverage.)
**A single update copy of licensed LonManager LonMaker Installation Tool,
LonManager Profiler, and/or LonManager DDE Server will be distributed on 3 1/2"
or 5 1/4" diskettes if such Products are licensed for use at such site.
Additional updates must be purchased separately.
NOTES
1. Prices are effective 2/15/94 and are subject to change. All prices are shown
in U.S. dollars. All pricing is FOB Palo Alto, California.
2. Customer is entitled to an Early Signing Discount of 20% off the list price
for the Service(s) if the then current Lon Support Agreement is renewed prior to
the expiration term of this Agreement.
3. Technical Support is provided only for the then current and immediately
preceding version of a Software Product(s). Software Updates are only provided
to parties licensed to use the immediately preceding version of such Software
Product(s). Such updates shall be shipped within sixty (60) days of the date of
general release and Customer will receive additional documentation as determined
by Echelon in its sole discretion.
4. Echelon intends to offer all customers software updates for each new release
of a Software Product(s). The price for each such software update will be
determined at the time of such release.
5. Technical Support shall include responses to inquiries regarding Echelon's
LONWORKSTM technology and the use of the Product(s). It does not include any
other Product(s) offered by Echelon unless specifically designated in this
Exhibit. When Echelon does not respond immediately to an inquiry, Echelon will
use reasonable efforts to respond within four (4) working hours of receipt.
Echelon's working hours shall be from 8:00 A.M. to 4:30 P.M., Pacific time,
Monday through Friday, with the exception of Echelon's regularly scheduled
holidays. The number to call for support is +1-800-258-4LON (US and Canada) or
+1-415-855-7400.
6. Customer must enter into a LonSupport Agreement with Echelon prior to
purchasing any services set forth herein. For a copy of this Agreement, please
call +1-800-258-4LON (US and Canada), +1-415-855-7400, or your local Echelon
sales office.
<PAGE> 23
7. If a Customer is licensed to use both the LonBuilder and any LonManager API
for DOS, and/or LonManager API for Windows Software Product(s) at a given Site,
then, unless otherwise agreed by Echelon, the Customer must purchase the same
level of support service for the API for DOS and API for Windows Product(s) that
Customer has purchased for the LonBuilder Software Product(s), provided, that a
Customer may elect to purchase support services only for the API for DOS and API
for Windows Software Product(s) subject to the following surcharges: $1,200 for
the first copy of the Software Product and $600 for each additional copy of the
Software Product.
Echelon, LON, and Neuron are U.S. registered trademarks of Echelon Corporation.
LonManager, LonMaker, LonTalk, LonSupport, LonBuilder, LONWORKS, LONMARK are
trademarks of Echelon Corporation. Some of the LONWORKS products are patented
and are subject to licensing Terms and Conditions. For a complete explanation of
these Terms and Conditions, please call +1-800-258-4LON (US and Canada) or
+1-415-855-7400.
<PAGE> 24
LEASE-TO-OWN SCHEDULE NO. 3 TO MASTER LEASE AGREEMENT NO. 5063
ECHELON
CREDIT CORPORATION
This Schedule and its supplements incorporate by this
reference the terms and conditions of the Master Lease Agreement,
Number 5063, between ECHELON Credit Corporation (Lessor) and DGS<
Inc. (Lessee).
1. Supplier: Echelon Corporation
2. Location of Equipment: 2492 Technical Drive, Miamisburg, OH
45342
3. Equipment value: $3,440.00
(exclusive of sales and/or use taxes).
4. Lease Term: The Lease Term of the Equipment described in
this Schedule shall begin on the Rent Commencement Date
referenced below in Paragraph 6 and its expiration date
shall be 24 months after such Rent Commencement Date.
5. Rent: $165.00 per month (exclusive of sales and/or use
taxes) due and payable at the Rent Commencement Date and on
the same date of each succeeding month of the Lease Term.
The advance Rent payment shall be $330.00. This amount
includes $165.00 for the first month, and $165.00 for the
last 1 month(s), of the Lease Term.
6. Rent Commencement Date:_________________________, 19____.
7. Purchase Obligation:
Lessee shall be required to purchase the Equipment for $1.00. The
purchase price shall be payable upon the expiration date of the Lease.
Term. Lessee shall be responsible for all applicable sales and/or use
taxes on the Equipment. Upon payment of the purchase price, Lessor
shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. Description of Equipment:
See Schedule A which is attached hereto and made a part hereof by this
reference.
<PAGE> 25
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule.
Accepted by:
ECHELON Credit Corporation LESSEE: DGS, Inc.
By:/s/ Oliver R. Stanfield By:/s/ Thomas C.Haas
Name: Oliver R. Stanfield Name: Thomas C. Haas
Title: Vice President & CFO Title: CEO
Date: March 7, 1995 Date: 2/22/95
<PAGE> 26
CHANGE ORDER AMENDMENT
AMENDMENT TO SCHEDULE NO. 1 TO MASTER LEASE AGREEMENT NO. 5063
This Change Order Amendment (the "Amendment") changes the Equipment value and
Rent set forth in the Schedule to Master Lease Agreement referenced above in
accordance with the attached Equipment change orders and related Equipment
description.
Equipment change Ref. No. Schedule A $ 9,846.00
-------------- -----------------
order values:
Ref. No. $
-------------- -----------------
Ref. No. $
-------------- -----------------
Ref. No. $
-------------- -----------------
Ref. No. $
-------------- -----------------
Total Equipment change order value: $ 9,896.00
-----------------
Increase or Decrease in Rent: $ 326.00
-----------------
TO BE COMPLETED UPON EXECUTION BY LESSOR:
Equipment value (prior to this Amendment): $ 26,887.00
-----------------
Equipment value (Revised): $ 36,733.00
-----------------
Rent (prior to this Amendment): $ 759.00
-----------------
Rent (Revised): $ 1,085.00
-----------------
LESSOR is hereby authorized to complete the Equipment value (prior to this
Amendment); the Rent (prior to this Amendment); the Equipment value (Revised)
and the Rent (Revised) in accordance with the terms hereof.
|_| Check box if this Amendment relates to and commences with Add-
On Amendment No. ____________________.
This Amendment alters only the Equipment description, Equipment value and Rent.
All other terms and conditions of the Master Lease Agreement, its Schedules,
Amendments and other related documents remain unchanged.
LESSOR: DGS, Inc. LESSEE: Echelon Credit
Corporation
By:/s/ Thomas C. Haas By:/s/ Oliver R. Stanfield
Name: Thomas C. Haas Name: Oliver R. Stanfield
Title: Vice President Title: Vice President & CFO
Date: 12-28-93 Date: 12-27-93
<PAGE> 27
SCHEDULE A-1
DGS, INC. MLA #5063-1
4601 Gateway Circle
Dayton, OH 45440
<TABLE>
<CAPTION>
QTY PART # DESCRIPTION
- --- ------ -----------
<S> <C> <C>
1 31400 LonManager AP/Lite for Windows
1 7300-1-6 LonWorks SLTA OEM
TOTAL COST $9,846.00
</TABLE>
<PAGE> 28
January 29, 1997
Mr. Dan Lackey
DGS, Inc.
4601 Gateway Circle
Dayton, OH 45440
Via Facsimile: 513-847-7810
RE: Master Lease Agreement No. 5063, Schedules 1 & 2
(the "Lease")
LESSEE: DGS, Inc.
Dear Mr. Lackey:
Echelon Credit Corporation acknowledges Lessee's request to renew the Equipment
as listed on the Schedule A of the "Lease" for a period of 36 months beginning
February 1, 1997 and ending January 31, 2000, at the rate of $250.00 (exclusive
of sales/use taxes) per month. This will be billed on a lease-to-own basis, and
title to all equipment will transfer upon receipt by Echelon Credit Corporation
of all renewal rental payments and other amounts due under the Lease. All other
terms and conditions of the Lease remain unchanged.
To secure the obligations of Lessee to observe and perform all of its payment
and other duties and obligations under the Lease, Echelon Credit Corporation
retains a security interest in the Equipment, all attachments thereto and
substitutions and replacements therefore, and all proceeds and payments for the
use thereof. Lessee shall keep the Equipment free of any claims, liens,
interests or encumbrances and shall not attempt to sell or sublease the
equipment or assign the Lease without Lessor's consent; any attempts to do any
of the foregoing shall be void and of no effect. Lessee agrees to execute and
permit filing of UCC-1 financing statements, if requested by Echelon Credit
Corporation to provide notice of this security interest.
Please make a note that all payments must now be remitted to the following
address:
Echelon Credit Corporation
1650 Zanker Road, Suite 236
San Jose, CA 95112
<PAGE> 29
Please sign this letter below indicating your approval and fax to (408)
436-8583, attention Colleen Tigges. Feel free to call me at (800) 258-4566,
press "4" and then x8587 if you have any questions.
Sincerely,
ECHELON CREDIT CORPORATION Accepted and Agreed:
DGS, Inc.
/s/ Colleen L. Tigges By:/s/ Daniel B. Lackey
Colleen L. Tigges
Title: Secretary
Date: 1-29-97
<PAGE> 1
Exhibit 10.5
DGS, INC.
1997 Stock Option Plan
ARTICLE I
PURPOSE
1.1 The purpose of this Stock Option Plan (the "Plan") is to enable
DGS, Inc. ("DGS") to compete successfully in retaining and attracting directors,
employees and advisors of outstanding ability, to encourage their ownership of
shares of DGS's Common Stock, and to motivate them to exercise their best
efforts toward the accomplishment by DGS of its financial and other goals.
ARTICLE II
DEFINITIONS
2.1 For purposes of the Plan, each of the following terms shall have
the definition which is attributed to it, unless another definition is clearly
indicated by a particular usage and context.
A. "Advisor" means any person who provides bona fide advisory
or consulting services to the Company other than services in connection
with the offer or sale of securities in a capital-raising operation.
B. "Board" means the Board of Directors of DGS.
C. "Code" means the Internal Revenue Code of 1986, as amended.
Reference to any Section of the Code includes the provisions of that
Section as it may be amended or replaced by any other section(s) of
like intent and purpose and also includes any regulations or rulings
promulgated thereunder.
D. "Company" means DGS and any subsidiary of DGS, as the term
"subsidiary" is defined in Section 424(f) of the Code.
E. "Disability" means permanent and total disability as
defined in Section 2(e)(3) of the Code.
F. "Effective Date of Grant" means the date on which, or such
later date as of which, the Board makes an award of an Option.
G. "Eligible Employee" shall mean both: (i) any employee of
the Company who is, as of the date of granting of an Option hereunder
to him or her, a salaried employee of the Company or of any subsidiary
corporation now or hereafter existent; and (ii) a director of the
Company who, even if he or she does not otherwise qualify as an
Eligible Employee pursuant to the foregoing subsection (i), shall
<PAGE> 2
nonetheless be considered an Eligible Employee with respect to the
grant of Non-Qualified Stock Options.
H. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
I. "Fair Market Value" means the last sale price reported on
the Nasdaq Stock Market, or on any stock exchange on which the Shares
are traded, on a specified date or, if there are no reported sales on
such date, then the last reported sales price on the next preceding day
on which such a sale was transacted. If the Shares are not then traded
as described in the preceding sentence, then the average of the closing
bid and asked prices on the specified date or last preceding day on
which bid and asked prices were reported, or such other method as the
Board may select, shall be used in determining Fair Market Value for a
Share.
J. "Incentive Stock Option" shall have the same meaning as is
given to that term by Section 422 of the Code.
K. "Non-Qualified Stock Option" means any Option other than an
Incentive Stock Option.
L. "Option" means the right, subject to the terms of this Plan
and to such other terms and conditions as the Board may establish, to
purchase from DGS a stated number of Shares at a specified price. Each
Option shall be represented by a Stock Option Agreement to be entered
into between the Company and the Participant to whom the Option is
granted in such form, not inconsistent with the Plan, as the Board may
authorize for general use or for specific cases from time to time.
M. "Option Price" means the purchase price per Share subject
to an Option. The Option Price shall not be (i) less than 85% of the
Fair Market Value of a Share on the Effective Date of Grant in the case
of a Non-Qualified Stock Option, except that no Non-Qualified Stock
Option which is intended to result in compensation that qualifies for
exclusion from the deduction limitation of Code Section 162(m) shall be
granted with an Option Price of less than 100% of the Fair Market Value
of a Share on the Effective Date of Grant, or (ii) less than 100% of
the Fair Market Value of a Share on the Effective Date of Grant in the
case of an Incentive Stock Option, except as otherwise provided in
Section 8.1.
N. "Participant" means any holder of an Option granted under
the Plan (who must necessarily be an Eligible Employee or an Advisor,
as those terms are defined above) pursuant to a Stock Option Agreement
entered into between
- 2 -
<PAGE> 3
him or her and a duly authorized representative of the Company.
O. "Plan" means this Stock Option Plan.
P. "Share" means one share of the no par value Common
Stock of the Company.
Q. "Stock Option Agreement" means each Agreement entered into
between the Company and a Participant under which each such Participant
is granted Options to purchase Shares in the Company pursuant to this
Plan. Each such Stock Option Agreement shall contain terms relating to
the granting and exercise of the Option covered thereby which are not
inconsistent with this Plan. Each such Stock Option Agreement shall be
subject to the approval of the Board.
ARTICLE III
ADMINISTRATION
3.1 Administration. The Plan shall be administered by the Board.
Subject to and consistent with the provisions of the Plan, the Board shall
establish such rules and regulations as it deems necessary or appropriate for
the proper administration of the Plan, shall interpret the provisions of the
Plan, shall decide all questions of fact arising in the application of Plan
provisions, and shall make such other determinations and take such actions in
connection with the Plan and the Options granted hereunder as it deems necessary
or advisable. At any time, or from time to time, the Board may appoint a
committee of at least two directors (the "Committee") to administer, or to
approve transactions pursuant to, the Plan. For the purpose of Option grants to
and approval of other transactions with persons who are subject to Section 16 of
the Exchange Act with respect to DGS, each member of the Committee shall be a
"Non-Employee Director" as defined in Rule 16b-3 under the Exchange Act. To the
extent that it is desired that compensation resulting from the grant of a
particular Option be excluded from the deduction limitation of Section 162(m) of
the Code, all directors comprising the Committee granting such Option also shall
be "outside directors" within the meaning of Code Section 162(m). In the event a
Committee is so appointed, it may carry out all of the functions of the Board
with respect to the Plan, except for amendments to or suspension or termination
of the Plan.
3.2 Except as specifically limited by the provisions of the Plan, the
Board (or the Committee if one has been appointed by the Board) shall have
authority to:
A. determine with Eligible Employees or Advisors shall be
granted Options;
- 3 -
<PAGE> 4
B. determine the number of Shares which may be subject to each
Option;
C. determine the term and the Option Price of each Option;
D. determine whether an Option is an Incentive Stock Option or
a Non-Qualified Stock Option (except that only Non-Qualified Stock
Options may be granted to Advisors);
E. determine the time or times when Options will be granted;
and
F. determine all other terms and conditions of each Option,
including (but not limited to) the terms of any Option agreement. The
Board may, in its discretion, determine as a condition to any Option
that a stated percentage of Shares covered by such Option shall be
exercisable in any one year or other stated period of time and may also
specify in that event whether any such Option which is exercisable in
such manner shall be exercisable in a cumulative or a non-cumulative
manner. Any Option granted pursuant to the Plan shall be exercisable in
accordance with the schedule or timetable for the exercise of such
Option which is set forth in each Stock Option Agreement between the
Company and the Participant who is the holder of the Option. Such
schedule or timetable for the exercise of such Option may vary as
between such Stock Option Agreements and does not need to be uniform.
The Board may also waive or amend the terms and conditions of, or
accelerate the vesting of, an Option under circumstances selected by
the Board.
3.3 Any action, decision, interpretation or determination by the Board
with respect to the application or administration of this Plan shall be final
and binding upon all persons, and need not be uniform with respect to its
determination of recipients, amount, timing, form, terms or provisions of
Options.
3.4 No member of the Board shall be liable for any action or
determination taken or made on good faith with respect to the Plan or any Option
granted hereunder and, to the extent not prohibited by applicable law, all
members shall be indemnified by the Company for any liability and expenses which
they may incur as a result of any claim or cause of action, or threatened claim
or cause of action, arising in connection with the administration of this Plan
or the grant of any Option hereunder.
ARTICLE IV
SHARES ISSUABLE
4.1 Except as provided in Article XI, the number of Shares which may be
issued under the Plan shall not exceed 300 Shares in
- 4 -
<PAGE> 5
the aggregate and Options for no more than 75 Shares may be granted to any
individual Eligible Employee during any period of twelve (12) consecutive
months. If any Option expires or terminates for any reason without being
completely exercised, the Shares with respect to which such Option was not
exercised may again be subject to other Options. Shares tendered or withheld as
payment for the Option Price pursuant to Section 7.1 shall be available for
issuance under the Plan. The Board may make such other determinations regarding
the counting of Shares issued pursuant to the Plan as it deems necessary or
advisable, provided that such determinations shall be permitted by law.
ARTICLE V
GRANTING OF OPTIONS
5.1 Subject to the terms and conditions of the Plan, the Board may,
from time to time, grant Options to Eligible Employees or Advisors on such terms
and conditions as it shall determine. Subject to the restriction of Section
3.2(D), more than one Option and more than one form of Option may be granted to
the same individual. An Option shall be effectively "granted" under this Plan as
of the date of execution of the Stock Option Agreement granting such Option duly
authorized by the Board or by the Committee.
ARTICLE VI
EXERCISE OF OPTIONS
6.1 Any person entitled to exercise an Option may do so, without the
need for further approval pursuant to Exchange Act Rule 16b-3, in whole or in
part by delivering to DGS, attention: Stock Option Plan Administrator, at its
principal office, a written notice of exercise. The written notice shall specify
the number of Shares for which an Option is being exercised and shall be
accompanied by full payment of the Option Price for the Shares being purchased.
ARTICLE VII
PAYMENT OF OPTION PRICE
7.1 Subject to such administrative requirements as the Board (or the
Committee appointed by the Board if there is one) may impose, payment of the
Option Price may be made, at the election of the holder of an Option, in cash,
by the tender of previously owned Shares, by directing that a portion of the
Shares to be issued upon exercise of the Option be withheld by DGS as payment
(to the extent permitted by law) or by a combination of the foregoing. If
payment by the tender of previously owned Shares or the withholding of Shares is
permitted, the value of each Share shall be deemed to be the Fair Market Value
of a Share on the day the Shares are tendered or
- 5 -
<PAGE> 6
withheld for payment. In the case of a tender of previously owned Shares, this
shall be the date on which the Shares, duly endorsed or accompanied by a stock
power duly endorsed for transfer to DGS, are received by DGS. In the case of a
withholding of Shares, this shall be the date on which a complete and correct
notice of exercise directing the withholding is received by DGS. Notwithstanding
the foregoing, an Option's exercise price may also be paid pursuant to a
"cashless" exercise/sale procedure involving a simultaneous sale by a broker, in
which case the exercise date shall be the trade date, provided that proceeds of
such sale in full payment of the Option Price are received by DGS on such date.
ARTICLE VIII
INCENTIVE STOCK OPTIONS AND NON-QUALIFIED STOCK OPTIONS
8.1 Any Option designated as an Incentive Stock Option will be subject
to the general provisions applicable to all Options granted under the Plan. In
addition, an Incentive Stock Option shall be subject to the following specific
provisions:
A. No Incentive Stock Option may be exercised after the
expiration of ten years from the Effective Date of Grant.
B. At the time the Incentive Stock Option is granted, if the
Eligible Employee owns, directly or indirectly, stock representing more
than 10% of the total combined voting power of all classes of stock of
the Company then:
(i) the Option Price must equal at least 110% of the
Fair Market Value on the Effective Date of Grant; and
(ii) the term of the Option shall not be greater than
five years from the Effective Date of Grant.
C. The aggregate Fair Market Value (determined as of the
Effective Date of Grant) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by any holder during
any calendar year (under all plans of the Company) shall not exceed
$100,000.
8.2 If any Option is not granted, exercised or held pursuant to the
provisions of Code Section 422, it will be considered to be a Non-Qualified
Stock Option to the extent that any or all of the grant is in conflict with
those provisions.
- 6 -
<PAGE> 7
ARTICLE IX
TRANSFERABILITY OF OPTIONS
9.1 During the lifetime of an Eligible Employee or Advisor to whom an
Option has been granted, such Option is non-assignable and non-transferable and
may be exercised only by such individual or that individual's legal
representative or guardian, with the single exception that a Non-Qualified Stock
Option may be transferred pursuant to a "domestic relations order" as defined in
Section 414(p)(1)(B) of the Code. In the event of the death of an Eligible
Employee or Advisor to whom an Option has been granted, the Option shall be
transferable only to his or her surviving spouse or lineal descendants (either
outright or in a trust created for his, her or their benefit) who is or are the
legatee(s) or beneficiary(ies) of the Eligible Employee's or Advisor's
unexercised rights under the Option pursuant to his or her duly admitted Last
Will and Testament, or under the statute of descent and distribution of the
state in which he or she was a resident at the time of his or her death, and may
thereafter be exercised by any such permitted transferee(s) as provided in
Section 10(C).
ARTICLE X
TERMINATION OF OPTIONS
10.1 Unless earlier terminated pursuant to Article XIII, an Option
granted to an Eligible Employee will terminate as follows:
A. During the period of an Eligible Employee's continuous
employment with, or service as a director of, the Company, the Option
will terminate upon the earlier of: (i) the date on which it has been
fully exercised; (ii) the date on which it expires by its terms; or
(iii) the date on which it is terminated by the mutual agreement of the
Company and the Eligible Employee.
B. Upon termination of the Eligible Employee's employment
with, or service as a director of, the Company for any reason, any
unexercisable Option shall immediately terminate. Except as provided in
Section 10.1(C), any Option which is exercisable on the date of
termination of employment, or service as a director, will terminate
upon the earlier of: (i) the date on which it has been fully exercised;
(ii) the expiration of the Option by its terms; and (iii) the end of
the three-month period following the date of termination. For purposes
of the Plan, a leave of absence approved by the Company shall not be
deemed to be termination of employment.
C. If an Eligible Employee to whom an Option was granted dies
or becomes subject to a Disability while employed by, or serving as a
director of, the Company or
- 7 -
<PAGE> 8
within three months of termination of employment or service as a
director, for any reason, the Option may be exercised at any time
within one year after the date of death or the commencement of
Disability, to the extent that the Eligible Employee shall have been
entitled to exercise it at the time of death or the commencement of
Disability, by the Eligible Employee or the Eligible Employee's legal
representative or guardian or by the personal representative(s) of the
Eligible Employee's estate, or by the deceased Eligible Employee's
surviving spouse or lineal descendants (either outright or in a trust
created for his, her or their benefit) to whom the Option may have been
transferred pursuant to the deceased Eligible Employee's duly admitted
Last Will and Testament or under the statute of descent and
distribution of the state in which he or she was a resident at the time
of his or her death.
10.2 An Option granted to an Advisor will terminate upon the earlier of
the full exercise of the Option or the expiration of the Option by its terms.
10.3 The provisions of Section 10.1 and 10.2 above shall apply
irrespective of whether an Option has been transferred to a person or entity
other than the Eligible Employee or Advisor to whom the Option was granted.
10.4 The Board, at its direction, may extend the periods for Option
exercise set forth in this Article X.
ARTICLE XI
ADJUSTMENTS TO SHARES AND OPTION PRICE
11.1 The Board shall make appropriate adjustments in the
number of Shares available for issuance under the Plan, the number of Shares
subject to outstanding Options and the Option Price of optioned Shares in order
to give effect to changes in the Shares as a result of any merger,
consolidation, recapitalization, reclassification, combination, stock dividend,
stock split, or other similar event. The determination as to the method and
extent of such adjustments shall be within the sole discretion of the Board
ARTICLE XII
TERM OF PLAN
12.1 The effective date of the Plan shall be May 31, 1997. If
the Plan has not been approved by the shareholders of the Company either before
or within twelve (12) months after such date, all Incentive Stock Options
previously granted hereunder shall be deemed to be Non-Qualified Stock Options.
Subject to the provisions hereinafter contained relating to amendment or
- 8 -
<PAGE> 9
termination, the Plan shall continue in effect until May 31, 2007. No Option
shall be granted pursuant to this Plan subsequent to May 31, 2007, or subsequent
to any earlier date as to which this Plan is terminated pursuant to the
following Article XIII hereof.
ARTICLE XIII
AMENDMENT OR TERMINATION OF PLAN
13.1 The Board may at any time amend, suspend or terminate the
Plan; provided, however, that no amendment to the Plan shall alter or impair any
Option granted under the Plan without the consent of the holder thereof.
13.2 The Board is further authorized to make such amendments
to the Plan as shall be necessary to bring it into conformity with any
regulation of any governmental body having jurisdiction over it, and may
otherwise alter the Plan in any manner which, in the opinion of counsel for the
Company, may be necessary or desirable in order to prevent the risk of
disqualification of the Plan under the Internal Revenue Code or the Exchange
Act, or non-compliance of the Plan with applicable SEC or IRS regulations.
ARTICLE XIV
CERTAIN EVENTS
14.1 In the event DGS shall consolidate with, merge into, or
transfer all or substantially all of its assets to another corporation or
corporations (a "successor corporation"), such successor corporation may
obligate itself to continue this Plan and to assume all obligations under the
Plan. In the event that such successor corporation does not obligate itself to
continue this Plan as above provided, the Plan shall terminate effective upon
such consolidation, merger or transfer, and, except as provided in Section 14.4,
any Option previously granted hereunder shall terminate. If practical, DGS shall
give each holder of an Option twenty (20) days prior notice of any possible
transaction which might terminate this Plan and the Options previously granted
hereunder.
14.2 In the event any person (other than a person who is such on the
date of effectiveness of this Plan), by any means of purchase or acquisition,
becomes the "beneficial owner" (as defined in Exchange Act Rule 13d-3 as in
effect on June 7, 1996) of more than 50% of the outstanding Shares of DGS, or
commences a tender offer pursuant to Exchange Act Regulation 14D (as in effect
on June 7, 1996) which, if successful, would result in such person becoming the
beneficial owner of more than 50% of such Shares, then all Options which are
outstanding at the time of such event shall immediately become exercisable in
full.
- 9 -
<PAGE> 10
14.3 In the event of the execution of an agreement of reorganization,
merger or consolidation of DGS with one or more corporation as a result of which
DGS is not to be the surviving corporation (whether or not DGS shall be
dissolved or liquidated) or the execution of an agreement of sale or transfer of
all or substantially all of the assets of DGS, then all Options which are
outstanding at the time of such event shall immediately become exercisable in
full.
14.4 In the event of any of the transactions referred to in Section
14.3 hereof, any holder of one or more Options who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to DGS shall be
entitled to tender such Options to the Company and to receive from the Company a
payment of cash equal to the difference between the aggregate "Fair Value" of
Shares subject to the holder's Options which are outstanding and not exercised
immediately prior to the time of consummation of the transaction and the
aggregate Option Price of such Shares. For this purpose, "Fair Value" shall mean
the cash value per Share to be paid to shareholders pursuant to such agreement,
or if cash value is not to be paid, the highest Fair Market Value of a Share
during the 60-day period immediately preceding the date of the consummation of
the transaction. The foregoing payment under this Section 14.4 shall be made in
lieu of and in full discharge of any and all obligations of the Company in
respect of all subject Options of the holder.
14.5 The grant of Options under the Plan shall in no way affect the
right of DGS to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business assets.
14.6 Notwithstanding the foregoing, in the event the amounts deemed
payable under this Article XIV when added to all other payments to the holder of
an Option by the Company, would, if made, constitute Excess Parachute Payments
within the meaning of Sections 280G and 4999 of the Code, the amounts
deemed payable by the Company under this Article shall be reduced by the amount
deemed necessary to cause the holder to receive $1,000 less than three times the
holder's Base Amount (as that term is defined in Code Section 280G) from all
such payments to the holder from the Company. In the event the amount
of the payment exceeds the amount subsequently determined to have been due, the
excess benefits over three times the Base Amount shall constitute a loan by the
Company to the holder, payable on demand by the Company, with interest at a
rate equal to 120% of the applicable federal rate determined under Section 1274
of the Code, compounded semi-annually.
ARTICLE XV
MISCELLANEOUS
- 10 -
<PAGE> 11
15.1 Nothing contained in this Plan shall constitute the granting of an
Option. Each Option shall be represented by a written Stock Option Agreement
executed by both the Eligible Employee or Advisor and a duly authorized
representative of the Company.
15.2 Certificates for Shares purchased through exercise of Options will
be issued in regular course after exercise of the Option and payment therefor as
called for by the terms of the Option. No person holding an Option or entitled
to exercise an Option granted under this Plan shall have any rights or
privileges of a shareholder of DGS with respect to any Shares issuable upon
exercise of such Option until certificates repre- senting such Shares shall have
been issued and delivered. No option may be transferred, and no Option shall be
exercisable or Shares issued and delivered upon exercise of an Option, unless
and until DGS has complied with any and all applicable federal and state
securities laws, listing requirements of any market on which DGS's Shares may
then be traded and other requirements of law. Any certificate representing
Shares acquired upon exercise of an Option may bear such legends as the Company
deems advisable to assure compliance with all applicable laws and regulations.
15.3 Nothing contained in this Plan or in any Option granted pursuant
to it shall confer upon any person any right to continue as a director or
employee of, or in any business relationship with, the Company or to interfere
in any way with the right of the Company to terminate a person's status as a
director or employee of, or the person's business relationship with, the Company
at any time. So long as a holder of an Option shall continue to be an employee
of the Company, the Option shall not be affected by any change of the employee's
duties or position.
15.4 Neither the Company nor any director or officer thereof shall be
liable to any person for anything done or omitted in administration of the Plan
or any Option, but the issuance of stock upon proper and timely exercise of any
Option may be compelled by an order of specific performance by any Court of
competent jurisdiction.
15.5 This Plan shall be construed and administered in accordance with
and governed by the laws of the Commonwealth of Pennsylvania.
- 11 -
<PAGE> 1
[GRANT THORNTON LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 14, 1997 (except for Notes L, O, P, as to
which the date is July 25, 1997), accompanying the financial statements of
Dayton General Systems, Inc. contained in the Registration Statement and
Prospectus, which will be signed upon consummation of the transaction described
in Note P to the financial statements. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Cincinnati, Ohio
August 14, 1997
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